WASHINGTON — More than four months after the federal government sought $700 billion to get troubled assets off bank balance sheets, there's a new administration that's promising to, yes, get troubled assets off of bank balance sheets.
However, the new plan unveiled Tuesday by Treasury Secretary Timothy Geithner was met with skepticism because it lacks any detail on how the bad assets that are clogging up the nation's financial system will be addressed.
"There's been essentially no forward movement," said Bert Ely, a nationally recognized banking consultant and expert on past bank bailouts.
When then-President George W. Bush signed the $700 billion Wall Street bailout in October, the plan was to have the government create an entity to buy bad assets — complex securities — from the banks.
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This program became known as the Troubled Asset Relief Program. The process was going to lead to what economists call price discovery: a buyer and seller meeting in the marketplace to determine the real value of these assets.
The dilemma, then and now, is that the underlying collateral for these assets is mortgages, and as home values have eroded amid the nationwide housing crisis, the quality of the underlying collateral has weakened. The result: No one wants to buy the securities.
This is one reason why then-Treasury Secretary Henry Paulson quickly abandoned the idea of purchasing assets in favor of a quicker way to bolster banks — direct injections of capital with few questions asked.
Months later, the original TARP concept is back with new packaging. Geithner no longer proposes a taxpayer purchase of bad assets, but instead a public-private partnership to purchase them. If markets can price these assets, the government will help private investors buy them — a form of insurance to reduce fears of risk and loss.
"Here's the problem. You get right back to the issue of price," said Ely, noting that Obama's Treasury, like Bush's, has offered no insight as to what the toxic securities' prices should be. Ten cents on the dollar of their face value? Fifty cents? More? Less?
Banks don't want to sell them at today's prices because the losses from their face value could swamp the banks. Investors, including the government, however, don't want to pay the banks more than the assets are worth, because that's wasteful and stupid.
Citigroup Chief Executive Vikram Pandit said as much on Wednesday, when the heads of the eight largest banks were grilled all day by members of the House Financial Services Committee. Asked why distressed assets are still on Citi's books, Pandit said he's unloading them where possible, but won't do it for a song, since he thinks they have longer-term value.
"I'm not going to sell them for a dollar," Pandit said, adding that he's acting in the interest of shareholders and has rid the company of $150 billion of distressed assets.
Lloyd Blankfein, the chairman and chief executive of investment bank Goldman Sachs, suggested that accounting rules are a major reason why distressed assets are now considered toxic. Banks are forced to mark losses every quarter because they must put a present-day value on an asset that will mature over time. This accounting practice is called mark-to-market.
Forcing banks to sell these assets at current market prices would lock in steep losses and perhaps render many banks insolvent.
"The supply and demand would only cross at a much lower level," Blankfein said.
Some economists think that rather than force fire sales of troubled assets, the government could suspend the accounting rule, and as markets rebound, there'd be buyers for the securities.
"When markets are not functioning, it's not mark-to-market, it is mark-to-craziness," said John Stumpf, the chief executive of Wells Fargo.
One serious new proposal did emerge Wednesday: Former Treasury Secretary Nicholas Brady wrote in an opinion piece that his resolution of the Latin American debt crisis in the late 1980s offered a way forward.
Back then, Latin governments were at risk of defaulting on their loans, and in some cases did. Banks were persuaded to write down the stated value of their loans, and in exchange, the banks received government bonds that were backed by U.S. treasuries. It created a win-win, as the Brady Bonds that bear his name traded in the billions of dollars and Latin countries rebounded from near oblivion.
This concept of repackaging bad assets into some form of government-backed bonds could be used to get bad assets off of bank balance sheets so that lending can resume across the economy, he said.
"It's serious and it's big and it's worked, and it's based on an optimistic outcome. Think what happened to the countries of Latin America," Brady told McClatchy.
Geithner went back before senators on Wednesday to defend his plan, offering little new detail on the question of how to value toxic assets. Instead, he took a shot at his predecessor, Paulson, with whom Geithner, as president of the Federal Reserve Bank of New York, worked closely last year to craft various piecemeal responses to the widening financial crisis.
"I do not want to compound the mistakes of the last 13 months, where things were rushed out," Geithner said. He noted that further delay might mean upsetting jittery markets and said "I will live with that disappointment."
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