Fallout: The Financial Crisis

How about taking bids on bad assets?

Jeremy Hobson Feb 2, 2009
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Fallout: The Financial Crisis

How about taking bids on bad assets?

Jeremy Hobson Feb 2, 2009
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TEXT OF STORY

TESS VIGELAND: Punxatawny Phil says we’re gonna have six more weeks of winter. But today President Barack Obama told NBC’s Matt Lauer we only have one more week to wait for a plan to lift some of those massive debts off Wall Street’s books.

President Obama: We’re gonna have to wring out some of these bad assets.

MATT LAUER: Are you gonna set up a “bad bank” or whatever it would be called?

OBAMA: Well, I don’t want to preempt an announcement next week.

So if there is going to be a bad bank, the question persists of how you price things like mortgage-backed bonds and other securities so that taxpayers don’t end up holding the bag and banks don’t fail?

Marketplace’s Jeremy Hobson went looking for some answers.


JEREMY HOBSON: The most likely way to price the securities would be through a reverse auction. University of Maryland economist Peter Cramton says you’d get all the banks in a room, and they’d try to out-bid each other to get to the lowest acceptable price for pools of toxic assets.

PETER CRAMTON: So the prices are very close to true market prices. It’s not perfect, but it works extremely well.

He says the government’s bad bank would be unlikely to pay too much. If anything, the banks would get too little for the securities and some could collapse.

Sue Allon of Allon Financial says the government could end up pumping in even more taxpayer money to keep banks afloat. But that’s no reason to delay the auction, she says.

SUE ALLON: These assets will have to be marked down if they’re to move. There’s nothing gained by holding onto them and not getting them out into the hands of investors.

Except maybe the hope that if banks just wait a little longer, home values will rebound and losses won’t be as bad.

Peter Cramton says it’s the same logic that makes you press the “No” button when the ATM asks you if you want to see your balance.

CRAMTON: We’ve got over $2 trillion of these toxic securities, and people are basically scared of pricing them. And that is ridiculous. I mean, we price General Motors stock, we price Citibank stock, why can’t we price these assets?

The problem is it’s not just those risky mortgage-backed securities that are considered toxic. Banks are reporting bigger losses on good loans now. So getting the bad assets away from the banks may no longer be enough.

In New York, I’m Jeremy Hobson for Marketplace.

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