Finding a Home for Toxic Assets: Where is the Final Resting Place?
There is a thinly veiled conundrum surrounding the new Public-Private Partnership Investment Program (PIPP) created by Treasury to help get toxic mortgage assets off the books of banks. Who will be the ultimate owners?
We've heard the bellows of those you know best, "Sell 'em! Get 'em off the books of the banks! Break the credit freeze!" But where does a toxic asset live once it has been sold?
The present plan is to take the loans off the bank's books through an auction process overseen by the FDIC and Treasury in partnership with the private sector. A handpicked group of fund managers will manage the troubled portfolio. They can also bid for packages of bad loans or buy into newly created investment funds.
Will these loans magically lose their toxicity because they've been "cleansed" via a government sanctioned auction process? The theory is that they will be priced in such a way as to "cleanse" them of their sins. We hope. Now is the time to focus on the Obama Administration's frequently used term, "price discovery."
Treasury and the FDIC will take a best guess on how to price them based upon a number of esoteric market factors. However, if the buyers of the toxic assets bid a low price and the banks hit those bids, the banks will take a current hit on their own P&L. If they don't hit the bids, there will be few, if any, transactions. In lay terms, the price has got to be right or there will be no buyers in the auction process. The banks may have to take a bath on the loans to get them off their books, all at taxpayer expense.
Then we get to the gnarly part. Once they auction off the loans, who will be the ultimate owners? Where is the final resting place of a toxic asset? We know that investment funds have been formed to take advantage of this opportunity. The securities will get sold at auction to, for example, institutional investors and some of the large public pension funds. Stay with me. The ultimate investors in those funds are individuals. Me and you - the folks from Main Street. The wheel has come full circle.
Along the same lines, while banks can't purchase their own assets, under the Treasury program there is no ban on the purchase or sale of securities and loans by financial institutions to one another. The average person likely doesn't realize that banks will be able to sell the loans to each other - which means that toxic loans could wind up back on the books of the same financial institutions but with different parentage. This approach won't rid the financial system of toxic assets. It will merely make the government and taxpayers liable for losses.
It is questionable whether Main Street will be able to make money on ownership of toxic assets as an investment strategy. Wall Street knows how to price risk into the sale of an asset, but the risk adjusted price is likely not going to benefit the ultimate investor if the margin potential has already been realized. Bear in mind that these things are going to be priced with prayers and pixie dust.
Who then will the circle of toxic investing really help? While the banks will get a manufactured "clean bill of health," that is like removing HIV from one person and injecting it into the body of another and expecting that nothing will happen. Private sector participants partnering with Treasury will need assurance that they can make money on the portfolios or they won't get involved. No one could blame them for that. After all, think of the political lion's den they are stepping into in order to assist in saving the global economy.
We are using taxpayer funds to bail out banks, we are using taxpayer funds to dispose of assets that destroyed our economy, wealth and retirement savings. Then we will sell the same toxic assets back to Main Street as investments to rehabilitate our retirement savings. This concept fails the same as the theory that laundering money makes it clean. It is still the same dirty money, just in different hands.
We are not facing the heart of the matter by merely moving these loans around like a Rubik's Cube. Yes, it is a complex question, but I'm scratching my head to figure out why taxpayers have to foot the bill to dispose of these assets to merely bounce them from one institution to another. A toxic asset is no less toxic if it finds a new home in another investment portfolio. Isn't that what got us here to begin with?
Even if the loans are off the books of the banks, it is doubtful that banks will be any more willing to lend in this tough economic environment. Banks should be made to face the music and restructure these loans or unwind positions under the guiding hand of Treasury, the Fed and the FDIC in partnership with the private sector. Then they will be forced to take responsibility for the mess they've created.
As retail investors, we should be scared to death that we will, unwittingly, own these things a second time. These loans originated in banks, got sold to the secondary market, were chopped up eight ways to Sunday, wound up in pension and other types of investment funds all over the world -- and then crashed the market. Today, they are performing worse than before, but will get repackaged and sold again. Fool me once, shame on you. Fool me twice, shame on you and me.
