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But Will Investors Buy It?

President Obama was smart, peppy and well-prepped in his prime-time economic presentation tonight -- and persistent, too, wasn’t that the tag line? But are the Wall Street tycoons going to play ball and buy those trillions of dollars of toxic assets, so we can get on with worrying about health care and energy policy and the rest?

Sorry, but that’s the baseline question this week, after Treasury Secretary Timothy Geithner revealed the details -- well, at least some of them -- of his plan for public-private partnerships to auction off the otherwise untradeable securitized assets that are clogging the balance sheets of major financial institutions.

Note that it’s the hedge funds and private equity funds that Obama and Geithner are hoping will come to the rescue. It turns out that these unregulated demons are, by and large, more solvent than the regulated banks and insurance companies. Fancy that!

So what will the demonic hedge fund manager be thinking tonight, after hearing the president deliver his solid, persistent explanation of economic policy? He’ll be wondering whether he can make a buck, of course. And whether, if he makes that buck, the government will let him keep it.

The real issue that will motivate investors thinking about bidding for pieces of the toxic waste is price. But the sort of prices that would likely motivate buyers would force the banks doing the selling to realize huge losses. Wouldn’t that make things worse?

Perhaps Geithner thinks the private investors will offer sweeter bids because the Fed is lending them so much of the purchase price. But since the private investors will have the first loss piece of the deal, the leverage won’t motivate them to take bigger risks than they think are justified. Maybe Geithner hopes the prices will be higher than the marks that many banks have assigned to the illiquid paper. I wouldn’t bet on that.

This plan puts the prospective investors in a double bind. If they make a mistake and bid too high, they will lose money for themselves and their government partner -- and earn the wrath of Barney Frank for wasting public money. If they bid low and make a handsome gain? Well, it better not be too handsome or they’ll get in trouble with that same Barney Frank for being greedy profiteers.

Cautious investors might decide this is a bad bet -- heads I lose, tails I lose -- and refuse to play.

And then we get another prime-time news conference, and a new Treasury secretary.

By David Ignatius  | March 24, 2009; 10:31 PM ET
Categories:  Ignatius  | Tags:  David Ignatius  
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Private investors hedge risk based on fees recouped for managing the purchase; plus it's theoretically possible for them to purchase swaps against their bet.

Given the required stake in the purchase there's a good opportunity for private investors to limit risk exposure to something close to zero.

One area that isn't clear -- can the troubled institutions purchase their own holdings through TALF? If so, this would be doubly problematic.

These financial institutions would have an advantage in pricing their own holdings. Plus, they would be able to move existing holdings off the company book; the new holding would be insured using FDIC money (something isn't currently the case); they'd develop a new profit center through management of funds as well. They could even use the process to help justify an inflated price on other similar holdings that they chose not to put up for auction.

The only limitation on the front end would be a relatively small outlay of capital.

Not sure if this is a loophole in the rules, but I haven't seen any restriction against financial firms bidding against their own holdings.

Posted by: JPRS | March 24, 2009 11:50 PM | Report abuse

Sorry, Mr. Ignaius, but you have not understood the plan.

Investors will receive subsisies to buy the toxic assets, and will be able to bid up prices, therefore, benefit of the upside, because the downside risk is limited by government (i.e., taxpayer). Heads, investors win. Tail: the taxpayer loses.

Posted by: Gatsby1 | March 25, 2009 4:24 AM | Report abuse

David Ignatius is clueless.

Obviously Obama is offering a very simple shell game:

The dodo bank 'financial specialists' paid a trillion bucks for lousy mortgages. Those mortgages are only worth 300 billion today. The poor bankers are crying to Obama to give them your money because they made big boo-boos.

So Obama's going to offer his buddies in the banks 600 billion instead the crummy 300, sock in some fake 'investors' who are never going to lose anything, and you, the taxpayer, are going to get stuck with the 300 billion dollars Obama loses on the deal.

