Toxic Trust Company of America

The Wall Street Journal outlines the idea of The Toxic Trust Company of America.

Any eventual plan isn’t expected to mirror the Resolution Trust Corp., which was created during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market.

One way this could be done is through some sort of auction facility so that the government was involved in directly negotiating the value of specific assets with different companies.

So let me get this straight. If Vulture Investors like Leon Black are unwilling to purchase these mortgage bonds at 30 cents on the dollar, then the tax payers will pay the banks an above market price for the bonds in the hope that the vultures might buy them for more later? This is insane. Many of these bonds are packages of foreclosed properties. As they sit empty they will only decline in value and are not paying any present interest to our Toxic Trust Company.

I watched in horror over the last 24 hours as the touts at CNBC like Jim Cramer and Larry Kudlow browbeat poor old Bill Seidman (who used to run the RTC) into pretending like he thought this was a good idea. 24 hours ago Seidman clearly stated that the RTC was very different. The government didn’t have to buy any assets. It merely inherited the busted S & L’s and their assets after it paid the depositors from the Federal deposit insurance. Within 24 hours Kudlow was acting as if the whole thing was Seidman’s idea and since he had made money for the taxpayers on the RTC, this would work just as well. Bullshit.

In asking some federal bureaucrat to purchase busted bonds above the market clearing price, you are guaranteeing the taxpayer will be stuck with the bill. Unlike the RTC, the vultures will know just what the Feds paid for each asset and will bid below that price, if they bid at all. The longer the negative carry charges to this new RTC on the $1 trillion they will probably have to borrow (because they will be receiving little or no interest from these toxic bonds) the more desperate the Feds will be to sell the stuff at a loss. And so Wall Street (with a nice clean balance sheet courtesy of Uncle Sucker) will buy them back.

If anyone knows Chris Dodd, tell him to slow this insane idea down.

This entry was posted in Business, Economics, Journalism, Politics, Recession, Television, Wall Street and tagged , , , , , , , . Bookmark the permalink.

0 Responses to Toxic Trust Company of America

  1. Brian says:

    Nothing surprises me anymore. The crooks on Wall Street and in Washington don’t care what we think and they don’t have any sense of shame.

    You thought my Dictator was in jest? Maybe we need the guillotine instead. Modern and well off citizens have a hard understanding how revolutions happen but many times it’s because a rich entitled group exploits the peasants/taxpayers just that little bit too far. When you’re starving you’ve got nothing to lose.

    The only thing that will slow this down Jon is if the banks that own our debt refuse to purchase any more. The Japanese, Chinese, OPEC and all the rest keep buying debt because we keep sending them dollars to pay for imports. Sooner or later those dollars won’t be coming back.

  2. Alex Bowles says:

    This following may be construed as devil’s advocacy, but I think it includes a good point, which is that the cost of a bailout, exorbitant as it may be, can still be a better deal than the loss of trust resulting from a major crash.

    Here’s Mark Tomma, with the Dept. of Economics at the University of Oregon

    My grandmother lived through the Great Depression. After she passed away, we found money hidden all over her house – I’m sure there was some we never found, maybe buried in the yard or something. Even with deposit insurance, after the experience of the Great Depression she never trusted banks again, and nothing could convince her otherwise. That lack of trust takes assets that could be used productively to finance investment projects and hides them in the house or yard. And when you spread this behavior over millions and millions of people, the result is lower investment and lower growth.

    In addition, when trust evaporates, the withdrawal of assets from the financial system is not limited to households with relatively modest savings worried about their bank deposits. People and businesses with large accumulations of assets do the equivalent of hiding their money in the cookie jar, and this can cause investment markets to dry up very fast. And as my grandmother’s case shows in its own small way, once trust is gone it can take a long time to be reestablished, if ever.

    The consequences of a big financial crash are not necessarily temporary, it is not simply a case of wiping out that which needs to be creatively destructed and moving on, the damage to trust can be permanent, and if it is, the consequence will be lower investment, lower growth, and fewer jobs than if the trust-busting crash had been prevented. The cost of, say, a quarter percent lower growth for 25 years is large, far larger than the cost of a typical bailout, and the costs do not fall solely on those who made the choices that caused the problems, the costs fall on all of us.

    Of course, any policy that takes such a long-view by defaulting to a pro-bailout position creates an enormous moral hazard, which has been widely observed. And that’s why we also need clear, criminal codes regarding self-dealing and personal enrichment at the expense of the public trust.

