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banyon
03-22-2009, 08:42 AM
:titus:

The Toxic Assets Plan - Yes, It's a Subsidy
by: The Baseline Scenario March 21, 2009

http://seekingalpha.com/article/127129-the-toxic-assets-plan-yes-it-s-a-subsidy

The Baseline Scenario

By James Kwak

According to The New York Times and The Wall Street Journal, the Treasury Department is set to announce its plan for troubled assets early next week. It will include three components. The details aren’t clear since these are anticipatory news stories, but it will be something like this (combining bits of information from the two stories):

The FDIC will create a new entity to buy troubled loans, with the government contributing up to 80% of the capital and the remainder coming from the private sector. The Fed or the FDIC would then provide non-recourse loans* for up to 85% of the total funding (NYT), or guarantees against falling asset values (WSJ), which more or less amount to the same thing.
Treasury will create multiple new investment funds to buy troubled securities, with Treasury contributing 50% of the capital and the rest coming from the private sector. It’s not clear from the news stories, but I think it’s highly likely that these funds will also benefit from either non-recourse loans or asset guarantees.

The Term Asset-Backed Securities Loan Facility (TALF) is a program under which the Fed was already planning to buy up to $1 trillion of newly-issued, asset-backed securities** (backed by car loans, credit card receivables, mortgages, etc.). The idea was to stimulate new lending in these categories. This program will be expanded to allow the Fed to buy “legacy” assets - those issued prior to the crisis. This enables the Fed to buy toxic assets off of bank balance sheets.

Instead of coming up with one plan to buy troubled assets, it looks like the government has come up with three. (As Calculated Risk said, however, "More approaches doesn’t make a better plan” [emphasis in original].) For now, I think the concerns I expressed last month still hold. If we take as given that the government will only negotiate at arm’s length with the banks (meaning the banks can decide at what price they are willing to sell the assets), then the most important thing is for the plan to work. But it’s not clear if the degree of subsidy offered will be enough to close the gap between what investors are willing to pay and what banks are willing to sell at. Having multiple buyers and using cheap Fed financing will increase the willingness-to-pay for these assets, but we won’t know a priori if it will exceed the reserve price of the sellers.

In the best-case scenario: a) the government’s willingness to bear most of the risk encourages private investors to bid enough to get the banks to sell; b) the economy recovers and the assets increase in price from the prices paid; c) the investment funds pay back the Fed (which makes a small spread between the interest rate and the Fed’s low cost of money); and d) the government gets some of the upside through its capital investments. (I think the main purpose of that government capital is to deflect the criticism that all of the upside belongs to the private sector.) In the worst-case scenario, the market stays stuck because the banks have unrealistic reserve prices. Perhaps the idea is that, in that case, the TALF will allow the government to (over)pay whatever it takes to bail out the banks.

Most encouragingly, the headline in the Times was “Toxic Asset Plan Foresees Big Subsidies for Investors,” indicating that the mainstream media have figured out the game. (By contrast, the Times headline announcing the bank-friendly terms of the Capital Assistance Program was “Government Offers Details of Bank Stress Test.”) I may soon be out of a job. (Wait a sec, no one is paying me for this . . .)

* A non-recourse loan is made for a particular asset or set of assets. If the borrower fails to pay off the loan, the most the lender can get is the asset (he cannot go after the borrower’s other assets or income streams), so the borrower’s loss is capped at the amount he pays himself. Mortgage loans are non-recourse loans where the borrower’s loss is capped by his down payment.

** Technically, the Fed would loan money to financial institutions and take asset-backed securities as collateral. However, these would be non-recourse loans, so the financial institution could pay off the loan simply by ceding the collateral to the Fed. (It seems to me that because these are loans, if the assets appreciate in value, the financial institutions could choose to pay back the loans and take the collateral back, thereby getting all the upside, but I’m not certain about that.) The TALF will be capitalized by some money (10-20% of the total) coming from Treasury, which will absorb the first losses

banyon
03-22-2009, 08:43 AM
U.S. Sets Plan for Toxic Assets Article
Comments (156)
more in Politics »By DEBORAH SOLOMON

http://online.wsj.com/article/SB123758981404500225.html

WASHINGTON -- The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.

But the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors. They've been the target of a virulent anti-Wall Street backlash from Washington in the wake of the American International Group Inc. bonus furor. As a result, many investors have expressed concern about doing business with the government in this climate -- potentially casting a cloud over the program's prospects.

The administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road.

The plan, which has been eagerly awaited by jittery investors, includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans. In addition, the Treasury Department intends to expand a Federal Reserve facility to include older, so-called "legacy" assets. Currently, the program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most toxic assets are securities created in 2005 and 2006, which the TALF will now be able to absorb.

Finally, the government is moving ahead with plans, sketched out by Treasury Secretary Timothy Geithner last month, to establish public-private investment funds to purchase mortgage-backed and other securities. These funds would be run by private investment managers but be financed with a combination of private money and capital from the government, which would share in any profit or loss.

All told, the three efforts are designed to unglue markets that have seized up as investors have stood on the sidelines. One big problem is that many of these assets no longer trade, which means it's very hard to put a price on them. Banks are unwilling to sell at too low a price, and investors are unwilling to take the risk.

The Treasury's hope is that introducing private investors will help create market prices. Earlier attempts to have the government set the prices foundered because too high a price would have hurt taxpayers and too low a price would have hurt banks. Private investors, by contrast, could set a market price because they are unlikely to overpay and banks are unlikely to undersell.

