Part of the Geithner plan, the government buying up the bad assets from the banks, is dead.
There are two ways of understanding what happened here. The first is that banks couldn’t sell their assets at current prices because doing so would have rendered them effectively insolvent. In this scenario, PPIP fails to fulfill its intended function: Saving the banks. The toxic assets survive and the banking system remains hollow and unhealthy.
The second is that banks no longer need to rush their troubled assets off their books because they’re increasingly able to raise private capital, operate in a restored financial market, and wait out the last vestiges of the storm. They can, in this world, let the value of the assets rise naturally, and sell them off later. In this scenario, PPIP is no longer necessary.
Kevin Drum on Ezra:
I’ll take door #1. It’s at least arguable that the banks were justified in not wanting to sell toxic securities at the fire sale prices on offer from vulture funds and others. But Geithner’s plan would have offered them considerably more than that — and they’re still unwilling to sell. That means they’re completely dedicated to the proposition that all their mortgage-backed junk is worth exactly what they say it’s worth.
I am not surprised by this as I never thought the program would work as banks would not price their assets at a point where investors would buy them (low bid / high ask – no trade!). Additionally, if banks sold into this Legacy Loan Program, it would not have provided capital (contrary to what the media puppet heads would tell you) unless they sold their assets for more than they were on there books at (which is unlikely). The program would have freed up some liquidity, but not increased capital. In fact, it would have more likely decreased capital as they would have had to sell at a price below the booked value and take a loss. That’s why this program was DOA although the financial media got giddy about it. It’s interesting though as this was one of the catalysts for the monster bank rally and now that the banks have been able to raise capital there is no need. Was this all in the script?
Pat Garofalo at Think Progress
An earlier post from Noam Schreiber wondering if the plan was necessary
The cover story has always been. “Oooh, this stuff is really hard to value and doesn’t trade.” That has been true only for an itty bitty subset of the damaged goods. The vast majority of it is readily salable. The banks just don’t like the prices.
We have said from the first sighting of this idea that it works only if the banks fetch at least the carrying value of the rubbish on their books. Even that isn’t a clear boon. Many banks are now plenty liquid, so as long as they can preserve the fantasy marks for the nuclear waste, they have no compelling reason to clear up the bad assets. They’d need to realize at least carrying value prices so as not to lower their equity levels (a loss on sale is a direct hit to their book value), or better yet above, to bolster their capital.
So this has every and always been an indirect and opaque subsidy to the banks. We have said it would never get done unless the powers that be found a way to manufacture at least carrying value sales prices for the dreck, since those sales prices would serve as market prices. If banks took a loss on any sales, they’d have to mark similar paper down too.
UPDATE: Ed Morrissey
**Apologies to Megan McArdle, who has a post up about Elizabeth Warren with the same title. We probably stole the idea and we’re sorry.
UPDATE #2: Ezra Klein and Will Wilkinson on Bloggingheads
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June 9, 2009 at 9:16 pm
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