Pricing a Toxic Asset to the Market

The government wants to buy up toxic assets from banks. If you look up toxic in the dictionary you will find that when something is toxic it can kill you. We know that banks own lots of toxic assets. We are not hearing much discussion about the problem, how it happened, and who is responsible. In fact, the U.S. government by announcing that they are going to buy "toxic" assets is sending the message that no one is at fault or to blame.

The U.S. government is ready to reward the decision makers-- the management-- of the banks that issued these toxic assets by buying all the bad stuff and letting them keep all the good stuff. This is antithetical to how things work in the capitalistic system. When you manage a company poorly you get fired. When the collective management makes bad business decisions the company goes bankrupt. Surviving companies in same businesses get rewarded because they now have less competition and more potential customers. Sounds simple right?

Why would I as a taxpayer want to own a trillion dollar pile of toxic assets? I would not, how about you?

Here is a novel idea. How about we take our trillion and invest in bankers that avoided this mess. In other words, we supply them with capital to grow. Obviously these new banks would be strengthened and additional capital would flow to them in the form of deposits from, uh, taxpayers.  As part of the deal we require these bankers to buy toxic assets up at "real" market prices. These real market prices will be discovered in the market place. The banks can repackage and sell these assets, over time, to collection agencies and investors. This is not a novel idea. Banks, credit card companies, and the like are in the habit of selling distressed assets and then allowing the new owners of these assets to fend for themselves. In other words, these distressed assets end up in hands of companies that know how to manage them, work them out, and how to turn them into a profit. If not, they go broke. The buyers of distressed assets never do it with government money. Don't be fooled. There are plenty of vultures out there that would love to get their hands on so called "toxic" assets. The big difference here is that unlike the government they will end up owning these assets at a fair market value.

It is true that shareholders and debt owners in the pitiful companies that loaded up on toxic assets will get wiped out, or nearly wiped out. Guess what, they are going to get wiped out anyway.

Here is one thing I know. Banks are not going to sell their toxic assets to the government at anywhere near fair market value. If they do guess what is going to happen, they are going to go bankrupt on the spot.

So it appears that we taxpayers are going to buy toxic assets at well above fair market prices. Does this remind you of the Savings and Loan crisis bank in the 1980s. If it does you are crazy. The model they used back in those days won't work this time around. Oh, and by the way, when the RTC took over the saving and loan or bank went poof.

There is a good article over over on the New York Times website entitled, Big Risks for U.S. in Trying to Value Bad Bank Assets. They discuss the current disconnect in trying to price toxic assets. In other words, a bank might be pricing an asset at 97 cents on the dollar, while the market place is pricing it at 38 cents on the dollar. What price do you think your Uncle Sammy will end up paying?

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