Monday, January 19, 2009

The Aggregator...

One bank
two bank
black and
blue bank

'The aggregator' is not a new Sci-Fi movie starring the current Governor of Collie-fornia. It is a proposal to form a bank with bad assets

Bad banks
talking about the sad banks
sad banks
talking about the bad banks, yeah

See them out on the street all right, makin'
loans to all kinds of strangers
if the credit score is right you may win
if you're pocket's not full
but you want a good time
don't ask them for the time day.
They only lend to those who can pay...

bad banks...

Yes the bad banks have learned a lesson; they are now more discriminating- too discriminating for the universe of credit scores most borrowers have. So there is a plan being considered to form a truly bad bank - a sort of Bank in Black (one that is really in the red) that will combine the worst, of the worst, of the worst. Do not look for Will Smith or Tommy Lee Jones to star in this one. And let's hope it does NOT have a sequel.

As usual the PROBLEM with a Bad-ASSet Bank is deciding how to acquire the assets for it- how to price them really. Recall the TARP was set up to do this at first. It had proposed a novel reverse auction process to to put a price on bad assets. In the end the novelty of that scheme was its undoing and it was judged to be an approach that would have been too slow. So now we come full circle. Had the reverse auctions been done, there might not now be a second round of Kool-Aid being distributed (just shut up and drink it -it will work).

The problem with capital injections is that they do not remove the troubled asset. So if it continues to deteriorate, it still can throw off more loss. If you remove it in a BAD ASSet purchase program it cannot go bad and hurt that bank again. But now its on the taxpayers' clock. Since it seems that the taxpayer is on the hook eventually, maybe this solution is a bit more palatable now (you can pay me now, or pay me later). But the acquisition cost is still key since it defines where the risk-line is drawn.

While some suggest that the government could buy these assets at their fair market accounting prices (or current price) given that things continue to go so bad one should be skeptical that all securities are properly marked. Look at Merrill Lynch... Thain had asserted that they had written things down strongly and realistically. Yes, the mortgage market is still deteriorating but WHAT view of reality has this paper been written to? What time line holds its value? Does it reflect real estate prices NOW? Does 'NOW' mean it reflects when someone last looked at it? Does it mean 'in the last accounting quarter (Q4)?' Or does 'Now' mean this quarter, Q1?

If we could mark the BAD ASSets right the idea would be more of a final solution for banks. The government's loss sharing and loss indemnifications programs for Citi and BofA and previously for JP Morgan-Chase on the Bear Stearns purchases are examples of how the government has assumed risk and liability in the past. So let's not pretend that a BAD BANK asset purchase program is any worse than previous actions. It's advantage is that it does stop the bleeding. Still, it is important where the vlaue line for acquisition is drawn. And there is nothing in it that would promote lending and that is still a missing piece of the puzzle, although a new FDIC plan has that as an objective.

1 comment:


Its only the weak that get hurt in this economy.