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What Amount Will the Government Pay for the Acquired Assets?

By Jeralyn, Section Other Politics
Posted on Mon Sep 22, 2008 at 08:05:00 AM EST
Tags: bailout (all tags)
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I have friends who are far more financially savvy than I am, and they say they are very frustrated with this bailout procedure. They say no one is asking the government what percentage of the dollar they are going to pay for these non performing assets? Is it 100%.....or 20 %? what is it? They say this is very important.

Does anyone know the answer?

One more thing: The AP reports:
"The government could contract with private companies to manage the assets it purchased under the rescue" The proposal does not require that the government receive anything from banks in return for unloading their bad assets. But it would allow the Treasury Department to designate financial institutions as "agents of the government," and mandate that they perform any "reasonable duties" that might entail.
The bailout, as we've mentioned before, would be sheltered from court review. There's something wrong with this picture. Care to fill in what it is?

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    What Amount Will the Government Pay for the Acquired Assets? | 30 comments (30 topical)

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    holy cow! (5.00 / 2) (#4)
    by cpinva on Mon Sep 22, 2008 at 02:22:45 AM EST
    talk about a bonanza for the institutions involved, and by extension, the highly compensated, underperforming managers of them!

    i have no clue what the assets are going to be acquired for, but i'm going to guess it's a much higher % than the free market would ordinarily pay.
    based on what i have seen, read and heard, they should be paying no more than 50 cents on the dollar, if that. my guess is that it's going to be closer to 90%. a damn fine deal for the banks.

    not so great a deal for the american taxpayers, who are footing the bill.

    talk about a supreme case of monstrous egoitis: this bill would give treasury (essentially paulson) total, unfettered control of the entire process. give him credit for chutzpah, if nothing else.

    you have to love it really. the bush administration, the gift that keeps on taking!

    will there be pallets of cash? (5.00 / 1) (#8)
    by Katherine Graham Cracker on Mon Sep 22, 2008 at 06:52:53 AM EST
    Why should we trust a government that lost pallets of cash?

    Paulson is chicken little and Bush is mad they couldn't hold out 5 more months and the rest of us should remember the lesson of the entire Bush administration and just say no!  There must be a better solution.

    There are a couple of better solutions, but (none / 0) (#15)
    by Elporton on Mon Sep 22, 2008 at 08:51:32 AM EST
    this is the plan we'll get stuck with because Congress won't propose another alternative.  They'll just try to tweak this one regarding CEO compensation, etc. so the deal can be done before they go to recess.

    Parent
    There are a lot of details (5.00 / 1) (#9)
    by litigatormom on Mon Sep 22, 2008 at 07:29:04 AM EST
    missing, including the percentage at which the assets will be sold.  The Resolution Trust Corporation (RTC), which took over failed properties during the S&L crisis, wound up making money overall, because it had the time to ride out the worst of the market.

    There's a difference here, though.  The RTC wound up owning and selling actual real properties.  The assets here are paper -- mortgages, and mortgage backed securities -- and they are much harder to value. The chances of the government ending up with a positive balance are much more remote.

    I think a bailout was inevitable. They had to do something to try to stop the spiral downward.  That doesn't make it less infuriating that we're taking on the private sector's losses without having had a share of the upside.

    Paul Krugman said the other day on Bill Maher: "We're all socialists now."  I wish we'd become socialists by providing national healthcare, rather than by nationalizing financial firms that got too smart for their own good.  

    The RTC actually cost the gov't $100-150 billion (none / 0) (#13)
    by steviez314 on Mon Sep 22, 2008 at 08:21:37 AM EST
    Maybe it would have been worse without the RTC.

    But I'm sure THIS TIME IT'S DIFFERENT.

    Parent

    You may be right (none / 0) (#28)
    by litigatormom on Mon Sep 22, 2008 at 11:30:42 AM EST
    but I think the losses would have been much higher had the RTC not existed.  But the RTC put the failed bank in receivership -- meaning that the revenues from asset sales flowed directly to the government. What Paulson's plan does here is assume the losses from sales of the "bad" securities, while leaving the financial institutions that hold them with cleansed balance sheets.

    Gives "corporate welfare" a whole new meaning, doesn't it?

    Parent

    Naomi Klein (5.00 / 2) (#12)
    by WS on Mon Sep 22, 2008 at 08:14:41 AM EST
    has a new article up:

    Free Market Ideology is Far From Finished

    This infuriates me more than anything:


    During boom times, it's profitable to preach laissez faire, because an absentee government allows speculative bubbles to inflate. When those bubbles burst, the ideology becomes a hindrance, and it goes dormant while big government rides to the rescue. But rest assured: the ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalization for deep cuts to social programs, and for a renewed push to privatize what is left of the public sector. We will also be told that our hopes for a green future are, sadly, too costly.
    I don't (none / 0) (#1)
    by Faust on Mon Sep 22, 2008 at 02:16:51 AM EST
    I think that is part of the problem with the "blank check" that is being asked for. Basically the percentage would be left up to Paulson et al.

