wiegie Posted February 6, 2009 Share Posted February 6, 2009 (edited) I'm going on the record as saying that I am not a fan at all of Obama and Geithner's plan to create a "bad bank" that will buy up toxic assets from commercial banks. Basically, the only way I think it can work (i.e. give the banks enough capital to make them solvent) is if they buy the asset's at too high of a price (and basically just transfer wealth from taxpayers to the commercial banks' shareholders). Alternatively, if they try to buy the assets at too low of a price, it won't save the banks anyway. There are some dreamers out there who think the bad bank will make money by buying the assets at a low price now and then selling them for a higher price when the assets finally return to what their "true" value should be... but I think it is very likely that at the price they will have to buy the assets at in order to make sure the commercial banks don't die is higher than the assets' true value. Note: this financial plan is NOT the same thing as the fiscal stimulus plan (of which I am a bigger fan) Edited February 6, 2009 by wiegie Quote Link to comment Share on other sites More sharing options...
Clubfoothead Posted February 6, 2009 Share Posted February 6, 2009 There are some dreamers out there who think the bad bank will make money by buying the assets at a low price now and then selling them for a higher price when the assets finally return to what their "true" value should be... but I think it is very likely that at the price they will have to buy the assets at in order to make sure the commercial banks don't die is higher than the assets' true value. Well then how do all these companies getting this bailout money plan on paying back the fed? I thought those in favor of the bailout used that exact rationale as a reason why it was a good idea? Quote Link to comment Share on other sites More sharing options...
Jackass Posted February 6, 2009 Share Posted February 6, 2009 I'm going on the record as saying that I am not a fan at all of Obama and Geithner's plan to create a "bad bank" that will buy up toxic assets from commercial banks. Basically, the only way I think it can work (i.e. give the banks enough capital to make them solvent) is if they buy the asset's at too high of a price (and basically just transfer wealth from taxpayers to the commercial banks' shareholders). Alternatively, if they try to buy the assets at too low of a price, it won't save the banks anyway. There are some dreamers out there who think the bad bank will make money by buying the assets at a low price now and then selling them for a higher price when the assets finally return to what their "true" value should be... but I think it is very likely that at the price they will have to buy the assets at in order to make sure the commercial banks don't die is higher than the assets' true value. Note: this financial plan is NOT the same thing as the fiscal stimulus plan (of which I am a bigger fan) I thought the latest plan was not to outright buy the toxic assets but offer some kind of government guarantee. no? Quote Link to comment Share on other sites More sharing options...
muck Posted February 6, 2009 Share Posted February 6, 2009 (edited) I'm not a fan either. Just a thought here ... typing as I think ... ...what about... Ten big banks each put up to $100 billion of crappy assets that MAY go into the "bad bank". The other nine banks value the contribution of each other; the average price is awarded for those assets is considered the "true value" of each asset (minimizing the ethical dilemna of how to value the securities since each firm is in exactly the same spot as the others regarding peer valuations). Then rank each banks' assets from those with the biggest mark-downs to the highest; start at the top and go as far down as you can until you get to (say) $20 billion of "true value" for each bank. THEN, it's these assets that are contributed to the "bad bank" ... thereby ensuring that each bank is contributing the exact same dollar amount ... and then each of the ten banks each have contributed 10% of the bad banks' balance sheet which is now holding $200 billion of "true value" assets (it is my guess that these assets would have a full face value well in excess of $400 billion if they paid off in full). This $200 billion is structured as a subordinated note paying interest at (say) Prime + 4%. What is it subordinated to? Keep reading... Next step, take these same ten big banks and add the next fifteen biggest banks (25 total banks) and do the same sort of thing ... each bank puts up $50 billion of crappy assets and they are ranked from worst to best by their peers ... and once average prices for each asset are set, start at the top and go down until $200 billion of new crappy assets are identified and contributed to the "bad bank" ($8 billion of current "true value" from each bank). At this point, each of the ten largest banks have contributed $28 billion of "true value" to a "bad bank" with $400 billion of assets (which probably would represent close to $1 trillion of face value); each of the ten biggies own 7% of this "bad bank" ... the other 15 smaller banks own 2% each. The bank has a new round of senior subordinated notes paying interest at (say) Prime + 3%. These are senior to the notes immediately above and subordinated to the notes in the two paragraphs immediately below. Next step, do the same thing with these 25 banks, plus the next 25 smaller banks (50 banks total) ... each bank puts up $20 billion of crappy assets and they are valued on average and ranked and contributed to the "bad bank" so that an additional $4 billion of "true value" is contributed from each of these 50 banks. When this round is done, the 10 biggest banks have contributed $32B of 'true value" assets (which probably carry a face value of close to $100 billion for each bank) ... the next 15 banks have contributed $12B of "true value" assets and the next 25 banks have contributed $4B of "true value" assets ... a total of $600B ... These super senior subordinated notes pay interest at (say) Prime + 2%. These notes are senior to the notes in the two previous paragraphs ans subordinated to the notes immediately below. THEN ... each and every remaining bank out there that has assets they want to "sell" to the bad bank are valued using a matrix pricing methodology based on the composite pricing of the assets already contributed to the "bad bank" ... except ... the first $400B of "true value" assets are contributed from the smallest banks first, and instead of these smaller banks receiving subordinated notes issued by the "bad bank" (like their larger bretheren did), they receive senior notes where their repayment occurs before their bigger counterparts (why? because the bigger banks are (generally) more to blame for our current mess than the small guys, so they should take more of the pain). These $400 billion of notes are senior secured notes and pay (say) Prime +1%. ...so... at this point, the "bad bank" has $1 trillion of assets financed by a $400 billion of notes paying (say) Prime + 1%, $200B at P+2%, $200B at P+3% and $200B at P+4%. Because none of the notes carry a prepayment penalty, each tranche of notes are paid in order of seniority ... interest is paid going down the list and if there is anything left over at the end of the month/quarter, it's used to reduce the principal owed on the most senior notes still outstanding. None of these notes are backed by the US Treasury department, FDIC or Federal Reserve ... and therefore, the taxpayer is not on the hook for any of this. Who owns the equity in the "bad bank"? The US Treasury Department, the FDIC and/or the Federal Reserve (i.e., the taxpayers). So, if this thing works out well, then the gov't can (maybe) take a stab at fixing social security, etc. with the bounty. As these crappy assets start to pay off (or be written off as uncollectable), the smaller banks who hold the senior notes get paid off first ... and the bigger banks get paid off last (and in proportion to what they contributed to the "bad bank"... What does the accounting entry look like? Well, take this as an example for one of the ten big banks (which assumes they've already taken $20 billion of loss reserves on the $80 billion of assets they contributed to the "bad bank" at $0.40 on the dollar, on average): Debit: Loans receivable -$60 billion (which is net of the $20 billion of loss reserves previously taken) Credit: Hold-to-Maturity Investments +$32 billion (subordinated bonds in "bad bank" to be held on the books at historical cost) Credit: New losses realized +$28 billion (loss to the income statement) ...the trouble then comes... How does the "big bank" not become insolvent by taking a $28 billion loss today? One answer is that the Treasury ponies up $28 large for a percentage of the bank based on (say) the average stock price of the last twenty days ... so, that if the average stock price over the last twenty days valued the bank at $28 billion, then a new $28 billion would buy 50% of the bank for the US taxpayers ... a bank that has shed a huge gob of junk and has a dramatically cleaner balance sheet. This would be (essentially) nationalizing our largest banks...and some of our mid-sized banks...and very few of our smallest banks... Not sure what that regulatory structure looks like, though ... probably would involve quite a bit of divestitures, mergers and acquisitions, though. PS -- I still substantially prefer the idea of facilitating a mass refinancing of performing mortgages at lower interest rates that has been posted elsewhere in the tailgate...as shown here... Edited February 6, 2009 by muck Quote Link to comment Share on other sites More sharing options...
MrTed46 Posted February 6, 2009 Share Posted February 6, 2009 I'm going on the record as saying that I am not a fan at all of Obama and Geithner's plan to create a "bad bank" that will buy up toxic assets from commercial banks. Basically, the only way I think it can work (i.e. give the banks enough capital to make them solvent) is if they buy the asset's at too high of a price (and basically just transfer wealth from taxpayers to the commercial banks' shareholders). Alternatively, if they try to buy the assets at too low of a price, it won't save the banks anyway. There are some dreamers out there who think the bad bank will make money by buying the assets at a low price now and then selling them for a higher price when the assets finally return to what their "true" value should be... but I think it is very likely that at the price they will have to buy the assets at in order to make sure the commercial banks don't die is higher than the assets' true value. Note: this financial plan is NOT the same thing as the fiscal stimulus plan (of which I am a bigger fan) I can see this working out and easing the depression/recession. Quote Link to comment Share on other sites More sharing options...
dmarc117 Posted February 6, 2009 Share Posted February 6, 2009 just tell me how many puts i should buy in BAC and WFC Quote Link to comment Share on other sites More sharing options...
MojoMan Posted February 6, 2009 Share Posted February 6, 2009 Is there any way we would use the one person cuts, the other person decides which piece to take procedure for establishing the value of the questionable assets. Quote Link to comment Share on other sites More sharing options...
Randall Posted February 9, 2009 Share Posted February 9, 2009 New twist Treasury Secretary Timothy Geithner is expected to announce that the government will become a partner with the private sector to purchase banks' troubled assets, according to people familiar with the matter. The plan for a so-called aggregator bank, a variation on a theme that Obama administration officials have wrestled with for weeks, is among four main components of Mr. Geithner's bailout revamp, which he is expected to announce Tuesday. The effort to restore confidence to the financial system comprises a broad range of tools and government agencies. It includes fresh cash injections into banks; new programs to help possibly 2.5 million struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and, lastly, the mechanism to allow banks to get rid of bad assets. The administration's plans have evolved over the past several weeks as it has considered and discarded a host of ideas, with financial markets anxiously awaiting details. Mr. Geithner had planned an announcement Monday but delayed it a day to allow the focus to remain on the stimulus bill in Congress. The aggregator bank, which some refer to as a "bad bank," would be designed to solve a fundamental challenge: How can banks purge themselves of their bad bets without worsening their weakened condition? The entity would be seeded with funds from the $700 billion financial-sector bailout fund, but the idea is that most financing would come from the private sector. Some critical elements remained unclear, including exactly how the government would entice investors to participate in the private bank, given that they can already buy soured assets on the open market if they want to. The government will likely offer some type of incentive, such as limiting the risk associated with buying the assets.... Quote Link to comment Share on other sites More sharing options...
Clubfoothead Posted February 9, 2009 Share Posted February 9, 2009 Well then how do all these companies getting this bailout money plan on paying back the fed? I thought those in favor of the bailout used that exact rationale as a reason why it was a good idea? Seemed like legits questions. http://www.brookings.edu/papers/2009/~/med...nks_elliott.pdf I read that twice and still don't understand it. Quote Link to comment Share on other sites More sharing options...
wiegie Posted February 10, 2009 Author Share Posted February 10, 2009 'Bad Bank' Is Dropped From Financial-Rescue Package good Quote Link to comment Share on other sites More sharing options...
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