How about taking bids on bad assets?
A government plan to buy up banks' troubled assets appears to be in the works. But how do you determine a price to sell those holdings when no one's really sure what they're worth? Auctions might work, as Jeremy Hobson reports.
The words "toxic assets" on $100 bills. (iStockPhoto)
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TESS VIGELAND: Punxatawny Phil says we're gonna have six more weeks of winter. But today President Barack Obama told NBC's Matt Lauer we only have one more week to wait for a plan to lift some of those massive debts off Wall Street's books.
President Obama: We're gonna have to wring out some of these bad assets.
MATT LAUER: Are you gonna set up a "bad bank" or whatever it would be called?
OBAMA: Well, I don't want to preempt an announcement next week.
So if there is going to be a bad bank, the question persists of how you price things like mortgage-backed bonds and other securities so that taxpayers don't end up holding the bag and banks don't fail?
Marketplace's Jeremy Hobson went looking for some answers.
JEREMY HOBSON: The most likely way to price the securities would be through a reverse auction. University of Maryland economist Peter Cramton says you'd get all the banks in a room, and they'd try to out-bid each other to get to the lowest acceptable price for pools of toxic assets.
PETER CRAMTON: So the prices are very close to true market prices. It's not perfect, but it works extremely well.
He says the government's bad bank would be unlikely to pay too much. If anything, the banks would get too little for the securities and some could collapse.
Sue Allon of Allon Financial says the government could end up pumping in even more taxpayer money to keep banks afloat. But that's no reason to delay the auction, she says.
SUE ALLON: These assets will have to be marked down if they're to move. There's nothing gained by holding onto them and not getting them out into the hands of investors.
Except maybe the hope that if banks just wait a little longer, home values will rebound and losses won't be as bad.
Peter Cramton says it's the same logic that makes you press the "No" button when the ATM asks you if you want to see your balance.
CRAMTON: We've got over $2 trillion of these toxic securities, and people are basically scared of pricing them. And that is ridiculous. I mean, we price General Motors stock, we price Citibank stock, why can't we price these assets?
The problem is it's not just those risky mortgage-backed securities that are considered toxic. Banks are reporting bigger losses on good loans now. So getting the bad assets away from the banks may no longer be enough.
In New York, I'm Jeremy Hobson for Marketplace.
Comments
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From Graham, TX, 02/03/2009
Before we dive into a distress sale, shouldn’t we take a look at the individual securities and assess the damage? Is it possible to cull out the bad apples and then realistically price the balance based on industry standards and current performance? This way the banks would not take huge losses on the sale of assets which were not toxic, and which will make someone a very secure long term investment. In the rush to get liquidity back into the market, we should not throw out the baby with the bathwater.
02/03/2009
Its ridiculous that we're still wasting future tax payments on this bad bank idea.
does anyone really think these banks found these bad loans on their doorstep one morning? No, these banks worked hard to find and buy these loans. Which means that when they are relieved of them...they will take their money and buy the same type of loan.
Face the simple fact--these ARE the bad banks! They already exist. There's no need to create a new bank to make the poor decision to hold a loan that won't pay. The banks that decided in the first place to accept these bundles, are already the bad banks.
From Durham, NC, 02/02/2009
In your reverse auction it sounds like the banks are trying to buy the toxic assets (They are trying to get the lowest price.) I thought the problem was that no one wants to buy these assets and so the government needs to buy them to put them in a "bad" bank. If there is already a real market for the assets, what is the problem in valuing them? Did Hobson actually mean to say that the banks would try to outbid each other to get the HIGHEST acceptable price at which they could get the government to buy the assets?
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