Special offer

Matthew Padilla of the Register states banks reject the toxic asset plan.

Real Estate Agent with First Team Real Estate

The Wall Street Journal reports Treasury Secretary Timothy Geithner's plan to help investors buy troubled assets from banks has lost momentum.

Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.

The Public-Private Investment Program, or PPIP, has faced resistance since it was announced in March. And the Federal Deposit Insurance Corp. has essentially shelved the part of PPIP that called for the government-financed buying of whole loans. Treasury is supposed to move forward with a focus on buying securities, but now that may be greatly reduced.

The Journal quotes Lee Sachs, counselor to the Treasury secretary, as saying the department remains committed to the program and has received more than 100 applications from potential investment managers. Read the full story HERE.

Meanwhile, the Bank of International Settlements, which represents the world's leading central bankers, released a report today that, among other things, argues bad assets remain a threat (I added the bold type):

Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks. The 1990s experience of the Nordic countries indicates that addressing problem assets is necessary to reduce uncertainties, re-establish confidence in a lasting way and lay the basis for an efficient financial system (see Box VI.B). Despite acknowledging these lessons, the steps taken so far have focused largely on providing guarantees and subsidised capital. At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses. Progress on problem assets has been slowed by the complexity of the securities affected, legal constraints and, above all, the limited political will to commit public funds to the clean-up effort. The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.

The lack of progress on removing troubled assets from the banks' balance sheets and recognising the associated losses is illustrated by the US
experience. Rather than buy impaired assets directly, the US Treasury outlined a plan in March, the Public-Private Investment Program (PPIP), to value these assets and to remove them through an auction mechanism. Under the PPIP, eligible private sector investors are invited to bid on troubled real estate assets held by banks. Winning bids receive matching government capital and non-recourse funding on attractive terms, with the US government assuming any losses beyond the equity invested. The generous terms were designed partly to boost the value of the underlying securities, to provide sufficient incentives for private capital inflows and to attract expertise to value and manage these assets. Despite the favourable terms, as of May 2009 the outlook for the PPIP was uncertain.

To increase confidence in the banks, US regulators conducted stress tests on 19 bank holding companies in April 2009 to ensure that they were
sufficiently capitalised given a set of assumptions about losses on various bank assets over the next two years. Following the release of the results in early May, US regulators directed 10 of the banks examined to increase their level of capital or to improve the quality by including more common shares. Several banks took advantage of the reduced uncertainty and the increased risk appetite of investors that accompanied the publication of the stress test results to raise equity and issue debt. While the United Kingdom conducted a similar exercise, other European countries were still debating the merits of an EU-wide stress test.

What seems clear is that the deterioration in credit quality will generate more losses on banks' loan books and other credit exposures (see Chapter III).
Banks may therefore have an incentive to delay recognising losses, aided by accounting rules that provide management more discretion over when to
write down assets. Taxpayers will not want to be exposed to greater potential losses, but key financial institutions are likely to require more government support in order to facilitate the required adjustments, to restore confidence in the financial system and to restart lending.

Comments (0)