Rolling Out TARP II

Creating an unnecessarily subsidized market in toxic assets

Anthony Randazzo | March 27, 2009

(Page 2 of 2)

Though the TARP II program creates a market for buying and selling these assets, it’s an unnecessarily subsidized one. These assets can be bought and sold now, in the current market. The catch is that the banks don’t want to because they don’t like the prices they are being offered, and bailouts have allowed them to hang on for a better deal. The best option is simply to let the banks that do not want to sell fail, and then divest the assets after going into bankruptcy.

There are other risks with the plan, including the possibility that banks will bid up their own auctions, but this can be stopped with the right oversight . The gravest concern is that there are high odds that many of the toxic Legacy Assets might never regain value, leaving the taxpayers with a heavy loss that should be felt by the banks.

Anthony Randazzo is a policy analyst at Reason Foundation. An archive of his work is here.

Comments

Reinmoose|3.27.09 @ 10:41AM|#

Toxic Avenger what?

|3.27.09 @ 10:44AM|#

Geithner + Toxic Assets = This

And then Leland hits him with a van while singing "Mairzy Doats."

|3.27.09 @ 10:50AM|#

I don't see the conundrum. This is a shell game. The government puts up most of the cash, the "private" sector puts relatively little at risk and stands to get disproportionate gains.

The "price discovery" is a joke, hopelessly polluted by skewed risk and incentives on both sides of the sale.

This is a smokescreen, designed to hide yet another massive transfer of wealth to fill the quadrillion dollar hole blown in the global economy by OTC derivatives.

alan|3.27.09 @ 11:16AM|#

Bill Bonner has a money quote on TARP II.

the
big fellow who has just entered the game is every poker player's dream.
He is almost infinitely rich and infinitely stupid. Before the night is
over, investors are going to clean him out.

|3.27.09 @ 1:42PM|#

I sat in on the FDIC conference call yesterday. They have no idea how they want to run the auction, there are still a lot of details to work out. The FDIC is soliciting public comment up on their site FDIC.gov. Even the article, the game is undone, if the FDIC underwriters can decide how much they are going to lend and at what price against the asset pool to make a safe and sound loan, then they de facto know the value of the underlying asset (within a range) which would seem to make the whole auction process a waste of time. They could go through this whole show and end up right back with the assets in FDIC hands again. They could lose twice on the same asset. It is crazy town.

|3.27.09 @ 1:45PM|#

Condundrum? What part of libertarianism does Randazzo not understand?

|3.27.09 @ 2:04PM|#

These assets can be bought and sold now, in the current market. The catch is that the banks don't want to because they don't like the prices they are being offered, and bailouts have allowed them to hang on for a better deal. The best option is simply to let the banks that do not want to sell fail, and then divest the assets after going into bankruptcy.

The prices on offer would force some of them into bankruptcy - perfectly rational to hold out as long as possible. Marked to market rules needless cause this foolish situation, since most banks are otherwise well capitalized.

|3.27.09 @ 2:06PM|#

scott clark - were they talking about reverse auctions at all? There is a lot of money on the sidelines, but guys like Ray Dalio (from bridgewater associates, who has a lot of it) have publicly said they distrust the government will play fairly.

|3.27.09 @ 2:19PM|#

Couple of comments:
:The best option is simply to let the banks that do not want to sell fail, and then divest the assets after going into bankruptcy.

It's 2009, gee maybe we could have taken our medicine back in early 2008. Foolishly thought that Bush set a precedent with Enron regarding bailouts. However, his political capital was spent and eventually was talked into seeking a bailout by the Treasury and GS (sorry, I mean the NY Fed). JPMorgan learned their lesson and did WAMU asset purchases the right way.

:This is a smokescreen, designed to hide yet another massive transfer of wealth to fill the quadrillion dollar hole blown in the global economy by OTC derivatives.