Oh, and if there ever are any gains then those fake investors are going to be the ones making all the money anyway.

Posted by: Jerusalimight | March 25, 2009 5:02 AM | Report abuse

What was this press conference about beside boring. Obama is in our face too much and yet not enough. The slow long winded talk is boring. After 45 minutes I am numb. He doesn't get it. Big talk, big plans, and yet he is always late to the party.

He needs to ditch the campaign boys and start governing like he likes it. I didn't know is not something we like to hear from the boss. We also are tired of : Bush did it and its all his fault, or I really didn't want to but Nancy Pelosi made me do it, or if I had known about this earlier I could have fixed it, but I can't now.

Unless he gets in front of the problems they will grind him down and grind him down. He will look like he isn't up to the job. Hey, if he didn't know how tough it was, why did he run for President?

Posted by: SanchoK | March 25, 2009 7:09 AM | Report abuse

There are two issues with the asset backed securities in question: unknown value of the collateral (because their underlying assets are hidden by the structure of the securities), and unknown market price (because there is no market). The Geithner plan is an attempt to deal with the latter, hoping that the former would turn out to be higher than current assumptions if the paper is hold to maturity. Is this a reasonable assumption? Nobody knows, but this is as good a way as any, and better than most to address the inescapable issue of pricing.

Posted by: xyuxuy | March 25, 2009 7:16 AM | Report abuse

Well, all you nay sayers, it looks like Pimco is already on board.

And yeah, the taxpayer is going to get stuck with it. Duh! The taxpayers got stuck with it 10 months ago when the neocon pseudo patriots took all the dough and ran off.

The taxpayers will continue to get stuck with it until Obama is able to reverse the Reagan/Bush deregulation. Which was the true shell game.

Posted by: aorj | March 25, 2009 7:56 AM | Report abuse

Profit. Unregulated Hedge funds. Two only questions out of any technocrat comment. To whom is porift benefiting? Can that kind of proftable beliefs to rise real Political problems now or in the medium term? ('Political' from Policy and not only economy)

Posted by: vercinget | March 25, 2009 8:28 AM | Report abuse

I agree with David. This public/private parnership is nothing more than a ruse. There is practically no risk for the private sector because if they get it wrong, they will be bailed out. Why? because the one who will participate will be Tim's buddies. We the taxpayer are the ones at risk. I hope it succeeds too, but we will see.

Posted by: gsms69 | March 25, 2009 9:05 AM | Report abuse

This looks like a sweet deal for investers. The problem with the whole thing is the continuing increase in unemployment as this sweet deal does not do anything for them.

Have not seen any recovery for the real estate market as prices are still failing. It is true that a bottom may take place at the end of the year. But growth in the coming years is not likely to help improve the employment situation. What is going to make this economy take off? Wind power? I see alot of hot air ahead!

Posted by: artg | March 25, 2009 9:09 AM | Report abuse

Cautions investors may stay away, but to others it is a chance to make lemonade from lemons. Most mortgages can be turned into profit. Just set good terms. Many will be able to make decent payments and want to stay in their homes.

I wish I had some cash. I would invest.

You know a good cook takes what they have and makes great meals. Others turn out garbage with great stuff. It depends on their skills with investment sand the borrowers.

Posted by: GaryEMasters | March 25, 2009 9:49 AM | Report abuse

The administration has a good plan. First we need to find out "really" what these toxic assets are worth. In fact what they will find is an upper bound on what these assets are worth because they are assuming a lot of down side risk. Once a market starts functioning then they will have a better idea as to how healthy the balance sheets of the banks "really" are. At that stage some of these banks might still have a negative net worth and still essentially be zombie banks. Then it will be necessary for the government to step in and nationalize the banks that still have negative net worth, wiping out the shareholders like they did to Lehman Brothers. Recapitalize these failed banks and then auction them off.

The Obama plan makes sense because you want to minimize the number of banks that get nationalized. Pricing these toxic assests is really the only way to figure out which banks "really" need to be nationalized.

