Toxic Assets: Sellers Holding Out for Government Deal?

Even though Congress in general seems pretty clueless on matters financial (the Wall Street/high end variety), some members appear to understand the mindset.

One consequence of the ever-delayed “buy the bad assets” program, which clearly has to pay at or above banks’ current marks (otherwise they show losses, which hurts their capital bases, something that the Fed/Treasury team is keen to avoid) is that banks have no incentive to unload that paper now. They might as well wait to see what the sugar daddy from Washington has to offer.

From Reuters:

Global credit markets are unlikely to revive as long as the U.S. government continues to dangle the vague prospect of a toxic asset purchase plan in front of distressed banks, some lawmakers warned on Wednesday.

The chance that taxpayers could be made to overpay for underperforming assets is making bankers, whose balance sheets are saddled with them, reluctant to sell to lower bidders, suggested Texas Republican Rep. Randy Neugebauer.

“People are afraid to buy and afraid to sell because they’re afraid the government is going to sweeten the deal,” he told Reuters in an interview. “The markets are just waiting to see when we’re going to be done.”

Uncertainty about the government’s strategy for toxic assets props up their value above what private investors might pay for them and delays potential resolution of the problems they pose, said California Democratic Rep. Brad Sherman.

“As long as there’s the prospect the federal government will overpay for the toxic assets … these banks would be insane to sell” in the private market, Sherman told Reuters.

“As long as they hold the toxic assets, they have regular value, plus a politically enhanced value that you may be able to sell it to Uncle Sam for more than it’s worth. Why dispose of an asset where it has politically enhanced value?”…

Neugebauer hit on the toxic assets issue in questioning of Goldman Sachs Group Inc’s (GS.N) Lloyd Blankfein and Citigroup Inc’s (C.N) Vikram Pandit.

Both CEOs told Neugebauer they could sell some of the worst toxic assets on their balance sheets, but they won’t because the price private investors would pay is too low.

“That low price is generated by the fear in general … and the lack of risk capital,” Blankfein said.

Similarly, Pandit said: “When we look at some of the assets that we hold, we have a duty to our shareholders. The duty is that if it turns out they’re marked so far below what our lifetime expected credit losses are, we can’t sell them.”

If you believe those “lifetime credit losses” embody the economic and housing market scenarios that the most accurate seers of our credit crisis (such as Meredith Whitney, Nouriel Roubini, and Kenneth Rogoff) foretell, I have a bridge I’d like to sell youl.

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  1. ndk

    I thought the bankers did a brilliant job playing Congress. Their answers were uniformly appropriate, and their bluffs — such as returning government funding from the TARP, with full knowledge they’d be recapitalized through other vehicles if things deteriorated again — were excellent.

    If you thought Congress had grown any reasonable fangs and/or ovaries, think again. A lifetime of practice building trust and selling toxic waste has just proven itself far superior to any politician with the backing of an angry constituency and a little knowledge, like, say, Mike Capuano.

    Extremely well played by the executives. They did vastly better than Geithner. Congress was embarrassingly polite and mismatched.

    I think they’ll be able to maintain lifelines from the government without too much impact on their own businesses. That’s horrible for everyone, of course, but a man takes off his hat when it’s due.

  2. bg

    So there was unintended consequences from Paulson, who managed not to unfreeze the credit markets, but rather strengthen the incentive for the markets to stay frozen waiting for a real TARP.

    I didn’t think of that angle. My guess is they didn’t either.

  3. Steve

    Gee it’s so much fun for the U.S. to pretend that its credit markets are just sleeping, even though they smell funny.

  4. ndk

    Gee it’s so much fun for the U.S. to pretend that its credit markets are just sleeping, even though they smell funny.

    Please be quiet, Steve, lest your brains be eaten. It could only make them smarter.

    I didn’t think of that angle. My guess is they didn’t either.

    With all due respect, bg — and that’s a lot of respect — I think this was obvious. Once the Fed or the Government, enormously powerful non-economic actors, enters or declares an intention to enter a market as a buyer, everything becomes simple. The same holds true if it were the JCB or PBoC. Your asset valuation decision consists of two questions:

    1) How can I front-run governments?
    2) If they won’t raise their bids, how can I quickly liquidate my position?

    The Treasury market from Nov through present, in light of Fed statements, is a remarkably good case study here.

  5. Anonymous

    Value, value, value where is the value, its camouflage is unsurpassed. Toxic Assets?, what a name, new-speak gibberish, like something "good/worthy" got poisoned by a party pooper and we have only to wait for the doctor feel good drugs to take effect and all will be better, BS.

    When in the world did we start down a road to favored time lines of worth. Hell I would like to jump back into the wayback machine and re capture my misspent youth, good luck to me eh?

    To W St. and The Big Hill, MAN UP, your fifth appendage is dragging all over the ground and your stepping all over it in public, yes we can see it, have you no shame.

    We the little people of the world can take a lot more than you can obviously, by the mere fact that we are still around, unlike you that jump out of high windows at the mention of reduction of status.

    Grow up and grow a pair, rather than complain about the lazy drug addicted lower classes not working hard enough for your graft, try and set an example for once in your life. Make a call and put your manhood on the line for once, like you ask others to do for you.