    Not directly related to your question but very interesting is the post recently posted by Digby.

    Digbys post makes good reading but I was also taken by some of the stuff she links to, for example the solution proposed by Roubini.

    One can argue that even a Broken clock is right twice a day but this guys has been predicting this for 2 years.

    Just to emphasize here (none / 0) (#2)
    by Faust on Mon Sep 22, 2008 at 02:18:49 AM EST
    he favors the HOLC solution that Clinton discussed in her talk on this crisis. Check out the link.

    Parent
    Paul Krugman on this point: (none / 0) (#3)
    by andgarden on Mon Sep 22, 2008 at 02:19:06 AM EST
    link:

    [The financial system] will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms -- and their stockholders and executives -- a giant windfall at taxpayer expense. Did I mention that I'm not happy with this plan?
    As proposed, the Paulson Fix (as in the Fix Is In) (none / 0) (#27)
    by jawbone on Mon Sep 22, 2008 at 11:19:58 AM EST
    will result in one of the largest wealth transfers in American history, maybe globally.

    And it's going to go to the folks who brought us this Big $h*t Pile, the uber wealthy.

    But note that many of the Village MCMers are doing the Happy Talk--this is all for your safety, little people; your own good. It will save your pensions, your jobs, your savings, your Future!

    And discussion of any alternate views?

    Crickets.

    Parent

    Don't know the answer (none / 0) (#5)
    by nycstray on Mon Sep 22, 2008 at 02:28:30 AM EST
    and haven't read through everything, BUT, I was wondering what they would be paying and also what sort of 'looking into' they would be doing. Bloomberg said something on MTP about the securities/stocks (not sure of the right word) and lack of transparency, the depth of it etc and how many companies may not really know what they have.

    I'm really p!ssed about this. Not only what they allowed to happen, but the signs were all there and nothing was done. So we end up doing quickie bailouts of companies (how much more did that cost us?!) and now are looking at the mother of all bailouts. I hope going forward with this mess, our money isn't tossed out there without a fine tooth comb and a detective checking wherever the money is going. All companies involved in this should be require to do a sit down and provide comprehensive reports on all their "whatevers" before any action is taken.

    Obviously, I'm not an economic whiz, but basic common sense made my alarm bells sing this morning listening to Paulson, Bloomberg and others. And I thought they were already singing loud and clear.

    I will say, when this all started going down, I thought back to Bloomberg after he had turned things around here. He's been putting stuff by for a rainy day, so to speak. May not be enough, but sounds like it is enough to keep us from taking a serious hit. And it was basic common sense. What goes up, will come down.

    It will be a reverse auction. (none / 0) (#6)
    by steviez314 on Mon Sep 22, 2008 at 05:53:50 AM EST
    In a regular auction multiple buyers bid up what they will pay.

    The Treasury will conduct a reverse auction with the banks....the bank sellers will offer at lower prices the assets they want to sell.  For example, Citibank will offer to sell $1 billion of assets at 50 cents on the dollar, and Morgan Stanley will offer $1 billion of assets at 45 cents, etc.  The gov't will take the lowest offer.

    That's the theory, at least!

    As an aside, as part of this deal the gov't should require any bank whose offer is accepted to not pay dividends or buy back their common stock for at least 2 years.

    Forget CEO compensation, that's small pototos;  Citibank paid $1 billion in dividends last year, and over the past 4 years (before the crisis) bought back $15 billion of their own stock.  That's capital that would be coming in mighty handy right now.

    Sure I can (none / 0) (#10)
    by lambert on Mon Sep 22, 2008 at 08:09:46 AM EST
    It's the definition of insanity: Doing the same thing and expecting a different result.

    We're handing billions of dollars (same) to the Wall Street bankers and financial engineers (same), and paying them immense fees (same) with no accountability (same).


    What to pay for the illiquid assets (none / 0) (#11)
    by sebelotodo on Mon Sep 22, 2008 at 08:14:23 AM EST
    Two things to keep in mind,
    1.  they are always referred to as "illiquid" assets and not as "distressed" or otherwise damaged goods.  The conclusion might be that Feds would charge a liquidity premium and not have any discount for bad/uncollectible assets.
    2.  the possible collusion between buyers of the assets and the eventual buyers of foreclosed properties is tempting.

