Big Risks for U.S. in Trying to Value Bad Bank Assets
As the Obama administration prepares its strategy to rescue the nation’s banks by buying or guaranteeing troubled assets on their books, it confronts one central problem: How should they be valued?
Not just billions, but hundreds of billions of taxpayer dollars are at stake.
The Treasury secretary, Timothy F. Geithner, is expected to announce details of the new plan within weeks. Administration and Congressional officials say it will give the government flexibility to buy some bad assets and guarantee others in an effort to have a broad impact but still tailor the aid for different institutions.
But getting this right will not be easy. The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.
The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.
The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.
The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid.
Ten cents on the buck is the choice–take it or leave it. That’s generous in an environment where banks, mortgage lenders, rating agencies and hedge funds conspired in a massive fraud against the American public–a fraud that has brought the nation’s economy to its knees.
Indictments and jail terms will follow as necessary.
Alternatively, the Fed can franchise a group of Federal Banks nationwide. New banks, newly funded without the toxic assets garnered by fraudulent banking practices–the famed liar loans investment bankers chortled about over cigars and brandy.
Charter a couple dozen brand new, shiny, federally funded, federally guaranteed, federally operated, staffed and governed banks. Give them a couple trillion in assets, with the absolute determination that loans will be provided to students, homeowners and small businesses of sufficient character and assets that they are reasonably able to carry the fixed-rate of interest and repay the obligation.
The rest of the banks, who have thus far used bailout funds to buy other banks and pay out continued wage-extortion, can do as they like. If their investors choose to bankrupt them, so be it. We will have in place a backstop of ‘clean’ banks to provide the lending that is everyone’s goal, with more than just the hope and a prayer that pouring more into frozen credit markets will thaw frozen minds as well.
There are already 9,000 independent banks in this country that are just fine and have no discernible toxic loan obligations. New, clean banks will serve as worthy competitors.
It’s considerably past time to reward the conservative and punish the greedy. Let’s get on with it.