From the WSJ:
The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It's central to the administration's efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.
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These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.
I've had issues with nationalization -- primarily because no one has effectively dealt with the issue of preventing the type of corruption that led to the financial sector's problems from happening again.
Over the last several weeks I endorsed a plan (and yes, I know that so many people are lining up for a Bonddad endorsement that it means so much) where the government would essentially create a "super-bank". I liked this idea because it only involved one bank -- meaning, there was only one institution to monitor. That made sense.
However, this idea is interesting. The government and the private sector form a partnership with the government putting up money along with the private sector. In addition, the private sector would run the fund. The main problem is the fact that banks would have to sell their bad assets at some price -- which they have so far been unwilling to do. However, if we can get some savvy investment people to run these funds, it could be the start of a semi-private RTC that has intriguing potential.
7 comments:
If the plan is bona fide, the threat to publicize the results of the "stress test" with the bad assets on the balance sheet is what forces banks to sell the assets.
Just one more way to pump government money into the banks without getting rid of the executives at the banks, or giving the bond and equity holders a haircut.
I agree this seems to work out the valuation issues and creates a market amongst the Fund Managers where they compete in their pricing of the Distressed Assets. I really thing the biggest problem the Obama Administration faces at this point is one they've had issues with all along, how quick can they set this up and how fast can they get out of the blocks?
The reason for expediting this, is that everytime a plan is formed to deal with this, the problem morphs before the conceived solution can be deployed. They gotta hit this thing hard and fast.
I think the real problem still comes down to the market value of the bad asset. That is impossible to determine in a falling economy. Who would invest in a fund when they knew it's value would drop even if it was backed by the federal government? Am I missing something here?
Why create a complex system when you already have the FDIC to handle the banks?
This sounds like just another scheme to screw the taxpayer.
After reading today about Penny Mac - looks like the private sector has already figured out how to turn bad mortgages and a benevolent if not addled uncle sam into another gold mine. Former Countrywide execs (gotta love these guys) and a plan to launder bad loans purchased at a 60% discount - for a 20% commission on any $$ collected. That jumps to 40% after some milestones. My guess is that's 5X what they got paid when they originally wrote the bad paper. Countrywide exec interview about returns "Off the charts!"
Demeur,
There are and have always been bids for these assets... the bids are just so low that the banks and govt want to pretend that they don't exist, to justify mark-to-magic, and overpayment by the feds. What would happen if they told the truth? "The bids that private entities are willing to pay are too low for our taste. We want the govt to pay three times the best private bid. Okay?"
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