Love it. These are contracts between two willing parties that represented the best and the brightest of Wall Street, hedge funds, pension funds and everybody else with a Bloomberg machine. Too many firms played the role of Jack Lemmon in Glen Gary Ross... did you see how they were living? They are insane, certifiable. The contracts are worthless. (not word for word, but you get the jist). Too many folks were busy high-fiving one another over "printing money" that they didn't realize that they were all in the money against the same players and those players (who were high-fiving one another about 2 years earlier) were broke. And all of the players had levered up to continue playing. This was essentially a non-clearing market and things like this will happen... lo and behold as things started to get bad, everyone and their brother started demanding collateral to make sure that they would get actually get cash for their winning "bets". This is the reason we are in deep trouble. Deleveraging means putting up cash to clear trades/bets. You either have it or you don't. Bear didn't have it, Lehman didn't, AIG didn't... and it will continue to unravel. The best thing is, the guys who came to the game with the MOST credit of anyone are Fannie and Freddie and they are still in business. The only way to prevent this again (not a bubble, but just a steroid induced one) is having these instruments on exchanges where cash is settled constantly. Of course, that would mean price/volume transparency and THAT would mean real loss of revenue to the Street (how are those equity market makers doing these days...). Anyway, its my 2 cents.

:the
big fellow who has just entered the game is every poker player's dream.
He is almost infinitely rich and infinitely stupid. Before the night is
over, investors are going to clean him out.

Just make sure the money is on the table and not in IOUs... (the Dumb and Dumber briefcase scene comes to mind), the govt has shown that they are more than happy to change the rules of the game when political winds shift. Rule of law, my a$$.

Conundrum?? Absolutely none. Its a bad idea all around. The market is not broken, there are just people who don't like the prices they are seeing. Love how leverage and risk insurance are considered incentives rather than bribes. If the loans were recourse, maybe you could call it incentive.


Much better. Happy Friday.

Jay S|3.27.09 @ 2:27PM|#

I wish I knew something about finance right now. There is surely lots of money to be made by some shrewd bankers during the acquisition of these toxic assets. Naturally, this money would not be able to be made if the government didn't step in here. Plus, you wouldn't be railed on by the media since you made money on 'fixing' the problem, not creating it.

Craig|3.27.09 @ 4:17PM|#

The Treasury Department has created a bit of a conundrum for libertarians when it comes to the newly announced Jekyll and Hyde-like TARP II.

What conundrum would that be? Libertarians should oppose TARP II in its entirety, just as we opposed TARP I.

If the assets aren't worthless, they can already be sold for some fraction of face value to risk-seeking entrepreneurs. The fact that they aren't selling simply means that the holders either under-estimate the risk, or are unwilling to admit how low the market value of the assets has actually fallen. Rather than blaming mark-to-market rules, I would question whether the current "mark" isn't indeed a bit too optimistic.

Congress is running around in a circle, trying to figure out how to regulate the financial sector further so that this doesn't happen again, yet the simplest way to discourage a recurrence would be to simply let those companies that took on stupid levels of risk face the full consequences of their actions. Bailing out those who took on excessive risk only encourages more of the same in the future.

Paul|3.27.09 @ 5:05PM|#

On the one hand, the government is finally reaching out to the private sector through this initiative, recognizing the power of markets and price discovery as means to end the economic crisis.

Is this a glimmer of light in a total governmental hurricane? The fact that a Democratic administration actually acknowledges the fact that only open markets can properly discover prices?

Paul|3.27.09 @ 5:07PM|#

If the assets aren't worthless, they can already be sold for some fraction of face value to risk-seeking entrepreneurs. The fact that they aren't selling simply means that the holders either under-estimate the risk, or are unwilling to admit how low the market value of the assets has actually fallen.

Not entirely. It's also just as possible and very likely that these toxic assets aren't selling because the entire market for them is sidelined while it waits to see what the government is going to do.

Why would you sell an asset for pennies on the dollar when the government might give you dollars on the penny?