    Skippy… the blancmange mean to win wimbledon and command the finacial centers of the world…

  6. bg


    “I think this was obvious”

    Of course it was obvious. But I still missed it, and my main point was that Paulson missed it too.

    I have been trading off the reactions of the government. Now I have to start thinking about trading off the reactions of companies reacting to the government. I don’t know how to do that.

    Complex non-linear and unstable feedback systems are not well understood, which is why not many are invented intentionally.

  7. Anonymous

    @bg said……Complex non-linear and unstable feedback systems are not well understood, which is why not many are invented intentionally.

    You just said a mouth full, and I think, is the crux of the hole problem, you just described the human condition. Would anyone like to buy stock on that assumption or on our future, come on 5yr, 10yr, 50yr, 100yr bonds on the human race. Maybe we should make our selves commodity’s with out hedges or shorts, for are we not the greatest commodity’s of all, in our minds.


  8. Anonymous

    Its not the fact that governments distort markets that is truly frightening, but that any exit mechanism will surely catch some out and cause a further tumble in the economy. The only real answer seems to be that these distortions need to be maintained at a cost of roughly 2+ trillion a year. How long can that continue when other countries with tighter spending controls (Germany) begin to recover.

    All companies’ responsibilities are totally towards their share holders and that is part of the problem in a way. If you are a bank you are going to get rid of your biggest loss making assets to the poor patsies the tax payers. The question should really be how can we make companies and especially banks accountable to their communities as much as they are to their share holders. This could be achieved through local profit tax, rent reductions, tax incentives and any number of reasonable solutions which decision makers seem loathe to think about. It seems to be becoming rather obvious why to those outside the current decision makers club.

  9. fresno dan

    The amazon I bought at 400$ a share is coming back I tells ya!!! I will be able to make my mortgage of 6,873$ on my 900sf home in LA if only I can sell my Amazon at its true value, not at these unfair FIRE SALE prices!

  10. Anonymous

    With Lehman Bros. going through liquidation, wouldn’t it be possible for the USG to price the various toxic assets at the prices LEH’s are being sold for? I’m sure those are low, but it is also what the market price is….and make it mandatory on the banks if they want some sugar from Uncle Sam.

  11. Anonymous

    There were so many people (including Roubini and other wise forecasters of doom) banging on the table last fall that the government had to do something – anything – about the crisis. Conservatives were so embarrassed and crushed by Bush’s failures, that they lacked the will to point out one of their core beliefs: that once the government gets invloved in a market, they will dramatically distort it. But really, this was foreseeable. The notion of the government bailout is an attempt to fix things and get back to the good old days of 2006. Even last fall, we should have known that wasn’t going to happen. We have to admit our collective mistakes and move on to the next phase.
    In my personal experience last fall, the distressed market was beginning to heat up and make progress but once TARP was on the table everything froze. There was no way Citi or anyone smaller was going to sell there bad assets when there was the prospect of the government paying a higher than market price. All sorts of small distressed funds and trading that were launching or getting to launch have since been crushed. Who is going to sell to them, let alone fund them, if they can just get the governmetn to buy the assets someday. It’s a shame there are so few people in our governmetn who understand this. I believe that this system of government will be another area where we will have to admit that we failed and we need to move on and let it go.

  12. Kursad

    It is obvious that the US government is overmatched against this task. It’s not just the President and his team, the whole government — including the Congress, Senate, regulators, everyone.

    We’ll have to wait for a distorted market to correct itself out. That will take long and will be painful.

    What makes me really sad is the bankers seem to have learned nothing from this crisis. A bank that’d get rid of all its toxic weight (at whatever price) would have an enourmous head start over its rivals to build the investor and consumer confidence. They don’t see this. They’d rather die slowly to make an extra fistful of dollars than clean themselves up and move on. Just sad.

  13. Anonymous

    Giving toxic assets as bonuses is a great scam. Watch as the banks embrace marking to market or indeed their own new hugely pessimistic models valuing them a cent to the dollar. Credit Suisse execs will make out like bandits. I see Barclays are paying cash bonuses 2 years deferred with 10% interest. This round isn’t even over and the next is beginning.

  14. Anonymous

    Maybe when it comes to exotic securities the biggest players in the “Why dispose of an asset where it has politically enhanced value?” game are the banks.

    When it comes to actual physical properties, the biggest gamers are Fannie and Freddie. The banks will let go of houses pretty quickly – if they don’t want to they’ll delay foreclosure for a few months. Fannie and Freddie are holding on to properties hoping a bigger sucker comes along (including Uncle Sucker) so solid cash offers are rejected and the properties remain unsold for over a year.

  15. Moopheus

    “A lifetime of practice building trust and selling toxic waste has just proven itself far superior to any politician with the backing of an angry constituency and a little knowledge, like, say, Mike Capuano.”

    I’m one of Capuano’s angry constituents. He knows it too, or at least, whatever flunky he has reading his email knows it. Usually all I do is regurgitate what I read here and at Calculated Risk, and rant a bit, and clearly it’s not quite getting through, or maybe a little of it is. At the rate it’s going, maybe he’ll get it by about 2012. And no, I don’t expect Congress to take any meaningful action against the bankers.

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