Tuesday, February 3, 2009

The toxic bailout

I printed this article out, but did not read it until today. It is an excellent bird's eye view of the problems faced by regulators in trying to "price" toxic assets. From the NY Times, Big Risks for U.S. in Trying to Value Bad Bank Assets:
A frequent refrain in Washington and on Wall Street is that there are no current market prices for toxic securities. But people who buy and sell these investments say that is a simplistic reading of the problem. They say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.

The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

Michael G. Thompson, a managing director at the S.& P. group, says his computer models can easily calculate what the bond is worth under different situations. “This is not rocket science, this is straight bond math,” he said. But determining what the future holds is much harder. “We are not masters of the universe who can predict the macroeconomic environment,” he added

Some would-be buyers of these assets fear that a deep recession could drive up default rates and push down home prices much further. They also worry that a cataclysm like the failure of a big bank could send prices tumbling again, just as the collapse of Lehman Brothers did in September. Others see no reason to bid up prices because those who need to sell are desperate. (Continue reading this article here)
RW: This is a very large problem. We will see what the Obama administration maps out over the next few weeks. But let's put it this way: the taxpayer has already invested $45 billion in Citi, and guaranteed hundreds more in losses, and it's current market capitalization is $19.9 billion. Talk about free ride! Who's taking the loss now?

Rebecca Wilder

1 comment:

  1. Rebecca, You're right! (again!)

    Anyone in who is a holder of U.S. dollars is getting creamed on this raw deal over Citi.

    If Citi has been taking TARP cash and paying off on bets it lost, that cash then comes forth into the currency (money circulating).

    As the money circulating (currency) increases in number and turnover, while the amount of goods remains fixed or falling (fewer imports from China), prices shall skyrocket.

    The failed Paulson/Bernanke Bailout shall do nothing more but increase prices as the paid off money must go somewhere.

    Eventually, when Bernanke gives permission for Big Banks to make loans by multiplying money against reserves, fully what inflation means, with production of real things flat or down and imports flat or down, prices shall become unbearable for the street-level, everyday American.

    The Right Fix

    Americans must awaken to the right fix. All the troubled Big Banks must go out of business.

    All MZM deposits (checking accounts, savings accounts, money market accounts) should be guaranteed by their full amount and not the current limit amount.

    Holders of such accounts should get transferred in random fashion to solvent banks.

    All bets these Big Insolvent Banks have with investors/speculators/gamblers should be repudiated.

    All executive management should be fired.

    All buildings and equipment should be sold at auction to existing banks and new bank start-ups.

    The bailouts are not fixing the economy.

    The bailouts are saving the skins and high-paying jobs of the biggest, most corrupted banks run by the most inept, incompetent men in American banking history.