    Perhaps I’m being a bit extreme, but my current feeling is that the entire senior management and board at Moody’s should be in jail right now. Slapping AAA certifications on products made from sub-prime loans was the peak of recklessness, and a major contributor to the conflagration that’s finally ignited.

    For more from Mr. Tomma’s superior blog, see here:

    Today’s post makes the fine distinction that things which merit saving don’t get bailouts because they’re too big to fail. It’s because they’re too connected to fail.

  3. Alex Bowles says:

    Oh, and of course, those firms that are too connected to fail should be regarded as though they were monopolies that needed to be broken up. On here, they would need to be systematically disconnected.

    I suspect that’s what the newly acquired AIG is about to suffer, without anesthetic, and in a huge hurry.

  4. Seth says:

    This is Not Bush’s Father’s RTC.

    We should stick closer to the original RTC concept and wait until the current owners of the bad mortgages are actually in bankruptcy. Not that vultures couldn’t make hay with that arrangement too. But Uncle Sam might as well not bid too much, too early.

    There’s probably a need to isolate some different types of security as well. The RTC problem boiled down to disposing of distressed real estate, but now we have uncollateralized derivatives in the mix.

    And I agree with Brian and Alex B: some accountability please?!

  5. Zhirem says:

    For your consideration:

    “Next, let’s talk about AIG. Did the federal government taking an 80% stake in the company do much good? If you look at their stock price, you might think so…but here are the facts: in today alone, AIG used $28 billion of its $85 billion loan facility from the Fed. That’s right, it blew through 1/3 of the amount in 1 day. Now, that’s not to say that this is going to happen every day, but if AIG has too many holes to plug, it could end in a very ugly fashion. I’m not sure how much due diligence the Fed and Treasury did before taking over the firm, but they need to start selling their assets quickly. And if $28 billion a day is the going rate for AIG – and at this point, who knows – this weekend is going to be another tense one.” – from DailyKos.

    Now, I don’t think that PsiFighter (author of the post

    is blowing smoke here, but he also does not source these assertions.)

    Others here may be more capable than I of discerning the meat of this. I found it troubling.

    The good news, to the anti-war front: This pretty much nails that coffin lid shut (no pun, or offense intended).

    We simply cannot afford to be in a war any longer. Certainly not in Iraq anyway.

    $10 to $15 billion a month, spilled into the sands of Mesopotamia…

    On the Foreign Oil front: We don’t seem to be able to afford that too long into the future either.

    On the Alt.Energy front: Looking better all the time, ain’t it Morgan? Oh, and lookee here, from an Iowa boy:,0,4046035.story

    The other plant in town just recently (within the last 2 weeks) shipped the first blade from their new factory. Iowa is currently ranked third in generation of wind power in the United States.

    What the *real* good news is: The blades that wind-turbines need are too problematic (read: costly) to have transported far. So, it is nigh-unto impossible to export these manufacturing jobs. Iowa being at the crossroads of I-80 and I-35 makes it a prime spot to produce blades for turbines for the lower 48.

    Despite the headlines, the fear and loathing, I smiled today, knowing that hope lives yet, all is not lost, and we need to roll up our collective shirtsleeves and get back to work on our country.

    We can make this generation’s moonshot, and we can make it now for future generations.

    Go green.

    Go hard.
    Like our lives depended upon it.
    Because they do.

    Go now.

    If we don’t put a WWII effort on this, we won’t be around too long to lament our apathy.

    If we don’t do this for the US, we will be forced to buy this from China. Or from Europe. Or from somewhere else our money should not probably go.

    If we don’t do it now, do we really want to find out what we will have to do later?

    – Zhirem

  6. Patrick says:

    Some sort of bailout by the Federal Government may be absolutely necessary to salvage something of our economy. I’m in no position to judge that, but I will never accept assurances about the need from the likes of Bernanke and Poulson, (neither of whom have ever been elected to anything not involving their Country Clubs) until the criminals and greedy bastards who perpetrated this whole enterprise are made to accept responsibility and suffer along with the thousands of foolish home-buyers and equity loan borrowers who swallowed their snake oil. I don’t have a clue how to identify them, or how to punish them, but I am certain that most of them, the Chiefs of whatever, will walk away with millions, while the rest of us pay for their mismanagement and thievery. My attitude is undoubtedly bone-simple populism, but I’ll bet a bundle that my attitude will be shared by millions of other Americans.

    My wife and I have worked and saved and invested. We have bought and sold a half-dozen homes over the years, courtesy of frequent moves by the Air Force, and we have never missed a payment for anything. So now, we have to underwrite the stupidity and cupidity of a few Wall Street jerks and clueless clowns in banks and mortgage companies across the country. Our 401(k) and other investments are plummeting in value, while the Fed and Treasury, along with Congress and the administration, make the world safe for CEOs and big investors.

