Sunday, May 16, 2010
Tuesday, March 24, 2009
Finally, A Plan to Save Banks that's Isn't Fully Retarded
In fact, the White Houses new plan to clean bank balance-sheets has been met with critical acclaim from a diverse political crowd, and even more importantly, Wall Street seems to have found favor this time. DJIA is up nearly 500 points after the White House released some preliminary details of its plan. Bank of America shares are up 26% and Citi Group enjoyed a 20% increase in celebration of the first economically sound proposition since banking's near collapse last October.
Using $100bn of TARP funds from the treasury, as well as financial guarentees from FDIC and the Fed to purchase mortgages securities and then provide financing to private investors to purchase the loans. Basically, the government is using TARP funds, FDIC, and the Fed to manage and guarentee mortgage backed securites that they own, providing private investors not only with the financing needed to purchase these securities, but a level of transparency and sound management of such mortgage backed securities that will draw private investors back into the market.
Tim Geithner is suddenly starting to make sense as well, recommending that the Obama administration place constraints on the risk-level that certain big firms take, essentially monitoring the way such firms leverage themselves. Although hind-sight is 20/20, its still sobering to think that such leverage-adjusted risk constraints do not yet exist in 'too big to fail' banks. In the same way that the Fed makes demands on banks' cash reserves to hedge against sudden insolvencies in more liquid markets, it only makes sense that the government manages leveraged risk levels of those same banks.
TALF, the Term Asset-backed Loan Facilitator, is the administration's mechanism for bridging the gap between these public subsidies and private investment. TALF is now even being expanding beyond newly devised securities tailored for this program, but will begin to take on existing securities as well. TALF seeks to invigorate the market for securities backed by consumer and small business loans. If successful, securitization of such consumer and small business loans would free of the balance sheets or retail creditors to issue new consumer and small business loans, combating the credit-crunch on a more consumer-level than initiative such as TARP, which will be slow to trickle down from its intial instiutional benefactors to the consumer-level comprised of credit-cards and smaller loans.
"Morgan Stanley analysts said banks that have taken the steepest write-downs on assets may stand to benefit. They will be in the strongest position to get rid of unwanted assets without incurring huge additioinal losses that sap capital levels."
The real trouble with troubled assets, such as morgage securities, is that banks and private investors are unable to find mutually-satifactory prices for these securities, as banks are reluctant to sell at the low prices that private investors are only willing to pay, which has turned the market for such securities into a stand-off between these buyers and sellers. Essentially, banks fall victim to capital erosion if they begin writing-down these assets at bargain basement prices, leading to compound losses as lost capital stifles investment and, therefore, future earnings. From the perspective of buyers, asset-backed securities are tough to value. Asset-backed securites are pool of, lets say, thousands of mortgage loans, and its hard to know how a particular collections of loans will perform, i.e. whether they'll be plagued by defaults, late payments, etc. But its not only mortgage backed securies that are in questions, in this economy any imaginable asset is question as exceptions to the trend of capital dilution are few and far between. Individual loans stressing bank's balance sheets are tough to sell as well. Such loans experience greater volatility and they're performance deviate more than their aggregated counter-part.
The new plan for troubled assets sets prices for hard-to-value securities through a 'Legacy Securities Program' and 'Legacy Loans Program' which work as a sort of subsidized arbitrage between buyers and sellers, in a effort to end the grid-lock. Institutional investors, including private hedge funds and insurance companies are effectively dubbing this as "the first win-win policy to be put on the table". oooohhhh, Wall Street has its buzz-on amongst this flurry of recent optimism. We can only hope that Wall Street and Main Street can reach and agreement and begin executing as soon as possible.
Using $100bn of TARP funds from the treasury, as well as financial guarentees from FDIC and the Fed to purchase mortgages securities and then provide financing to private investors to purchase the loans. Basically, the government is using TARP funds, FDIC, and the Fed to manage and guarentee mortgage backed securites that they own, providing private investors not only with the financing needed to purchase these securities, but a level of transparency and sound management of such mortgage backed securities that will draw private investors back into the market.
Tim Geithner is suddenly starting to make sense as well, recommending that the Obama administration place constraints on the risk-level that certain big firms take, essentially monitoring the way such firms leverage themselves. Although hind-sight is 20/20, its still sobering to think that such leverage-adjusted risk constraints do not yet exist in 'too big to fail' banks. In the same way that the Fed makes demands on banks' cash reserves to hedge against sudden insolvencies in more liquid markets, it only makes sense that the government manages leveraged risk levels of those same banks.
TALF, the Term Asset-backed Loan Facilitator, is the administration's mechanism for bridging the gap between these public subsidies and private investment. TALF is now even being expanding beyond newly devised securities tailored for this program, but will begin to take on existing securities as well. TALF seeks to invigorate the market for securities backed by consumer and small business loans. If successful, securitization of such consumer and small business loans would free of the balance sheets or retail creditors to issue new consumer and small business loans, combating the credit-crunch on a more consumer-level than initiative such as TARP, which will be slow to trickle down from its intial instiutional benefactors to the consumer-level comprised of credit-cards and smaller loans.
"Morgan Stanley analysts said banks that have taken the steepest write-downs on assets may stand to benefit. They will be in the strongest position to get rid of unwanted assets without incurring huge additioinal losses that sap capital levels."
The real trouble with troubled assets, such as morgage securities, is that banks and private investors are unable to find mutually-satifactory prices for these securities, as banks are reluctant to sell at the low prices that private investors are only willing to pay, which has turned the market for such securities into a stand-off between these buyers and sellers. Essentially, banks fall victim to capital erosion if they begin writing-down these assets at bargain basement prices, leading to compound losses as lost capital stifles investment and, therefore, future earnings. From the perspective of buyers, asset-backed securities are tough to value. Asset-backed securites are pool of, lets say, thousands of mortgage loans, and its hard to know how a particular collections of loans will perform, i.e. whether they'll be plagued by defaults, late payments, etc. But its not only mortgage backed securies that are in questions, in this economy any imaginable asset is question as exceptions to the trend of capital dilution are few and far between. Individual loans stressing bank's balance sheets are tough to sell as well. Such loans experience greater volatility and they're performance deviate more than their aggregated counter-part.
The new plan for troubled assets sets prices for hard-to-value securities through a 'Legacy Securities Program' and 'Legacy Loans Program' which work as a sort of subsidized arbitrage between buyers and sellers, in a effort to end the grid-lock. Institutional investors, including private hedge funds and insurance companies are effectively dubbing this as "the first win-win policy to be put on the table". oooohhhh, Wall Street has its buzz-on amongst this flurry of recent optimism. We can only hope that Wall Street and Main Street can reach and agreement and begin executing as soon as possible.
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