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The disposal is our kids. Let Mikey eat it, he'll eat anything. The problem is they are going to be really upset when they come to voting age and see the junk we've hung on them.
We need to get rid of the term "toxic" assets for good. It is a meaningless adjective when used to describe an asset and just serves to confuse the issue.
I'm no expert but if something is an asset it must have some value. It may be worth less than you paid for it but it is still something.
And, if you are talking about Credit Default Swaps or similar, where you are on the losing end of a bet, then that should be called a liability not an asset from my understanding.
If there was a market and you could just "sell 'em" the toxic crap would be flying out the door.
The root problem is there is NO MARKET for "toxic paper". Ergo the government wants to socialize the losses for the failed banks and their fraudulent banking model.
Timmy Geithner's plan allows Hedge funds a high leverage play with free money limiting their downside risk. Geithner's plan is playing accounting legerdemain with the banks books nothing more.
The latest kick in the head is selling the toxins to the unsuspecting public as some public offering conning the citizens into a "buy in" in a false dream that there may be an upside.
The average citizen will not be afforded the same leverage that makes the Hedge funds money. It is total risk.. even better for Timmy's plutocrat pals as the Hedgehogs cherry pick assets and stick JQ public with the anal cancer pie.
Banks dont sell them because they are getting on average 90% of the cash flow , because people make payments. Are you paying your mortgage?
Now if you believe these assets are worthless, I will make you the same offer I have made Krugman.. I will buy your house for 10% of what you paid. They are only worthless if your house is worthless. Even in forclosure I will get 40-50% return.
The author some how neglects that there are alway bad investments, toxic assets that at disocunted prices are always bought up! This is nothing new .. happens daily.. bought up by individuals all the time... by collection agencies... and by finanical instutions.... There's an industry that does this. It just overloaded by the defaults caused by us not paying our debts.
The problem this time the markets froze due to volume. More Toxic assets than buyers which drove the price way below what their cash flow value is/ pledged security.. a home.
If not this plan, then where do the toxic assets end up.. in the same place!
At a price, they are a good investment /not toxic. Same with stocks,, many have dropped 80% in value, does not mean that at their new price they are Toxic/ that some will not go to zero...while other will increase 500%...
Given the huge refinancing going on.. some of these toxic assets are going to be worth 100% of face value since they will be paid off completely.
Regards
Here we go again arguing "value" There is no intrinsic value in anything unless you want it. Trouble is what we ALL say we want is 'Money' but money is not really real. It's a symbol and the house of cards that we have lived by using this symbol is now collapsing. Let it collapse. Yes it will be frightening but we'll get over the fear and learn to co-operate which is what we should have done in the first place. Oh when was the first place??? Several millennium ago.
Sundialsvc4 - no one seems to have caught the meaning of your post.
THERE ARE NO TOXIC ASSETS! There are mortgages in default at a much greater rate than in the past - that is the only part of the "toxic asset" scam that is actually an asset! The collective value of those assets is not enough to crash an economy. The amount of money the government has paid out to banks and financial firms, AIG, etc. so far is probably enough to buy every one of those bad mortgages, in full, more than once.
The rest of the so-called "toxic assets" - the part with no ASSET to it - are the things like credit-default swaps. They are nothing but paper. Wall St. and the banks should eat the value of these non-assets as the perpetrators of fraud. Those pieces of paper were sold, falsely, as having value when the only value they had was to the people selling them. They sold a fraud; let them suffer the consequences AND SEE THAT IT CANNOT HAPPEN AGAIN.
I agree completely.
The Mortgages held are around 14 trillion.
Of which 1.4 trillion are currently troubled... and almots trillion have already gone bad, but the holders got the homes..
That said you are correct... Even in foreclosure, on average you get 40-50% of the face value.
The value of them dropped below any reasonable valuation based on payments/cash flow because of the sheer volume, where sellers were higher than buyers. Its a market distortion. 90% are paying.. so they s.b worth 90% less a risk factor/return.
