d Princeton Profs
businessinsider.com/insolven … les-2009-4
(Courtesy of Some Assembly Required)
John Carney|Apr. 6, 2009, 9:04 AM
he government’s official view that toxic assets are incorrectly priced due to illiquidity “fire sales” is wrong, a new study by Harvard and Princeton finance professors suggests.
You can read the whole paper by Harvard’s Joshua Coval and Erik Stafford and Princeton’s Jakub Jurek below. The striking conclusion is that the low prices of toxic assets actually reflect the fundamentals, rather than being driven by an illiquidity discount.
“Troubled real estate-related assets comprised of legacy loans and securities, are at the center of the problems currently impacting the U.S. financial system…The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales,” the Treasury and the Fed claimed.
Many prominent economists–including such diverse types as Anna Schwartz and Paul Krugman–have taken with this official view, saying the government was mistaking a solvency crisis for a liquidity crisis. This latest paper effectively demolishes the “fire sale” view. It draws three important conclusions.
* Many banks are now insolvent. "...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."
* Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks. "...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."
* We're making it worse. "...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen – the day of reckoning."
The banks are insolvent, their assets genuinely worthless and government intervention in the process is delaying and worseing the day of reckoning. Hoocudanode? It’s a good thing the insolvent Irish banks, their worthless assets and the interventionist Irish government are different…
We’re all socialist bankers now…
lets sieze the commanding heights of the economy…oh wait…they be flat…
huffingtonpost.com/jeffrey-s … 83499.html
Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.
Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank’s net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K.
Have I got this totally wrong or is there another step to this -
The banks can then buy back the actual assets from the bankrupt proxy.
This leaves them with an almost full ‘market value’ profit and they could eventually repurchase the asset itself at a ‘bankrupt valuation’.
I’ve read that it might be a dumb plan but it can’t be
that dumb, can it?
Yes…But you must be one of the golden 5 who can take adantage of the plan!