    If Obama can clearly link McCain to this collapse because of McCain’s long-term opposition to Federal regulation of these sleazy outfits and his love affair with Bush, he will win in a landslide. The problem, of course, is that Obama seems to have no idea what to do now, either.

  7. Phil says:

    Zhirem your post just made my morning.

    Thanks for that.


    Please sign and copy and post the following petition.

    “Petition the government for a redress of grievances”

    The Constitution of the United States of America

    Bill of Rights

    Amendment I: Freedom of speech, religion, press, petition and assembly.

    Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

    On this day the 19th of September in the year 2008 the Bitter Hinterlands hereby issues an invitation to affix your name upon the petition for a redress of grievances.

    “The Use of Taxpayer Monies to Bailout Fraudulent Bankers Shall Be Prohibited”

    The Citizens assembled of the Republic of the United States of America hereby declare to the Congress of the same that they shall not continue to raid the People’s Treasury to resolve the immoral and illegal practices of lenders and speculators in the Domestic and Foreign Markets. The Moral Hazard of private profits and public losses has resulted in an imbalance in the Treasury creating a deficit that threatens the foundations of this Republic. The duly elected servants of the People have betrayed the trust bestowed upon by the Founding Fathers and signatories of the Constitution of the United States of America by putting financial interests ahead of and to the detriment of the will of The People thereby forfeiting those positions of responsibility. We the signers of this petition strongly protest the fiscal malfeasance of those who have sworn to uphold the laws and protect the interests of The People and call on those individuals who will not cease the illegal raiding of the Treasury to resign forthwith. Those that stand against the tyranny of moneyed interests and with the taxpaying citizens of the Republic are hereby urged to hold fast against the immoral and shameful behavior of those seeking bailouts. The Bitter Hinterlands urges all that sign to copy and disseminate this petition as widely as possible throughout the Republic. Together we can restore the People’s interests.

  9. Dan says:

    Zhirem I also appreciate your post, and god knows we need more people like you who can see the bright side of things.

    Yes we do roll up our shirtsleeves and get back to work.

    But many of the creeps who created the mess in 1929 sat back, waited, and bought up the depressed stocks for a song, and made themselves even richer than they had been before, while shrieking that FDR was an agent of the Bolsheviks and what this country needed was strong leadership like they’ve got over there in that Nazi Germany. Then when war approached, some of those same people got even *richer* with government war contracts. And in the case of IBM and Ford, they continued to do business with the Germans up to, and even after the outbreak of the war.

    That crap will happen again with this mess, and the way I’m wired makes it very difficult for me to put it out of my mind.

    Pencil in the year 2023, guys: that’s roughly when the next big wave of financial industry corruption will wash over us.

    Oh and for those who say that economic collapse makes war impossible, I would say that economic collapse makes war inevitable.

  10. P. Cross says:

    There may come a day when the dominate species on this planet may rediscover the most important tool for dealing with problems, any problems. It is a tool that when used correctly usually prevents problems in the first place but is indispensable when trying to correct errors/problems in the second place.

    It is what people both run too and from, sometimes at the same time.

    The fix will identify the guilty parties. Lets see who is nominated , Bear Stearns, Leyman , AIG, Morgan or are these just the players? Stupid? Yes. Poor business decisions? Absolutely. Crooked individually and as a group? Most likely. Playing by the rules? What? What rules you say? Actually the rules are written down. Bovine Scatology you say.

    Ok, fair enough let’s go to the beginning. What were they doing and when did they start doing it? That is easy, bottom line bad loans/mortgages. Well that doesn’t make any sense why would lenders create all this certified bad paper? Do bankers ordinarily loan money to individuals or groups who can’t pay it back, why would they do that? “Rhetorical”. We all know the answer.

    So who changed the rules? More importantly who had the power to change the rules? Why would they change the rules? FHA, Farmers Home Administration and the VA have been operating for years with no apparent deleterious effects to the economy right? Of course they were limited in their scope and they had pretty sensible underwriting requirements and they have rules for builders and sellers to follow. They can be a pain in the ass but there are rules.

    Of course this left out literally millions of potential home buyers who are of course entitled to own a home. Why don’t they own a home now? Here in begins the answer part. No job, bad credit already over extended, car payments, cell phone, drug habits, parole, probation, etc, etc. Of course there are also those that are starting out, don’t as yet have the savings or credit history to buy. These are the families that I feel sorry for because they were caught up in this frenzy and for years to come they will pay for it.

