Saturday, March 21, 2009

Is the new Toxic Asset Plan a Mirage?

More and more, it appears the new toxic asset plan is a mirage--it is being done with smoke and mirrors.

Current talk is that the Treasury is going to buy $1 trillion in troubled mortgages and related assets from financial institutions. It should be noted that this means we, the taxpayers, are going to be buying these toxic assets.

The plan is being designed to rescue the nation’s banking system by taking the toxic assets off their balance sheets. Does that sound familiar?

Nouriel Roubini has been writing about this for some time, and if he is right the numbers are staggering. More than the $2 trillion that is currently being forecast.

It appears the plan has three parts:
  • The FDIC will set up investment partnerships and lend 85 percent of the money needed to buy up troubled assets that banks want to sell. This will be accomplished with low interest, non-recourse loans, and lots of taxpayer money. It remains to be seen how purchased assets will be priced. Incidentally, this is how the Resolution Trust Corporation ( RTC) unloaded much of the real estate from the savings and loan crisis--non recourse loans.
  • The Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money. If this turns out to be part of the package then one can assume they have the managers lined up.
  • The Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility. The plan is to buy up as many toxic assets as possible so that banks can get back to lending. The available monies to the Treasury will be running out of money soon so the key word here is--leverage. We never learn.
This is not very different from what was proposed last September. It has more buzz words and wrinkles but one thing remains the same--lots of taxpayer money; and hope that this strategy will help avoid the inevitable nationalization of banks.

There is one big wild card. Will the banks be willing to sell the mortgages at prices substantially below the prices they paid for these securities. Stay tuned--I doubt it.
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