We have been saying from the first time the idea that Team Obama floated the idea of having a “public private partnership” buy toxic bank assets, that it was merely a very costly way to disguise overpayment. Henry Paulson tried twice to find a way to hoover up bad bank assets, the first time via the MLEC, the second via the initial conception of the TARP. Both times he was unable to solve the basic conundrum: the banks were holding the assets on their books at above market prices, and would not be willing to sell them for less (that would result in them showing losses, which is precisely what they want to avoid). And under the TARP, Paulson had contended the purchases might result in the government showing a profit; that would almost certainly be rubbish, given that the banks would have the incentive to dump their most overvalued assets on Uncle Sam.
Our suspicions have finally been confirmed. From Andy Lees at UBS (hat tip reader Scott, boldface his):
The U.S. will give further details of the Geither public/private partnership plan to take bad assets off banks books, later this week a senior department official has said. The official said that the Treasury wants to put out enough information in the coming week so that the potential participants can better judge the proposal. It will also detail the timeframe in which it will become operational. So far the plan is expected to leverage both public and private capital to buy assets using government financing. The initial funding would be from what remains of the USD700bn financial rescue fund, but a “placeholder” provision in President Obama’s fiscal 2010 budget plan signals a possible request of around USD750bn in new funds. Neel Kashkari, the Treasury’s interim administrator for the USD700bn rescue fund told law makers last week that private investors are ready to invest in distressed mortgage assets if they can get financing. With no private financing available, they could only pay prices that are too low for banks to be willing to pay. The bad asset plan is expected to be structured along similar lines to the TALF, which is scheduled to launch this week, although the TALF will be restricted to funds investing in highly rated asset-backed securities.
Lees said by e-mail that:reports suggested that the deal would have two subsidies: first to the investors to let the pay more for the assets that their current market prices, second, further capital contributions to the banks to allow them to take a haircut on their marks. That would allow for a deal to be done at prices somewhere between the banks’ inflated marks and the current market prices.
This is what readers ought to be upset about. The AIG bonuses are rounding error, and an done deal. This is billions to avoid price discovery, which is what it needed to assess the magnitude of the problem, attract private capital, and do triage on sick financial firms. This is simply a Japan solution with a lot of moving parts to disguise the essence of the undertaking.