The drop in asset values reduced the money supply and the amounts banks could loan.. freezing credit markets... The FED and tarp has pumped money into the economy/banks to make up for the 7 trillion dollar drop in asset value.. what they are putting in is not money lost or spent for the most part... You have to make up the drop in money supply inorder to restart asset inflation and end the downward cycle.. only known cure...
Its a bad situation but magnified by a market distortion much as oil was not worth 147/BBL.
Regards
Regards
So taxpayers get to foot the bill now and later but still have nothing but toxic assets to show for it. Meanwhile, the rich get richer , the poor get poorer, the middle class is forced to bend over once again and neither Congress or the President doesn't even hold our hair while we puke over it all.
The middle class caused this problem to begin with. So what's wrong with it having to bend over to receive a good spanking?
Lots of people to blame and indict--banks, govt, people who were misled or uninformed or not careful. So, even if the money cannot be recovered, like a life cannot be recovered, who gets the penalty? There is always a penalty. That's our "system." Even if I am ignorant of the law, that's no excuse for breaking it (as we are told). So, who pays for these crimes or transgressions that will cost the public? How will they be held accountable. And who in govt gets the trip to the gallows?
Why are we helping the institutions with toxic assets (which are really assets that were overvalued not worthless). Who owns these so called toxic assets. The extremely wealthy, foreign countries whose favor we need or want. Definitely people people with major influence since no one at these financial instutions even got fired and got bonuses to boot.
You and I own these toxic assets. They balance out with the IOUs we get from our banks when we deposit our savings on savings accounts. If you think that the wealthy will be the ones to pay for this you assume wrongly. Wealthy people have long secured their assets in such ways that they will not lose a whole lot, certainly no more than they can afford to write off with a smile and a drink.
I agree with you. I believe the wealthy may have owned toxic assets along with foreign countrries and they used their influence to get the taxpayer to buy them out.
Can't make a silk purse out of a sow's ear.
This article misses the important point that the only reason these assets are "toxic" is that they are overvalued. The PPIP plan is a bunch of sleight-of-hand to use taxpayer money to keep banks from losing their shirts by admitting they paid too much for assets (and paid too much for the people who made careers out of inflating the price of those assets AND got commissions based on selling them at inflated prices). It would be more satisfying (and ethical) to make banks face the results of their poor decisions, but apparently the powers-that-be have decided that would be disastrous.
Banks can't lose their shirts. They can lose your deposits, though, which leaves you in a rather unpleasant position. Can you imagine? One day you wake up to learn that your bank is closed, your bank account is not accessible and the FDIC is out of money to repay you...
Now wouldn't that be a fun day?
fscottnm-
I agree completely.
Whichever way you cut it, the people will carry the can for the toxic assets, be they dispossessed house owners or ordinary taxpayers. Its high time the people who benefited so enormously from the creation of the toxic assets, should be deprived of their ill gotten gains and then their "final resting place" should, of course, be in gaol, alongside their fellow criminals.
Everyone is missing the point, which is that the investors in the toxic mortgages are going to bring foreclosure actions against the homeowners and take over the property from the homeowners, leaving homeowners holding the bag. There is no holding of these investments. The investments are no more than the right to sue to recover millions of homes of hapless homeowners, turning them from hapless homeowners into hapless home-renters.
Where is the break for these homeowners?
Carl E. Person
attorney
Tax payers don't get breaks in America unless your filthy rich, didn't you know that?
Carl, as an attorney you know that the easiest way not to get in conflict with the law is to not break the law. And the easiest way not to be stuck with a mortgage contract that one can not service is not to sign on the dotted line. And I am pretty sure that as an attorney you also advise clients that once they have signed on the dotted line, the only sure way they can expect to keep "their" home and investment is by honoring the contract they signed.
In order for this plan to work, "toxic assets" must be subject to mark-to-market valuations.
In light of the continuing decline in housing prices, 40 cents on the dollar sounds about right.
Anything more than that means the American taxpayer is being taken for a ride.
The toxic aspect only disappears from the books if the taxpayer swallows it. No other way. That's not exactly "being taken for a ride". It's just a fact of life that these assets have soaked up all the liquidity in the system and in order to undo that we need to print money. One way or another... it does not really matter. And, yes, some people will get stinking rich by participating in this scheme on the winning end. The only phrase that comes to mind here is "Suck it up!".
