- The Washington Times - Wednesday, April 1, 2009



Donald Lambro asks the wrong question (“Will investors buy in?”, Opinion, March 26). Of course investors will buy into Treasury’s generous bank bailout plan, the Public-Private Investment Program (PPIP). The real question is whether this “gold mine” for politically connected, big-money managers should be allowed to go forward.

The avowed purpose of the bank bailout plan is to increase the demand for “toxic” assets. But that isn’t the problem. Market insiders assure us that there’s plenty of money sitting on the sidelines, waiting to be deployed. But potential buyers of these assets are offering only low-ball prices. The underlying problem is not a lack of bidders, but rather an overload of uncertainty in the market.

Recent mortgage loans made under relaxed underwriting standards have been found to perform much worse than expected. They have much higher-than-anticipated rates of foreclosure and losses per foreclosure, and these figures are still rising. The fact that the magnitude of the factors crucial to asset valuation remains unknown means that traders cannot calculate the value of the assets. This has prevented the market from generating a market-clearing price. Instead, buyers bid only worst-case-scenario prices of 30 cents on the dollar while sellers hold out for the 85 cent cash-flow value they impute to their holdings. The true value is somewhere in between.

The only way to find out the true value is to wait until these “new” loans establish enough of a track record so that usable estimates of the missing foreclosure-rate and foreclosure-loss parameters can be developed, which would then enable the estimation of the true value of the assets.

The solution would seem apparent: Instead of selling their assets at fire sale prices, hold the assets until enough of a track record has unfolded. But banks are prevented from doing so because of “mark-to-market” regulations. So why force banks to sell their assets to nonbank entities just so those entities can wait instead? A better policy would be for the federal government to guarantee the value of the “toxic” portfolios of the major banks at 30 cents on the dollar - about what the bailout plan would pay for them. That would enable banks to raise capital as effectively as if they had actually sold their portfolio, while allowing them to recoup some of the value.

Ultimately, the question is: Do we want healthy banks or healthy managers?





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