The more I read and reflect on Treasury's proposed plan to assist banks in their recapitalization, the more confused I am by just how it is supposed to work. I refer often to Fed Chairman Ben Bernanke's explanation.
In brief, he described a process by which Treasury would buy distressed CDOs at near-'hold to maturity' values, thus allowing banks to mark remaining, similar securities at similar, capital-preserving values, plus receive Federal money in exchange for the CDOs.
If Treasury does this, however, no private equity bidders will participate, since they have been arduously 'bottom fishing' these CDOs at fire sale prices. For example, recall Merrill Lynch's deal to offload several billion dollars of CDOs to a buyer, with recourse, at something like 37 cents on the dollar.
Further, if Treasury bids such high, close-to-maximum-economic value prices for these securities, then there is virtually no chance of the US taxpayer realizing any gain on subsequent sales. At best, they may breakeven.
At the other extreme, though, also described by Bernanke, if Treasury's bid is a little above the fire sale price, but well short of the economic, or 'hold to maturity' value, then the selling bank receives little extra capital, and not much more in the form of marking similarly-held securities up to the bid, either.
What is it that I am missing? This isn't going to work!
Not, at least, as advertised. The banks either receive full value, and American taxpayers pay the difference of fire sale and economic valuation, or the taxpayer gains, but the banks still lack capital, as their mandated 'mark to market' prices remain too low to provide additional capital to our financial system.
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2 comments:
You say: "if Treasury's bid is a little above the fire sale price, but well short of the economic, or 'hold to maturity' value, then the selling bank receives little extra capital"
True --but the bad asset is removed from the banks assets so that the equity previously tied up supporting that bad asset can now be used to create new additional credit.
The intent is not to inject new capital -its to unlock existing equity that is presently locked up
However, a better way is by stroke of the pen of the SEC chairman to rescind or pause fair value accounting standards, allow the bank to carry the asset at original cost as an industrial firm would and require the bank to hold the asset to maturity... .
Jon-
I disagree.
The intent is to allow banks to conform with the senseless 'mark to market' application, but with higher, near-to-economic-worth values, for performing assets, in order to avoid writing down more capital.
But, yes, we agree, per my prior post, that a simpler solution to this whole mess is to loosen the application of 'mark to market,' confining it only to held-for-trading assets.
-CN
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