    In other similar large clog in the system with bad debts situations several actions were taken in the past to determine the price and face amount purchased.
    1)  let every holder of these assets submit bids containing the %discount and $volume of loans they are willing to exchange; the total volume of loans submitted by each not to exceed their holdings).  The Treasury would buy the cheapest ones until it reached the cost limit allocated.  If some asked for too much and didn't have their offer accepted, they are on their own and would have to deal with 'mark to market' requirements of the regulators.

    Thought could be given to;
    a)   'paying for the illiquid assets' with 'liquid assets' and I don't mean cash!  Give the banks 30 year amortizing bonds.  This would finance the transaction and leave free cash flow from operations to flow to other social programs.

    b)  How any bureaucrat will determine who can/cannot pay for their mortgage is a mystery, the banks couldn't figure it out when the made the loans and Fannie/Freddie couldn't when it was their turn.  Give every debtor of the 'illiquid assets' a multi-year grace period.  Let's say every one got 3 years with greatly reduced payment schedules and a deferral of foreclosures.  This would stop the avalanche of home for sale - we know that when someone yells fire in a theatre, not every one can get out thru the same exit door.

    c)  Lastly, the Treasury could contribute the purchased paper to the Social Security Funds to ensure that any proceeds of mortgage collections go to the "people".

    I really like b and c (none / 0) (#17)
    by befuddledvoter on Mon Sep 22, 2008 at 09:07:16 AM EST
    Good ideas!!  I don't know enough about a to opine.  

    Parent
    Won't it be easy to control... (none / 0) (#14)
    by EL seattle on Mon Sep 22, 2008 at 08:32:35 AM EST
    ...most of the possibilities for mischief here? Maybe just by adding public notification of the asset transactions and the identities of the players involved?  

    I think that if financial institution "A" acts as and "agent of the government" and purchases non-performing asset "X" at 99% of its value - when other "agents" are buying comparable assets at, say 70% value, that would really stand out on a public transaction listing/database/website.

    And then that agent would have to do some serious 'splainin' to do before buying another asset at anything like 99% value. (Public pressure and a member or two of congress could publicly put them on Double Secret Probation, perhaps?)

    In the hurry to complete this rescue, I'm sure that individual mistakes will be made (frequently).  But it should be easy enough to keep corruption under control through simple transparency and a bit of diligence.  In my opinion, anyway.

    I don't think so (none / 0) (#16)
    by Steve M on Mon Sep 22, 2008 at 09:02:59 AM EST
    Unless there's some kind of legal recourse, depending on transparency and public shame to prevent improper transactions from happening strikes me as wishful thinking.  The system needs to be designed better in the first instance.

    Parent
    Wishful thinking perhaps, but... (none / 0) (#18)
    by EL seattle on Mon Sep 22, 2008 at 09:24:35 AM EST
    ... I think this would be a gift that keeps on giving for television "investigative reporters" from 60 Minutes on down the local "Action-6" level.  And I'm sure that there are a few grandstanding folks in congress who will love to have easy access to this sort of bucket o'muckfodder.

    Parent
    People-centered solution (none / 0) (#19)
    by Newt on Mon Sep 22, 2008 at 09:49:45 AM EST
    The bailout should be homeowner centered, not investment oriented.  Every homeowner should be offered the option to immediately transfer any and all mortgages on owner occupied properties into government owned financing.  Interest rates should be fixed at 5%, which would be an incentive for anyone with higher rates to switch.  Homeowners who are not in foreclosure would be offered the same deal.  The banks and mortgage companies would be paid a nominal fee to continue to process the loan payments for each loan they already own.  Management of foreclosed properties would be through HUD and/or VA, since both currently have infrastructure for housing and could increase capacity to manage the attorney contracts for foreclosure.  The transition would be seamless in the sense that homeowners would not have to qualify for the new loans with a refinance process.  The government would simply assume the loan, offer a new rate, and have banks continue to manage the payments.  A homeowner wouldn't have to do anything; their monthly payments continue unless they chose to make changes.  (Savvy homeowners can opt to continue to pay the same monthly amounts, or revise their payments to match the new interest rates.)  Homeowners with financing at less than 5% can choose to do nothing.  Banks would not have a choice in whether to participate on a loan per loan basis, but could opt out of the entire package, which would mean keeping their junk loans as well as the good loans.  

    If we're going to socialize the risk, the investment must be socialized as well.  All revenues would be put back into VA & HUD, and all losses paid through the general fund. Of course, since a plan like this would help the homeowners and taxpayers more than the banks, because even good loans would be switched over, it would never be offered or accepted by Congress.  

    Retroactive immunity for Wall Street (none / 0) (#20)
    by lambert on Mon Sep 22, 2008 at 09:54:41 AM EST
    A a little noticed aspect of clause 8.