Don't give the money to the banks...give it to the home owner to be used only to pay the bank off for the toxic mortgage.
1) the Bank gets the money anyway.
2) the toxic mortgage is gone.
3) people keep their homes.
If you are going to hand out billions due to toxic assets why not pass the same dollars through the owners of those assets to pay them off? This helps three ways for the same dollars! How can Congress and Treasury be so stupid unless they are in the pockets of the banks?
Banks are just using the money to buy more banks and no one is being helped in the process except the banks.
They often won't even sell the toxic mortgages when they have offers because they find holding them to be a bargaining chip when begging for money.
I can tell you why your idea will never happen.
Because it makes sense and it would actually help the people.
So why should we give free money to a bunch of idiots who couldn't do the math when they signed their mortgages??? So that home prices can stay high and we can go through another bubble because every speculator wannabe learns the lesson that all you have to do is to buy a home at a price that you can't afford? Yep. That will really help the 90% of honest home owners in this country who pay their mortgages on time.
I think it's interesting that you seem to equate the ability to pay a bill with honesty.
There are millions of honest people that, for one reason or another, can't pay their bills or make their mortgage payments. A lot of those people weren't a "bunch of idiots who couldn't do the math" - they could afford their mortgage when they signed the paperwork. Now, someone's been laid off. Or the mortgage company has raised their interest rates 3 times this year, despite the fact that the mortgage company is paying LESS for the money.
When I hear the president (or anyone else) talking about selling something that is "worthless" (his term), you KNOW the buyer is going to be ripped off.
Because if it is "worthless" it is worth NOTHING, so it should NOT BE SOLD.
If it's TOXIC, that's even worse. The owner of something toxic should PAY to have it taken off their hands.
In the economy, in the environment, whatever -
WHOEVER PRODUCES TOXINS should be responsible for their disposal - NOT fraudulently sell it and make money from the buyer.
If we follow your logic it means we should let the foreclosure wave roll across the country and take out millions of people and thousands of banks. Sounds like a plan. It just does not sound like a good plan.
Worthless is worthless
Toxic is toxic
Why should we taxpayers be forced to pay for them? No private buyer would! It simply wouldn't make sense.
Now, how about cutting the vagueness and scare tactics which are just like the BANKSTERS have been using to put a gun to our heads, and actually explaining clearly WHY it would be so disastrous to make Wall Street GAMBLERS take their losses.
Like I said,
The owner of something toxic should PAY to have it taken off their hands.
They made money fraudulently. Seize their assets and pay back the people (us) who've been ripped off.
The answer -- which still rewards rogues and frauds -- it to detoxify the assets.
Do this be government and distressed homeowner entering into shared appreciation mortgages.
This makes all the many derivatives built on these mortgages whole again.
It also preserves neighborhoods and families.
What it also does is to keep home prices unaffordable for most people and it invites speculators to start another real estate bubble.
I agree (strongly) with almost every post you have on this thread KTM, except this one. I see it from the opposite perspective.
The value of a home is determined by the purchase, not by the speculation of a future purchase. The Joneses bought a house for 300K and make payments each month on the 300K mortgage. The house was valued by the Joneses at 300K and so far the Joneses are worth the 300K. That house is worth 300K - period.
The Smiths paid 300K for a similar house and then went into default. Opps! What went wrong? Was that house somehow over priced? No. The Smiths were over valued. The Smiths, as it turns out, were really only worth a 200K house and if they had bought one they'd be making payments today too.
93% of mortgages are being serviced monthly. Those homes were valued correctly by the only parties who get to do that, the buyer who fulfills the contract. 4% of homes are in default, 3% are over two months behind but are keeping up at least interest payments. Although 7% of buyers got in too deeply, their bad choices do NOT negate the value of the other 93%.
Because 4 to 7% of homes are suddenly flooding the market while banks can not extend credit, today's market price is "saturated". That is not tomorrow's market. Investors buying those 4 to 7% of "toxic" mortgages are gambling on tomorrow's market.
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