Marketplace Whiteboard
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The public-private partnership
The U.S. Treasury Department plans to recruit private investors to take toxic assets off banks' balance sheets. Senior Editor Paddy Hirsch explains how the plan is supposed to work.
Hostile takeovers
We all know what a takeover is. That's when one company agrees to be bought by another. But what happens when companies don't agree and the takeover goes hostile? Senior Editor Paddy Hirsch explains.
Derivatives
Credit default swaps? They're complicated -- and scary! The receipt you get when you pre-order your Thanksgiving turkey? Not so much. But they have a lot in common: They're both derivatives. Senior Editor Paddy Hirsch explains.
Bonds, notes and bills
So much government debt! But what's the difference between the Treasury's bills, notes and bonds? Senior Editor Paddy Hirsch explains.
Inflation
Most economists agree that inflation of about 2% or 3% annually is a natural function of a growing economy. But people are worried government stimulus measures could spark much higher inflation. Senior Editor Paddy Hirsch explains
High-frequency trading
High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains what high-frequency trading is and why some people are up in arms about it.
Factoring
Many small businesses get the cash they need to operate and expand from so-called factors. One of the biggest factors in the business is CIT, and with CIT on the ropes, small businesses are worried. Senior Editor Paddy Hirsch explains what factoring is, and how it works.
Financial alchemy
Many asset-backed securities have been downgraded from AAA recently. But at least one issuer has miraculously repackaged a downgraded deal to make some of its bonds worth a AAA rating again. Senior Editor Paddy Hirsch explains.
Where's the toxic waste?
Banks are paying back TARP money and claiming they're the picture of health. So what happened to all those toxic assets that were clogging their arteries a few months back? Senior Editor Paddy Hirsch explains.
Dark pools
Dark pools are exchanges where people trade stocks anonymously. Senior Editor Paddy Hirsch explains how they work, and why the SEC is considering regulating them.
The 'repo' market
Senior Editor Paddy Hirsch explains why the repurchase (or repo) market is a vital part of the financial system, and why the government is considering changes to it.
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Comments
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From Venice, FL, 05/06/2009
Wonderful! Thank you. I have been hoping for a primmer in economics for a long time and you've made my day.
From MA, 04/08/2009
Paddy,
Great explanation!
Without reading too much else about this, I am struck by how much of a burden is being placed on the FDIC. And then I saw the below article and got even more concerned: the FDIC wasn't collecting fees and how, when it needs them, will be hitting up banks for the needed funds with an emergency fee, and now will go beyond its charter (the D in FDIC stands for Deposit, not Dtoxic-asset) to backstop the Geithner plan. And the only solution seems to be to reinflate the housing bubble to make the Dtoxic-assets worth anything. And that doesn't seem easy or make a lot of sense.
Am I crazy or is this what's going on?
Now-needy FDIC collected little in premiums. With fund going strong, banks didn't pay for decade. By Michael Kranish. Boston Globe. March 11, 2009
http://www.boston.com/news/nation/washington/articles/2009/03/11/now_needy_fdic_collected_little_in_premiums/
From Petersburg, VA, 04/07/2009
@ James Fredrickson - Like this? http://www.businessinsider.com/banks-plan-to-bid-on-each-others-toxic-assets-with-taxpayer-money-2009-4 I find it hilarious that Paddy would use a Hummer H1 as metaphor. The H1 will never be worth more than his $5,000 example. And that is why the private, of this public-private "partnership", will not touch this. The reality is, that the same people who are expected to clean this up, are the ones who knew exactly what they were doing, making fat bonuses for doing nothing but build a house of cards (when they were actually doing something) and are now not going to put their easily earned, ill-gotten gains into a plan they know will not work because they really do know what the assets are worth. Look at how much excess housing capacity is available, add what is being held back, and adjust for all the people who were put into houses they really couldn't afford and will be losing them; and you get some numbers that will scare your britches off! I am getting a drink!
From Seattle, WA, 04/07/2009
What's to stop Sam from forming his own hedge-fund on the side and using public/private partnership money to effectively buy the toxic asset from himself, thus taking it off of his books at higher price and shifting his risk onto the tax payer?
04/04/2009
Hi Haroon.
Thanks for your comment. Sorry you don't like the Hummer analogy, although I have to say that I don't agree that cars lose 50% of their value after the initial sale (seen Blue Book rates for second-hand Lexus hybrids recently?). All best are off if you're talking GM cars, of course!
But I think you're right about the roulette we're playing here. The longer it takes to recover, the more likely it is that much of this debt will end up worthless, and we will end up losing our equity stake. We could step in and buy all the debt at par and keep our fingers crossed. But think of the downside there!
From CA, 04/03/2009
Noone explains all these complicated, technical terms like Paddy. This is fantastic. Keep 'em coming!
From Atlanta, GA, 04/02/2009
Your presentations are very informative and thought provoking.
I have a small criticism. I wish you would have used a better analogy. We all know cars reduce in value by half the second they are driven from the lot. And unless it's a collector's car or a rare exotic, it will NEVER be the case that a car goes up in value, no matter what you do with it.
comments:
It seems to me that this plan is attempting to spread the risk. However I think taxpayers are getting an absolute raw deal. From what I understand, the FDIC is willing to issue a maximum of up to a 6 to 1 debt-to-equity ratio to purchase these asset pools! And the UST will also provide equity at the same time. Although many details have not been released about the terms of the debt (date of maturity, interest rate, etc.) I feel like the government is playing russian roulette here. If it makes one slight miscalculation or error in making these loans the results could be disastrous. This is not even mentioning the assets themselves; nobody can predict what values these assets will fetch in 1, 2, 3 years from now. Is this seriously the best that we can come up with?
What are your thoughts/comments on the issue?
04/01/2009
HI Anonymous (or is it Noel)
You ask a great question - what are the toxic assets? They can be anything. Mortgages, securities backed by mortgages, bonds, loans, whatever - anything that is trading, or marked at distressed (less than 80 cents on the dollar?) prices.
But the price does not necessarily reflect toxicity.
I address this issue to an extent in another whiteboard on this page, but it's worth noting that not all assets labeled toxic now will necessarily turn out to be toxic in the future.
For example, if I'm a troubled bank and I need to sell all my assets to raise money, it doesn't really matter whether those assets are CDOs of mortgage backed securities (often genuinely toxic, ie, not paying interest and probably unlikely to, ever) or senior secured loans (not necessarily toxic in the long run, as most are still paying interest and even if the companies go under, they're well-enough collateralized that I'll get my money back).
Why does it not matter? Because I need to sell them now to make money, which means I have to take the market price for my assets, however low that price may be. In the case of genuinely toxic assets (those CDOs) they're probably only worth 5c on the dollar, but in the case of loans that are likely to pay out at 100c on the dollar in a few years, I'm at the mercy of the market. I'll get what the market's prepared to pay and no more. In other words, one bank's toxic asset can be another bank's goldmine. Which is what Treasury is banking on.
04/01/2009
My question is.. what are the actual toxic assets? Is it, basically, houses and land?
From manhattan, NY, 04/01/2009
Keep up the good work! I love watching the White Board videos. Paddy Hirsch makes a great teacher.
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