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Fallout: The Financial Crisis

Are investors going to buy bad assets?

Steve Henn Mar 11, 2009
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Fallout: The Financial Crisis

Are investors going to buy bad assets?

Steve Henn Mar 11, 2009
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TEXT OF STORY

Kai Ryssdal: It’s not just Bush administration programs that banks aren’t thrilled with. They’ve been waiting a month now for details about current White House plans to fix the banking system. Treasury Secretary Timothy Geithner went on the “Charlie Rose Show” last night, where he offered more of what we already know — that he hopes private investors are going to lend a hand and buy up some of those bad assets. We asked Marketplace’s Steve Henn if there are any takers yet.


STEVE HENN: Last night, Tim Geithner told Charlie Rose the obvious: Our banking system is a mess, but . . .

TIM GEITHNER: It’s very important for people to understand it’s going to take some time to work through this.

Geithner’s plan to buy hundreds of billions of dollars of troubled assets from banks isn’t new, but six months into this financial crisis it still hasn’t happened because . . .

Darrell Duffie: The pricing issue remains.

Darrell Duffie at Stanford says if the government pays too little for troubled mortgages and assets banks could fail. If it pays too much, taxpayers lose. That’s why Secretary Geithner’s hoping to partner with private equity investors.

Josh Lerner: Private equity groups are good at figuring out what value assets have.

Josh Lerner teaches finance at Harvard.

Lerner: Private equity is all about buying assets cheap. On the other hand, there’s also, particularly in a market like today’s, some very reasonable caution about coming in too early and essentially getting burnt.

Investors wouldn’t go on tape, but a few said they won’t buy assets without some government guarantees. They want low-interest loans, they want the government to limit their losses, and they want to know the rules of this game won’t be changed.

Duffie: Of course, if the government is extremely generous, there will be plenty of participation.

But Duffie says taxpayers would bear most of the risk.

Duffie: And the taxpayers might not get a good deal. So you want to be very careful because you have some very sharp investors out there who will be watching.

A little mistake could cost the government a fortune. So Duffie says it may actually be very good thing that Geithner is taking his time working out the details.

In Washington, I’m Steve Henn for Marketplace.

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