The major problem with this plan is that it will take time. At a later stage saying "okay we still need more money to nationalize and recapitalize banks" will be difficult politically. And by keeping zombie banks alive longer, could delay the economic recovery. However, given that - taking over the banks and recapitalizing them, then auctioning them off - would be a nightmare politically and damaging economically (for instance: even once the banks are auctioned off, it will be hard for the government not to come to their rescue if they get back into trouble, or to get involved in purchases of corporate jets and the like) this plan is a good balance that will likely need some work in a few months to finally get it right.

Posted by: dafergu3 | March 25, 2009 10:15 AM | Report abuse

Sir: Good points, but I think the expression goes something like this--"heads I lose, tails you win". Thank you!

Posted by: baltic | March 25, 2009 10:15 AM | Report abuse

You are right, master Ignatius. You nailed it.

Posted by: reginacoeli | March 25, 2009 10:22 AM | Report abuse

Let's think about real-life stuff.

Let's say I want to buy a bank-owned house.

The realtor's web site only mentions the asking price: $100,000. There is no data about bedrooms, bathrooms, garages, plumbing conditions, the neighborhood, nothing.

The government is desperate to help the bank clear its books. So it asks me to buy the house with only $8,000, and the governmend will put the remaining $92,000. If I manage to ever sell the house, the government will get $50 percent of the profits.

How do I know if the business makes sense?

First, I want to receive the house's full record, including not only the physical condition but also tax and mortgage information. THE BANK AND THE GOVERNMENT MUST PUBLISH IT. THAT'S THE EASIEST WAY TO "CREATE A MARKET" FOR THAT HOUSE.

Second, I want to verify those data. I want to see the house by myself. And will have it inspected. MAYBE I WOULD ASK FOR A "STRESS TEST" TO SEE IF THE HOUSE DOESN'T HAVE STRUCTURAL PROBLEMS.

Easy, isn't it???

Posted by: tropicalfolk | March 25, 2009 11:30 AM | Report abuse

Is this even still a valid question? OBVIOUSLY, investors and homebuyers are encouraged by President Obama's leadership. The major stock indices are rising as are home sales and loan applications.


Posted by: free-donny | March 25, 2009 12:35 PM | Report abuse

The government tells us we must save the banks because of the credit crisis.

Perhaps it would be better to directly deal with the credit crisis instead of saving the banks.

After spending 750 billion dollars to buy bank assets the banks might simply say thank you, and not use the new capital for lending.

Saving the banks does not equate to dealing with the credit crisis.

Posted by: bsallamack | March 25, 2009 1:25 PM | Report abuse

I agree the press conference was boring and droll...the premises of his rescue plan are all suspect.

I also agree that the real losers with the Obama plan and budget are the American taxpayers.

Heads we lose, tails we lose - we just lose our incomes, our 401ks, our health care, our jobs, our homes - but Obama and his gang of fat cats stay rich. He is willing to gamble with our money!

Posted by: mgd1 | March 25, 2009 2:16 PM | Report abuse

"It turns out that these unregulated demons are, by and large, more solvent than the regulated banks and insurance companies. Fancy that"

This is a classic God bless the free market statement. Well Long Term Capital Management was a hedge fund and they went bankrupt and as did many others. Fancy that! The banks which got into the most trouble got into that trouble because they acted as hedge funds. Fancy that! The unregulated insurance company AIG went under because of a small hedge fund division. Fancy fancy that!

Posted by: mlang46 | March 25, 2009 3:12 PM | Report abuse

Mr Ignatius you know perfectly well that your clan and cartel has carried out the biggest swindle on America and world.

Basics of free market are 'one- There are no toxic assets two-when some one losses others gain, money does not vanish'.

