No Bad Bank
Joe Stiglitz has added his voice to those opposing the idea of an Aggregator (or Bad) Bank.
That amounts to swapping taxpayers’ “cash for trash,” Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. “You shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage.”
From the moment Paulson first proposed this idea, I called it the Toxic Trust Company of America . It was a bad idea four months ago and it’s still a bad idea. The Times explains that the biggest problem is in valuing the assets to be purchased.
The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.
The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.
If the selling bank was forced to sell the bond at market value to Toxic Trust, it would take an immediate 60% hit to its balance sheet, and need to raise lots of new capital to be in compliance with reserve ratios. If on the other hand we played “Uncle Sucker” and the TTCA bought the bond for the bank’s valuation or even S & P’s (why are the rating agencies still in business?), we would never recover our principal. Making things even more complicated is my suspicion that many of the synthetic Credit Default Obligation bonds have no underlying value what so ever–are a complete Madoff type fiction.
We have a mechanism to deal with failed banks. It’s called the FDIC, a completely funded insurance pool for deposits. Merge the middle tier banks into the strong ones and let the rest be taken over by the FDIC. We have many more systemic issues to face and we should get on with it.
interesting, more info here: http://www.fdic.gov
interesting, more info here: http://www.fdic.gov
I hope more people read this post than commented on it.
Seems to this plebian that doing the Toxic Trust and Savings thing would be kind of like what the young Spartan did. He wanted a pet and caught a fox. Pets weren’t allowed in the barracks and when the top kick came through to inspect, the young soldier stuffed the fox in his toga. Because he was stoic, he didn’t say a word when the hungry fox started eating his belly, and he didn’t fall out of ranks until the fox finally ingested something really vital and the young soldier bled out.
I don’t know what it is, but there’s gotta be a better way. Maybe the guys who thought up the CDSs and CDOs, and their children and grandchildren, could be made to work in the mines and mills and farm fields until they made up enough Real Wealth to fill up the economic hole they made while stealing from this and so many future generations to tickle their egos and limbic systems.
That’s slavery, you say. But I gotta ask, what’s the status of the hourly worker in a Real Economy job going to be for the next maybe 50 years, as the Real Wealth is rebuilt?
I hope more people read this post than commented on it.
Seems to this plebian that doing the Toxic Trust and Savings thing would be kind of like what the young Spartan did. He wanted a pet and caught a fox. Pets weren’t allowed in the barracks and when the top kick came through to inspect, the young soldier stuffed the fox in his toga. Because he was stoic, he didn’t say a word when the hungry fox started eating his belly, and he didn’t fall out of ranks until the fox finally ingested something really vital and the young soldier bled out.
I don’t know what it is, but there’s gotta be a better way. Maybe the guys who thought up the CDSs and CDOs, and their children and grandchildren, could be made to work in the mines and mills and farm fields until they made up enough Real Wealth to fill up the economic hole they made while stealing from this and so many future generations to tickle their egos and limbic systems.
That’s slavery, you say. But I gotta ask, what’s the status of the hourly worker in a Real Economy job going to be for the next maybe 50 years, as the Real Wealth is rebuilt?
While the hue and cry has been for heads on pikes, perhaps galley slaves would be more useful. Or giant hamster wheels connected to electrical generators…
While the hue and cry has been for heads on pikes, perhaps galley slaves would be more useful. Or giant hamster wheels connected to electrical generators…
Their object all sublime … to make the punishment fit the crime. Really, your ideas should be set to music.
Their object all sublime … to make the punishment fit the crime. Really, your ideas should be set to music.
Have you watched Forbes make the media rounds? He’s pushing recapitalizing the banks by eliminating mark to market – and probably loves the idea of removing the toxic assets from the banks. But as usual with Forbes, he ignores the primary issue: at what value should those assets be?
Obviously, they’re worth nearly nothing now. Someday, down the road in years to come, they might be worth a great deal. But I’m not ready for my tax monies to be used in overpaying for assets on a “maybe” pricing that some bank decides.
Have you watched Forbes make the media rounds? He’s pushing recapitalizing the banks by eliminating mark to market – and probably loves the idea of removing the toxic assets from the banks. But as usual with Forbes, he ignores the primary issue: at what value should those assets be?
Obviously, they’re worth nearly nothing now. Someday, down the road in years to come, they might be worth a great deal. But I’m not ready for my tax monies to be used in overpaying for assets on a “maybe” pricing that some bank decides.
Jon, from Jeremy Siegel…
http://finance.yahoo.com/expert/article/futureinvest/138579;_ylt=Asjf6srPFYwpIua8INC9wZC7YWsA
Jon, from Jeremy Siegel…
http://finance.yahoo.com/expert/article/futureinvest/138579;_ylt=Asjf6srPFYwpIua8INC9wZC7YWsA