Francois Galarneau's Library tagged fasb → View Popular

27 Mar 09

Tim Geithner’s toxic-asset scheme will not work unless banks are forced to sell their problem loans
Ideally, the government would have raised that money from Congress and parked the toxic assets in a discrete “bad bank”, or offered to guarantee them. But Congress has bail-out fatigue. Bonus-bashing scores immeasurably higher with voters than adding to the $700 billion earmarked to buy bank assets last October.
2 more annotations...
- The government bears almost all the risks, while private investors pocket half the rewards.
- Without a subsidy, there are many reasons for private investors to hold back. Above all, they do not have the same information advantages as the seller, which is only too keen to offload the worst assets on its balance-sheet while hanging on to the good stuff. The trouble is, the proposal barely has a hope unless banks agree to sell assets, and therein lies Mr Geithner’s unfinished task: arm-twisting them to do so. Many banks value their assets well above the prices they would fetch in an open (albeit illiquid) market. They have incentives to keep them there: the lower the price, the more capital they need to raise; in these capital-constrained times, that means the closer banks are to insolvency.