Thursday, February 5, 2009

Of Bad Banks & Retribution

Now that the Obama Administration is considering the idea of a "bad bank" to clean up the toxic assets on bank balance sheets, the concern turns to how the assets should be valued. As I discussed in my blog post called Resolution Trust Corporation Redux there is precedence for this type of action, which goes back to our Savings & Loan crisis during the 1980's. While the RTC seized the assets from failed Savings & Loan institutions and allowed the insolvent ones to go out of business, depositors assets were merged into solvent banks and individual depositors didn't lose their money.

Recently, I read an editorial by Robert C. Posen of MFS Investment Management. The valuation method he suggests for the toxic assets on bank balance sheets has merit and should be explored. While it is less sanguine than the RTC process of seizing assets and allowing the company to go out of business, Posen's idea attempts to deal with the fact that the toxic assets of today may still have a great deal of intrinsic value, but marking them to market, a market which has been frozen for six months may not be the best way to deal with this situation.

Posen suggests that "after the Treasury has determined a best estimate of the assets current value, they should offer the bank a cash payment equal to 80% of that value. For the remaining 20% Treasury should provide the bank with a capital certificate, which would count as common stock in determining whether the bank meets its capital requirements". This would help to insure that the Treasury doesn't overpay for the assets, which would help protect taxpayers, and should entice the banks to participate in the program, because the prices won't be too low.

Furthermore, this plan would give taxpayers and the banks an opportunity to benefit from a sale of the assets in the future. The certificate given to the bank would entitle it to 80% of any profit that might be made on the asset when it is sold by the government. If the government sells the asset at a break even price or for a loss, the bank would be entitled to nothing.

Click here to read the entire editorial How to Value Toxic Bank Assets

I've also copied a blog entry by Edmundo Braverman of which discusses the quest to find a scapegoat for this most recent financial debacle.

A Pound of Flesh

© 2009 Edmundo Braverman,

Now that the media and Congress have succeeded in deflecting all blame for the current crisis to Wall Street, they've begun their frantic search for the fall guy. You know the guy I'm talking about. The one guy who personifies all that is wrong with the world and is deserving of limitless scorn and a hefty prison sentence. Think Ken Lay of Enron, Bernie Ebbers of WorldCom, and Dennis Kozlowski of Tyco.

In the Roman circus that is the 24/7 news cycle, the crowd is getting restless and they want blood. It's not their fault they were thrown out on their asses after defaulting on an adjustable rate mortgage that represented 65% of their take-home pay. That house was supposed to go up in value, damn it! Now their blood lust must be sated. Always a willing accomplice to government skulduggery, the media is deciding whom to throw to the mob, even as we speak.

We all know Barney Frank, arguably the chief architect of the housing demise, will never see the inside of a jail cell..... To read more click here
John H. Kaighn

Jersey Benefits Advisors

The Kaighn Report