In this case the losers and the gainers are same cartel of crooks and
are part of
Money and media Mafia which controls America,

Federal Reserve likes of Bernanke, Geithner,

and regulators also belong to the same family of crooks

they helped their cronies, with so called toxic assets to cheats, loot and deposit trillions in their private banks in Israel and Europe.

now they are be-fooling America by shifting trillions into the accounts of same fraudsters in name of buying toxic assets

Americans and the world have caught on their con tricks and

demand return of looted trillions deposited in their private banks in Israel,
by Madoff and other bosses of AIG, Lehman Brothers, Goldman Sachs.. etc..

All these crooks are linked to same cartel

these criminals should be prosecuted through a Grand Jury.

Posted by: chaffcutter | March 25, 2009 5:09 PM | Report abuse

But Will Investors Buy It?

Sure, they did before. Actually should they buy the toxic assets, circulation of money would occur and stricter loan stipulations would be in place to accommodate a loss effect, in expose to how the process was in the last few years. I say go for it, you win some and you loose some. In the past it was a lose-lose situation, now under this agenda guidelines have been put into place to levy that effect.

Posted by: Nisey01 | March 25, 2009 9:37 PM | Report abuse

Henry Blodget in today's "The Business Insider" wrote:

The big problem with Tim Geithner's plan to fix the banks is the same as it ever was: The gap between what banks say their assets are worth and what the market says they are worth.

When a bank says an asset is worth 60 cents and the market says it's worth 30 cents, someone has to cover that spread. The genius of Geithner's plan is that it pawns most of the cost (and most of the risk) off on the taxpayer without the taxpayer noticing.

But unless the taxpayer gets stuck with the entire spread, which is probably what Geithner is hoping, banks that sell assets will have to take massive writedowns. This will start the whole cycle of violence again.

This risk to the banks is particularly acute when dealing with whole loans that the banks currently say they have no plans to sell. These loans are often carried at 100 cents on the dollar, because loans classified as held to maturity don't have to be marked to market. Even subsidized buyers won't likely be willing to pay anywhere near 100 cents on the dollar for these loans. So, here, the writedowns could potentially be huge.

And then there's another problem:

If the banks go through the exercise of putting assets up for sale only to have the bids come in at, say, 40 cents instead of the 60 cents on the books, the banks' accountants and/or federal regulators might notice. So even if the banks recoil in horror and refuse to sell at 40 cents, someone somewhere might insist that assets now carried at 60 cents be written down to 40 cents (after all, they won't have the "temporary illiquidity discount" excuse anymore, will they?). This will blow another huge hole in the banks' balance sheets.

Given this, banks would probably be wise not to participate in Geithner's plan. Which is why the government is already talking about forcing them to.

“The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,” said an executive at a large bank...

Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: “[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.”

But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made “in consultation with regulators” – a sign that the authorities might put pressure on banks to sell toxic assets.

It's time to face the fact that we have already de facto nationalized the big banks--and that the way we've done it is worse than standard receivership and restructuring. The longer we remain in denial about this, the worse off we'll be. But that's another story...

Posted by: bbahler | March 25, 2009 10:25 PM | Report abuse

About the best one can say is that this is half a plan, i.e. it creates the buyer half of the market and provides attractive financing. We can speculate until the cows come home whether willing sellers will find willing buyers at a tolerable price.

Having performed its "stress tests", surely the government knows the concentration and amount of toxins on the balance sheet of every important domestic bank, and knows it in relation to its capital. Furthermore, by intelligently directing Tarp capital allocations and the intelligent application of regulations, Treasury can force willing sellers into the market. The reality is, that the insolvent banks, no matter how solvent they might appear, are twisting slowly at the end of the noose in the wind, and it is Treasury that holds the end of the rope. There will be a market, as large or small as Treasury wants to make it. What the invester has to focus on is the present value of the toxic asset and whether there is an acceptable rate of return relative to the asking price.

One way or another its time we actually learned what the real losses are at which specific banks. Letting one or two of them go belly up won't be the worst thing in the world. The worst thing would be saving all of them.

Posted by: simpsonth | March 26, 2009 2:24 AM | Report abuse

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