Cleaning up bad assets
From then Treasury Secretary Paulsen's doomed initial proposal in October '08 until today there has been talk of government sponsored programs to buy distressed "bank" securitized assets to create more liquid and functional fixed income markets. The TALF plans passed in early spring of this year envisioned public/private partnerships that would manage the acquisition and reliquification of these assets. It's never happened, even though it continues to be an exceptionally good idea as a way of restarting the quality tranches of the securities markets.
Why does this continue to be a good idea? A first clarification --- taking this action would have the intention of creating better functioning markets that are still damaged from the credit crisis and an overhang of illiquid assets. It is not a bailout of banks but since banks are the largest repository of these assets both for their own account and for the accounts of retail investors, pension funds, institutional investors, and high net worth individuals, that's where you go to find them. Second thought --- it is a basic principle of managing a portfolio of assets, especially trading assets, that you must take your losses and move on. The purpose of a program to buy these assets would be to liquify the entire market for these assets at levels that not only reflect their impairment but also their future cash flows. Stop the bleeding and allow the healing to begin.
Why hasn't this happened? First, there is a general perception that this is just another bank bailout effort, instead of it being a salve for the overall securitization markets; second, with the positive yield curve giving financial institutions breathing room and the recent ability of firms to raise capital in private markets there is now a false sense of security that suggests to some that a program to buy up and reliquify these assets is no longer necessary, or helpful; and third, the Obama administration, led by Obama himself in a major way, and Congress have consistently villified financial institutions and corporate America in general in ways that suggest to both banks and investors(Pimco, Blackrock, many other major fixed income players that would have been candidates to participate on the private buy side of the equation) that any involvement with the government is to be avoided at all cost.
To the potential investors the word from Congress, and subsequent silence from Treasury, suggests that participation in the public/private program would put these firms under the umbrella of regulation and management intervention that the banks are already under. To the banks who in the same breath have been told by Treasury to reduce leverage and lend more, which makes no sense at all, it is just another mile down a path that they are trying to get off.
A more constructive approach by both Treasury and Congress could still make this happen, relieving bank balance sheets of the need to take on more assets at an inappropriate time as securitization markets would again facilitate credit extension, and allowing those with these assets, the previously mentioned retail investors, pension funds, institutional investors, and high net worth individuals to make rational decisions about selling these assets into more liquid markets, taking reasonable losses, and getting on with their lives managing portfolios by choice instead of being stuck with essentially a dead part of their book.
Cleaning up these assets would still be a very good thing for the market.
Why does this continue to be a good idea? A first clarification --- taking this action would have the intention of creating better functioning markets that are still damaged from the credit crisis and an overhang of illiquid assets. It is not a bailout of banks but since banks are the largest repository of these assets both for their own account and for the accounts of retail investors, pension funds, institutional investors, and high net worth individuals, that's where you go to find them. Second thought --- it is a basic principle of managing a portfolio of assets, especially trading assets, that you must take your losses and move on. The purpose of a program to buy these assets would be to liquify the entire market for these assets at levels that not only reflect their impairment but also their future cash flows. Stop the bleeding and allow the healing to begin.
Why hasn't this happened? First, there is a general perception that this is just another bank bailout effort, instead of it being a salve for the overall securitization markets; second, with the positive yield curve giving financial institutions breathing room and the recent ability of firms to raise capital in private markets there is now a false sense of security that suggests to some that a program to buy up and reliquify these assets is no longer necessary, or helpful; and third, the Obama administration, led by Obama himself in a major way, and Congress have consistently villified financial institutions and corporate America in general in ways that suggest to both banks and investors(Pimco, Blackrock, many other major fixed income players that would have been candidates to participate on the private buy side of the equation) that any involvement with the government is to be avoided at all cost.
To the potential investors the word from Congress, and subsequent silence from Treasury, suggests that participation in the public/private program would put these firms under the umbrella of regulation and management intervention that the banks are already under. To the banks who in the same breath have been told by Treasury to reduce leverage and lend more, which makes no sense at all, it is just another mile down a path that they are trying to get off.
A more constructive approach by both Treasury and Congress could still make this happen, relieving bank balance sheets of the need to take on more assets at an inappropriate time as securitization markets would again facilitate credit extension, and allowing those with these assets, the previously mentioned retail investors, pension funds, institutional investors, and high net worth individuals to make rational decisions about selling these assets into more liquid markets, taking reasonable losses, and getting on with their lives managing portfolios by choice instead of being stuck with essentially a dead part of their book.
Cleaning up these assets would still be a very good thing for the market.
posted by John Borden at 9:13 AM
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