Bank Rescue 2.0: Treasury Could Dump Toxic Assets Online

Bank Rescue 2.0: Treasury Could Dump Toxic Assets Online

The Treasury Department is not ruling out (though, not endorsing either) a novel proposal floated in small circles of tech/finance experts: to post Wall Street's toxic assets online, so any American with an Internet connection has the chance to assess their value.

"Treasury hasn't endorsed or rejected the idea," said an official at the Department.

Economists and activists are intrigued by the plan, with some speaking highly of it. They argue that an online index could boost the government's efforts to purge banks of their dead weight, and open up a process that is currently expected to be highly secretive and overseen by just a handful of Wall Street's most powerful firms.

"An economist would generally tell you that more information is good, and that this would help us with the price discovery process, or someone will use this in a way no one thought of," said University of Oregon economics professor Mark Thoma. "In the end it probably won't do much harm and could do some good."

Discussion of such a proposal should be considered, as the Treasury official added, in the context of greater efforts to pursue transparency, including posting investment contracts for future transactions, instituting rules to limit the influence of lobbyists in the Emergency Economic Stabilization Act, and launching on Tuesday the website FinancialStability.gov.

Unlike those steps, the idea to post toxic assets on the web is still in formative stages. Still, experts say it's not difficult to conceive.

Toxic assets are already digitized, so putting them on the web wouldn't be hugely labor intensive. "I think it would be totally feasible," said Dean Baker, co-director of the Center for Economic and Policy Research. "They have everything there. None of this should be secret information. So the expense involved would be to hire competent people with basic computer skills to post it online."

The benefits, Baker and others note, are also quite easy to predict. More eyes would result in a more honest assessment of an asset's worth, regardless of whether the public was offered the right to bid on these assets (which, currently, it is not).

"Generally speaking economists believe that more public information, openness and transparency make markets work better," said Chris Carroll, a professor of economics at John Hopkins University. "Even if it is information that already exists online," he noted, "if it were organized in a way that can be easier to understand, that can be useful as well."

There are some potential downsides. One worry is that private or proprietary information would be spread over the Internet for anyone to see. Another, Thoma said, "is that you can confuse people more than you can help them." Posting the assets online could result in "eyes focusing on one particular place. And if that is not the right direction, it could reinforce that downward trajectory." In short: one asset deemed to be below its current market value could lead to a perception that all the assets are similarly worthless.

In this environment, says Matthew Richardson, a professor of finance at New York University, banks have "an incentive to keep the market opaque." With the goal being to get the assets off the book as quickly as possible, debate over the quality of these assets, let alone the possibility that they are determined to be much worse than imagined could prove problematic.

"The government has laid out essentially free leverage to investors," said Richardson of Treasury Secretary Timothy Geithner's public-private hybrid plan for purchasing these assets. "So if the prices are too low, the banks are going to try and hold on to the assets unless the government forces them to sell them... If they are too high then they will go and sell them."

That said, Richardson considers the idea of posting toxic assets online one that, while "a little gimmicky" could "work pretty well." His chief concern with the current system is that banks will "cherry pick" which assets it puts up for auction. Getting them all on the web would effectively eliminate that concern. As for the complexity of the assets -- some of which range in the thousands of pages with complex mortgages packaged together in trusts - causing confusion among the masses, Richardson makes a valid point. "I don't even think the people who bought [these assets] knew what was in them," he said.

Indeed, while Dennis Kneale, a co-anchor of Power Lunch on CNBC, said he is worried about people being overwhelmed by all the data, he believes that when it comes to evaluating and even bidding on these assets, "millions would be vastly better than six" (the number of hedge funds he predicts will be allowed to participate in Geithner's program).

As such, Kneale has a proposal that he believes will achieve all the upsides of greater involvement in the toxic-relief effort while avoiding some of the risks. Called "The Rob Plan," it utilizes Exchange Traded Funds - essentially, a basket of min-funds - to take the toxicity out of the banks and while encouraging more market activity.

The banks pick out their very worst mortgage-backed securities, which threaten some of them with insolvency if they were to mark down this securitized garbage to reflect its true lack of tradable value in this fretful market.

Let's say the scariest bad stuff has a combined on-the-books value of $1 trillion. All of it goes into a joint central fund, run by a quasi-governmental entity. In return the fund hands out ETFs to the banks, proportionate to the sums they had put in.

The feds then pay the banks a 4 percent annual dividend on the ETFs. This would cost taxpayers $40 billion a year on $1 trillion in bad assets--and pump that sum into the banks that were the sickest from all those silly derivatives.

So the banks' balance sheets suddenly have been freed of the scary bad stuff, and in its place are the ETFs, which produce real income (the dividend). Instantly that shores up their capital and adds to their cash flow, letting them boost their lending elsewhere.

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