To target troubled securities, such as mortgage-backed securities, the government will create several investment funds. Treasury will act as a co-investor, in most cases contributing $1 for every $1 contributed by the private sector and sharing in the first-loss position.

To target troubled loans, the government will create a Disposition Finance Program with the FDIC. In that case, the government will be a co-investor, but could also agree in some cases to contribute 80% of the financing, with the government putting up $4 for every $1 in private financing. As part of that program, the FDIC would provide guarantees against losses on a pool of loans that a bank wants to sell. The program could guarantee as much as $500 billion in loan investments.

To beef up the amount of government funding, the Treasury is relying on the Fed and the FDIC to provide backing for these programs. For example, under the newly launched TALF, the Fed provides inexpensive and low-risk financing for investors to buy loans backed by consumer credit.

Whether these programs will work as anticipated depends in part on how Wall Street investors react to the AIG furor this week. Congress is moving to clamp down on anyone receiving financial aid by severely taxing bonus payments.

More broadly, investors have become leery about signing on to government programs for fear Congress will abruptly change the rules. Hedge funds, for example, which stand to make sizable profits from participating, worry they won't be able to keep their gains if the mood swing further against Wall Street.

Bankers are already expressing anger at Congress's moves. In a letter to employees Friday, Kenneth Lewis, Bank of America Corp. Chief Executive, said that Congress's proposals to clamp down on bonuses "have the potential to damage the ability of the government to engineer a financial recovery." Several of the government's plans, he wrote, "depend on the private sector being willing to contract with the government. If investors or companies in the private sector believe that the rules can change quickly and indiscriminately, they will be unwilling to participate."

Those sentiments dominated some discussions among representatives of the Managed Funds Association, the biggest hedge-fund lobbying group, during meetings in Washington this week.

The Treasury is still discussing whether it can get around restrictions on executive compensation that were included in the stimulus bill. That provision was designed to hit any recipient of bailout funds and some investors worry that their participation in the toxic-asset program would subject them to those restrictions. The Fed's TALF program already has such an exception.

For Mr. Geithner, getting this plan right is paramount to confidence in his abilities as steward of the economy. His reputation has taken a hit this week as lawmakers demanded to know why he didn't do more to derail the AIG bonus payments. Earlier, Mr. Geithner's nomination was clouded by questions about his failure to pay personal taxes. His February announcement of the toxic-asset plan, which was shy on details, was also widely panned.

The plan might be the administration's best chance to make a big impact on the financial crisis. With bailout fatigue running high, the chances of Congress proffering more funds beyond the $700 billion authorized last fall are close to zero in the short term, lawmakers say. The Treasury instead will likely have to rely on the Fed, FDIC and private investors.

—Damian Paletta contributed to this article

banyon
03-22-2009, 08:46 AM
I think I shall join the chorus of people calling for Geitner's resignation before he hands out too much more taxpayer $ to his Wall Street buddies.

Also looks like it's time to buy gold or silver.

HonestChieffan
03-22-2009, 08:57 AM
Thats a bit of an over reaction.

HonestChieffan
03-22-2009, 09:06 AM
FDIC buying troubled loans is a better move than waiting for a bank holding those loans to go under. The end result from the failure of a bank is the same thing. This proposal if its accurate just moves the FDIC in front of the issue and could help calm a lot of peoples feers and would allow the banks to get back to the basics of banking with more focus on only loaning money to those who will repay.

As I read these stories, its basically a safety net expanded. And if it works the return to the government and to the private investor could be good. I don't fear a catastrphic meltdown like some so it actually could be a good investment opportunity for anyone looking for an opportunity that is government backed and has collateral behind the asset. The investment could be pretty highly discounted in the beginning giving a investor a rather high return especially if there is a period of hand wringing and carrying on by people who will predict doom.

banyon
03-22-2009, 09:06 AM
Thats a bit of an over reaction.

What? Haven't you posted about 15 threads about how this is the end of the world?

alanm
03-22-2009, 09:25 AM
I think I shall join the chorus of people calling for Geitner's resignation before he hands out too much more taxpayer $ to his Wall Street buddies.

Also looks like it's time to buy gold or silver.
In all seriousness I think he's going to be offered up as a sacrifice before too much longer. :hmmm:

petegz28
03-22-2009, 09:51 AM
The dude is in over his head. He needs to go, these companies need to fail and we need to get on with life.

RINGLEADER
03-22-2009, 01:50 PM
FDIC buying troubled loans is a better move than waiting for a bank holding those loans to go under. The end result from the failure of a bank is the same thing. This proposal if its accurate just moves the FDIC in front of the issue and could help calm a lot of peoples feers and would allow the banks to get back to the basics of banking with more focus on only loaning money to those who will repay.

As I read these stories, its basically a safety net expanded. And if it works the return to the government and to the private investor could be good. I don't fear a catastrphic meltdown like some so it actually could be a good investment opportunity for anyone looking for an opportunity that is government backed and has collateral behind the asset. The investment could be pretty highly discounted in the beginning giving a investor a rather high return especially if there is a period of hand wringing and carrying on by people who will predict doom.

Good luck getting the private sector to do anything without the promise of large (and costly) returns after this government enacts punitive taxes and legislative oversight after the fact. Trust and certainty are big issues weighing on the free markets and unfortunately, with the current crop of buffoons and their inability to either be truthful or be consistent, recent events have only succeeded in creating more distrust and uncertainty about future actions.

But as long as Obama can keep his masses chanting his name nothing will change.

munkey
03-22-2009, 01:54 PM
The dude is in over his head. He needs to go, these companies need to fail and we need to get on with life.

this :clap: