Monday, March 23, 2009

Treasury Toxic Asset Plan

I don't get it.

However, it is very possible that this DOES NOT need to work as a prerequisite for an economic recovery.  In fact, the best case is if it sort of dies out with minimal participation -- for whatever reason -- as the economy recovers without this sort of help.


1.  The problem is with the shadow banking system, which is largely gone.

2.  This doesn't apply to small banks.  Period.

3.  There aren't that many toxic assets.  Unless someone would like to argue otherwise -- toxic assets are those that are opaque and difficult to value.  A bad asset isn't a toxic asset.  

4.   It applies mostly to investment banks, which were doing huge amounts of securitization, but not much anymore.  Legacy assets have no bearing on whether investment banks can sell new securitized loans.  The original TALF sounded promising on that score.

5.  Non investment banks don't have a lot of non agency mortgage backed securities.  

6.  FDIC insured banks have only abut $7 trillion in loans.  They don't mark whole loans to market.  They don't need to sell them.  

7.  The plan excludes CDO^2 or any mortgage security that holds something other than whole loans. 

8.  The investment banks may need to dump some securitized loans, but who/what/etc.  


I don't see how this could work.

The only example that I can think of is if -- if someone like WFC wants to get rid of Pic a Pay, which already has a 40% haircut, and perhaps book a profit -- then maybe.  Most other loan portfolios are booked with a 5% loan loss reserve or something similar.  

It seems like this is just for Citi and BAC.  Why didn't we just give them the $150 billion.


babar ganesh said...

i've been wondering about a lot of these points.

the public debate on this is obscured by the fact that the debaters never cite numbers. how big is the pool of 'toxic' assets and what are they? who holds them and what is the state of their balance sheets? what is the mark in the market and how are they marked on the book?

i have no idea how people can make their minds up before getting that information, but they certainly have.

in my opinion failure (ie a failed 'auction') is the best and most likely outcome but i could be wrong.

cap vandal said...


Having the facility but no successful auctions would be an OK outcome.

My latest thinking is that the leverage and subsidized interest rates will allow a bid close to true fair value and allow the investors to make 20%, which they need for the risk.

At least this way, there would always be a bid out there at a plausible price for distressed assets.

babar ganesh said...

curious, since you seem to maybe have an idea -- post-recovery, what do you think the scale of securitization is going to be?

cap vandal said...

It's too good an idea to just disappear because of excesses and one catastrophic failure.

In the 19th century, bridges tended to collapse fairly frequently, but they kept at it until they more or less perfected it.

For mortgages, I think agencies will have the market to themselves for a long while. Other stuff -- credit cards, auto loans, etc. will come back more slowly.

The basic concepts of pooling and tranching are too valuable to just disappear. Right now, there might not be any market for the equity and mezz tranches, but at some point, it will be back.