Josh's view of the TARP
Josh's recent post says that the TARP is designed "on the idea that the US taxpayer buys these securities for far more than they're worth". I disagree.
I don't understand why people think that the TARP would have to be administered this way.
The TARP does not have to, as Josh says, "buy these things at what the banks insist they're worth." (Per Josh's Antique Roadshow example, the TARP can certainly buy the asset for $850.)
Goldman, for example, could have a CDO it wishes to sell which has $100mm (face value) of mortgages that they've marked at 50 cents on the dollar. The TARP would need to do its own independent analysis to come up with a valuation. The TARP would bid whatever it thinks fair value would be. It doesn't have to buy them for what Goldman says they're worth. And whether the TARP pays 40, 50, or 60 cents on the dollar, it's still a massive loss for Goldman because Goldman probably paid close to 100 cents on the dollar if they were the one originally structuring the CDO.
I don't understand why people think that the TARP would have to be administered this way.
The TARP does not have to, as Josh says, "buy these things at what the banks insist they're worth." (Per Josh's Antique Roadshow example, the TARP can certainly buy the asset for $850.)
Goldman, for example, could have a CDO it wishes to sell which has $100mm (face value) of mortgages that they've marked at 50 cents on the dollar. The TARP would need to do its own independent analysis to come up with a valuation. The TARP would bid whatever it thinks fair value would be. It doesn't have to buy them for what Goldman says they're worth. And whether the TARP pays 40, 50, or 60 cents on the dollar, it's still a massive loss for Goldman because Goldman probably paid close to 100 cents on the dollar if they were the one originally structuring the CDO.
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The problem is if the government is buying the CDO (or pick the asset of your choice, it really doesn't matter), if they don't buy it at 100% of the obligated owner, they aren't really bolstering the industry, they're downgrading them. Get it?
Better to help the actual borrowers out, as this puts money (real, non-artifical money) in the banks pockets and helps the borrowers out, as well.
January 19, 2009 11:38 AM | Reply | Permalink
MCB we are stuck with snippets on cable and, most of the time, three or four paragraphs that attempt to define what TARP is.
Your point is well made. But why not give us longer version of the definition and how it has been applied.
If I am short on financial issues, I cannot be the only one. These polls that rate TARP or the bail out in general are meaningless. Most of those interviewed are as clueless as me or even more so.
January 19, 2009 11:38 AM | Reply | Permalink
No, I think Josh is right and here's why:
Say Goldman wants to sell its CDO at $100 a share. TARP wants to pay $50. Goldman grumbles but takes the sale and the loss.
Morgan has a similar security on its books that it has written down to $75 a share. But now, because of the TARP sale, a market has been made for that security. We all now know that the value is closer to $50 than $75. Because of Goldman's sale, Morgan has to take a big mark to market writedown and that means Morgan will have to raise new capital to meet its capital requirements. Uh oh, now Morgan's begging for money again and we're back to the mess, all because TARP made a market in these securities and caused Morgan to take a writedown.
The only way TARP can buy securities without doing this would be to overpay.
January 19, 2009 1:54 PM | Reply | Permalink
Maybe it causes more writedowns but hard to say for sure. The assets are so complex (at least some of them) that one sale won't necessarily be a perfect comp.
But that doesn't mean we have to bail out Morgan. It might force Morgan to merge with someone else or (yikes) go bankrupt. But is that so bad?
January 19, 2009 5:04 PM | Reply | Permalink
Yes, I agree. the government is going to pay what they are worth especially if buyers are beating down the doors to get them. No competition means lower prices and it doesn't seem that much of any bank is in a position to buy right now.
January 19, 2009 2:21 PM | Reply | Permalink
My guess is that these things are worthless. If they were worth anything at all there would be private market. But there appears to be no market at any price except for the government which means that whatever TARP pays for them will be too much. Treasury is playing this game so that it doesn't look like a give-away project to the voters when they bail out the failed banks.
January 19, 2009 4:14 PM | Reply | Permalink
I find it hard to believe the mortgages are "worthless". The property values may be less than the mortgages but they must be worth something.
The Resolution Trust Corp is a similar exercise and it ended up turning a profit and saving the banks.
The leveraged loans and mortgage assets do have markets. I disagree that it's "no market at any price".
January 19, 2009 5:07 PM | Reply | Permalink