Still... no way, no how, no bailout
"Ms. Bair said the assets could be purchased at fair value, the figure banks use to value their own assets. Such a move would remove the challenge of placing a price on assets that rarely trade."
It was a bad idea in September, and it's a bad idea now. Josh has a post up about this now. And while some things have changed, other things haven't. The banks & their enablers are attempting a sleight of hand, convincing taxpayers to pay $350 billion for assets that are worth about $100 billion. That's total BS.
Not one more penny for the banks until common is wiped out and the unsecured creditors trade that debt for equity. No other solution is acceptable that involves the government funding these banks. No more deals that are so good banks are falling over themselves to get billions in free money from the Feds.
Sorry Citi. Your run is over, close up shop. BofA, tough luck, but you might be hosed. It's time for some pre-packaged bankruptcies before any more taxpayer money goes to fix our failing financial system.
Say it with me kids. No way, no how no bailout. I was right then, and I'm right now. Call Obama on Wednesday and tell that this plan would be BS.
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So then let's have the TARP buy the assets at whatever price it considers to be "fair value". The banks won't be forced to sell assets at those prices.
That way the government won't be overpaying.
Let's say Goldman has a CDO with a nominal value of $100mm and they currently have it marked at 50.
The TARP will need to come up with its own measure of fair value. The TARP is willing to hold those mortgages to maturity. If enough mortgages get paid back, the TARP could end up with a CDO that's ultimately worth 70 or 80 cents on the dollar.
Some of the assets are hard to value. So it's not a no-brainer. But it can work and it may be the best way to get the banking system working again. But these banks have a cost basis in the CDOs close to 100 cents on the dollar so if the TARP buys them at significant discounts I don't see how we're giving sweetheart deals to them.
The banks are still massively undercapitalized (although slightly less so than pre TARP 1.0). The best way to improve their capital bases is to let them get the assets off the balance sheets. And there should be a way to do this such that the banks aren't making profits in the trade.
January 19, 2009 11:09 AM | Reply | Permalink
Sorry Bill, you've been duped.
Imagine that BofA bought some crap mortgages for $100 because they thought they would be worth $110. They planned to profit. Suddenly, everyone knows they are crap. No one will pay more than $20 for the mortgage, because that's the expected long-run value. BofA responds by writing down that mortgage to $80. Now, instead of realizing their loss (that's how capitalism works), and selling it for $20 to get it off their books, they stubbornly refuse even though everyone else agrees it's worth $20.
Now they want the government to come in and pay $80. Eventually, once all the mortgage defaults happen, the government will recover about $10-30... let's say the feds got $30, which makes it simple. We've just spent $350 billion (more than $1000 from every man, woman & child in the US) to buy assets that'll eventually yield $175 billion. That's real money, and it's gone. You just made a $500+ donation to the largest banks in the country, spending money that could have been used to improve education or reform health care.
It's a scam, pure & simple. The CDOs will not be worth anything close to $0.20 on the dollar. But even given all that, I'm not completely opposed to the government stepping in. But not until the stockholders and unsecured debtors have made real sacrifice. The bondholders lent the money, and it's not the government's job to keep them whole.
Send your $500 to Wall St. bill, they will enjoy it. But I'm keeping my money. You're letting yourself to be bamboozled by professional thieves. You need to stop believing their PR and use your own critical thinking skills to assess the situation. The banks have nobody's interest but their own at heart, they tell lies to scare you into supporting them. Don't let them win.
January 19, 2009 1:48 PM | Reply | Permalink
But you're missing the point. The TARP can work well if it buys the assets from BofA at 20 cents on the dollar. If BofA refuses, that's fine. They'll go bankrupt or force to be taken over by JPM or somebody else.
I don't understand why you say that the CDOs won't be worth anything close to 20cents on the dollar. Are you saying the all of the underlying properties have no value at all?
I don't understand your math by saying we bought 350 billion for assets that will only yield 175billion??
If we buy assets at significant haircuts (ie your 20 cents) and they're secured by the underlying properties, I don't see how we can't make money on it.
January 19, 2009 7:09 PM | Reply | Permalink
Because the government and the banks are lying. The government is going to pay $0.50 for assets worth $0.20 and PRETEND that we're getting them at a discount. But we're not. We'll be dramatically overpaying for these assets, as a way of giving hundreds of billions of dollars to the banks-- a pure donation masked as an investment.
Did you know that Warren Buffett invested in Goldman Sachs, paid 1/4 of what the government paid, and received options worth twice as much.
Don't believe the news or the politicians-- it's a sleight of hand meant to finance billions of dollars in bonuses for Wall St. while the taxpayer gets saddled with the debt.
A complete scam.
January 23, 2009 1:41 AM | Reply | Permalink
If you want to think people are "lying" that's your business.
But you have no way of knowing that we'll be overpaying for the assets. You have no proof that we're paying 50 cents for something worth 20 cents.
I do know that Buffet's deal is better than Paulson's. But if the government doesn't get as good of a deal as Buffett, that doesn't mean that it's a scam or that it's being ripped off. Buffet will make a killing on his investment and the TARP will make less of a killing, but will still makes tons of money on it. Paulson's deal with the banks had to look very similar to all the banks that were in the room on that day back in October. He couldn't bend each one over the way that Buffet was able to do on a one off basis.
Last time I checked there were hundreds of thousands of Wall Street bankers getting laid off. People I know at banks who still have jobs are getting diddly for bonuses this year. Most of it is in company stock or toxic debt that's still on the company's books (CSFB is paying bonuses with LBO and CMBS paper it still owns). And some banks like JPM who actually made money in 2008 should pay bonuses to their employees
January 23, 2009 7:08 AM | Reply | Permalink