    So the governing body in their infinite wisdom decided to require lenders to include a certain percentage of this disadvantaged Demographic in their portfolios while at the same time protecting the tax payer by not allowing the big guys, Fannie & Freddie to purchase these loans. So far so good. Their really was very little teeth in the new rules because the penalties were worked around. Why would they do that you say? First and foremost it was bad paper.

    So we went along for years then in 95′ the governing body decided that not enough of the entitled were being serviced up to now so they attached negative monetary inducements. They changed the rules again, now they have the mortgage industries attention. It was like well if you absolutely insist we’ll do it. A very pragmatic approach considering the alternative is, in business or out of business.

    So now you have all this bad paper being created and no place to sell it. Wrong, since Fannie & Freddie can’t buy the individual notes lets allow entities to bundle them into securities and then allow F & F to buy all these brand new bright shiny securities.

    All this brought to you by the politically correct among us who would scream foul if the truth were told. Politicians are now asking for the responsibility for fixing the problem while not taking any responsibility for the problem.

    There are enough bad guys in this story to go around but if the congress had stayed out of it in the first place we wouldn’t be dealing with this now.

    I can see it now Conservatives standing and admitting that political correctness caused this problem in the first place. Liberals could do it, Conservatives never, the liberal press would suck the life out of them.

    And now you are going to tell me it didn’t happen this way.

  11. Dan says:

    “So the governing body in their infinite wisdom decided to require lenders to include a certain percentage of this disadvantaged Demographic in their portfolios while at the same time protecting the tax payer by not allowing the big guys, Fannie & Freddie to purchase these loans”

    I knew you were heading in this direction. Go read the article on Your assertion is baseless. This was a result of trying to hide default liability for bad debt inside of synthetic CDOs. You are deluding yourself in trying to blame this on liberal do-gooderism.

    This was naked cheating. This was a pyramid. This was a Ponzi scheme.

    Delude yourself if you wish.

  12. JR says:

    How about burying it in Yucca Mountain?

  13. P. Cross says:

    Obviously these loans don’t exist and have no explanation they were conjured and this buyback is only a rouse.

    Go read about the CRA and it’s permutations and then go and get some understanding of how important bond ratings are and how important the ability of the taxpayer to repay those bonds and how that is dependent on the net worth of the American people and you will begin to understand how important today’s actions are.

    Then go look into the close relationship Obama has with former Country wide, Freddie and Fanny leadership and who was number two in the Senate receiving money from same.

    The thievery that taken place in this disaster is beyond belief only to be outdone by the politicians that will throw US under the bus for their own politically correct views.

    We the taxpayers, the ones that actually work are going to be paying for this for years.

    Will this postpone many liberal programs, one can only hope. Come to thinks of it maybe this isn’t such a bad deal after all.

    It really is amazing!

  14. Dan says:

    You have one thing right: this was in fact about bond ratings, and the flimflammery that went into those ratings.

    How you move from that, to Barack Obama forcing Freddie and Fannie to make loans to the “undeserving” (wink wink) in the name of political correctness, and then conclude that this whole thing is good because it stops the Scary Black Man…

    But enough of this foolishness.

  15. Jon Taplin says:

    P. Cross- You can repeat John McCain’s lies about Franklin Raines, but that won’t make them true. He also told his audience that “they paid Raines’s bonus”. The taxpayers had nothing to do with it, because until last week, Fannie and Freddie were private companies.

    Don’t get all loyal republican on us now. You’re one of the smart guys we need to help reinvent this country. :)

  16. VeryBadMan says:

    P Cross It would be a good idea for you not to write anything down until you recover from whatever warp of the mind is rendering you insentient. You make an absolute fool of yourself.

  17. Jon Taplin says:

    P. Cross.- Just some facts on the Franklin Raines ad you referenced.

    First, a statement from Raines himself

    “I am not an advisor to Barack Obama, nor have I provided his campaign with advice on housing or economic matters.”

    And second the following from Bill Burton, which is something of a zinger

    This is another flat-out lie from a dishonorable campaign that is increasingly incapable of telling the truth. Frank Raines has never advised Senator Obama about anything — ever. And by the way, someone whose campaign manager and top advisor worked and lobbied for Fannie Mae and Freddie Mac shouldn’t be throwing stones from his seven glass houses

    Now, there is something very satisfying about being able to flat-out deny an ad like this with the words of Raines himself. Furthermore the response was so swift, and clear, it seems likely that they are on very very strong ground, and they know it.

Leave a Reply