    Brilliant piece by Krugman this morning (none / 0) (#21)
    by rennies on Mon Sep 22, 2008 at 09:56:17 AM EST
    on the perils of the Paulson bailout:Taxpayer cash for
    Wallstreet trash.
    http://tinyurl.com/3zvk9x

    I hope the Congressional Dems have enough backbone to put on the brakes.

    Not trustworthy is right.... (none / 0) (#22)
    by kdog on Mon Sep 22, 2008 at 10:08:23 AM EST
    Knowing the players here, this is a raid on the treasury, Wall St. edition.  The sequel to the Iraq occupation edition.  

    Time is of the essence, (none / 0) (#23)
    by KeysDan on Mon Sep 22, 2008 at 10:11:27 AM EST
    for Paulson, et al.  The more scrutiny of the plan, the more questions without answers and the less popular it will become.  What is the reason for no review by another agency or courts?  Yes, things go smoother without meddlesome agencies and courts second-guessing subjective decisions--guess that is an advantage of dictatorial governance.  But is that what we want?  In keeping with Naomi Klein's thesis of Republican government, we should be prepared for an additional shock to get the bill passed, essentially, as proposed.  Maybe, a failure that affects more people, like a run on insurance guarantees for money market or bank accounts.  Please forgive the skepticism; there really is a financial crisis, of course, but we need to watch for other agendas in the wake of any attempt by the Bush administration to resolve  a real problem.

    Pricing, etc. and Conflicts of Interest (none / 0) (#24)
    by santarita on Mon Sep 22, 2008 at 10:25:23 AM EST
    I wonder if the purchase price is vague because Treasury has no idea how to price the paper and if they were to establish a discount price, all of the paper would have to be marked to the price which would in turn cause balance sheets of financial institutions to go south and create "credit events" on unrelated credit default swaps, etc.

    I am very disturbed by the idea that some of the same institutions who receive the benefits of the bailout will be paid millions of $$$ in fees to manage the purchased paper.  I believe that the Bear, Stearns bailout was made a little less painful for certain firms because they earned fees for handling the merger and acquisition.

    Wall Street is a fairly closed group and the probability that $$$ will be transferred from the US Govt to line some pockets is pretty high.  I hate to say this but the work should be done by these institutions on a pro bono basis.

    Pro Bono work!!! (none / 0) (#25)
    by befuddledvoter on Mon Sep 22, 2008 at 10:43:29 AM EST
    I strongly agree with this.  Afterall, the US citizens are paying the freight and taking the burden and risk off "Wall Street."  Pro Bono concept is very foreign to these entities.  I don't know if it even exists in most financial settings.    

    Parent
    Hey now (none / 0) (#26)
    by Steve M on Mon Sep 22, 2008 at 11:04:48 AM EST
    Lots of lawyers in my circles still reminisce wistfully about the "full employment" days of the RTC.  Please don't go raining on our parade.

    Parent
    I'm Sympathetic, Of Course... (none / 0) (#30)
    by santarita on Mon Sep 22, 2008 at 11:42:28 AM EST
    This situation has the potential to be "The Full Employment for the  Commercial  and White Collar Criminal Defense Bar Act".  But some reasonable cap on fees might be appropriate.  Someone here or elsewhere on the Internet proposed paying what government employees make which makes sense because the Fed and/or Treasury would be appointing agents to act in their behalf.

    Parent
    Jeralyn, you might want to read Anglachel's last 5 (none / 0) (#29)
    by jawbone on Mon Sep 22, 2008 at 11:41:14 AM EST
    or so posts, all on the Paulson Fix and underlying problems.

    Bernhard at Moon of Alabama has some excellent posts, and this commenters are also interesting (mostly). He and some of the commenters bring a European perspective (believe he's French). He's been a pretty good analyst so far. He predicted the countries who can afford to keep loaning to us will probably place conditions on doing so. Today, b covers a call from Bush to the Chinese president. Guess what topic came up? Taiwan, and US cooperation on China's interests in Taiwan....
    There will be other quid pro quos we will have to make.

    The Agonist also has lots of good posts on this topic.

    Correntewire.com has been inundated with good posts and comments; Digy, v. good; I understand Marcy Wheeler has done some good stuff. It is hard to keep up, now that attention is being paid. Finally.

    What I do love is that Warren Buffet called the CDS's--credit defaul swaps--a "buried time bomb" in the financial system and 5 years ago said they were "weapsons of mass destruction" for our financial system. Oooff.

    I posted a comment somewhere with the links--and can't recall where, alas.

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    What Amount Will the Government Pay for the Acquired Assets? | 30 comments (30 topical)

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