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.