Geithner's TAP - Taxpayer's Losses

Real Estate Agent with Inactive

Suppose we segregate the MBS and CDO assets currently held by banks into 3 separate tranches:

  1. Assets backed by Prime Mortgages;
  2. Assets backed by a blend of Prime and Sub-prime Mortgages; and
  3. Assets backed by Sub-prime and Alt-A Mortgages.

Assets backed by Prime Mortgages were properly rated as AAA investments and are performing well. The Banks will not want to sell these assets and they wont be offered to the FDIC to liquidate via the TAP sanctioned auctions.

Assets backed by a blend of Prime and Sub-prime Mortgages are underperforming at present and the current market price for these assets is well under the banks' book value. These assets have a reasonable to good risk to reward ratio and will garner a fair amount of interest from participants in the TAP Public Private Investment Fund. The problem is that the banks will be reluctant to sell these assets at auction prices because losses incurred by the sale of these assets at market value will further jeopardize their solvency and work against the banks' own best interest by reducing the demand for the most toxic assets.

Assets backed by Sub-prime and Alt-A mortgages are basically not performing because these mortgages are not being serviced, the properties are in foreclosure, and the market value of the properties purchased with these mortgages is already significantly less than the value of the mortgage and dropping. These assets are the most toxic and the banks are more than willing to sell these assets in the TAP sanctioned auctions. The problem is that the banks still need to receive an auction price high enough to protect and preserve their asset value to remain solvent and private investors will not be willing to pay their price. Under this scenario the market ceases to perform without government intervention.

The desired government intervention from the perspective of the banks and Wall St. is for the taxpayers to absorb the losses. The way these programs are generally sold to elected officials and to the public is for the program supporters to market future profits or return on investment and then to contrast these manufactured benefits with an alternative doomsday scenario. However, this is usually just smoke and mirrors and more often than not the taxpayers end up taking massive losses to bailout the banks and Wall St.

Listen closely to expert analysis from proponents and opponents then make your own conclusions. In my opinion, if the banks do sell these assets the cost to the taxpayers will be too great and the benefits to Main St. will be too few and too protracted; if the banks don't sell the most toxic assets then benefits to the banks and to Wall St. will be unrealized.

Posted by

George Bennett, Principal Broker, Affiliated, GRI in Port Orford, OR 97465

Affiliated with 'Neath The Wind Realty Inc.

Comments (4)

George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

FYI - John Thain, CEO of Merrill Lynch, sold toxic assets for 22 cents on the dollar in Aug 2008. Other banks have sold these assets for 30 cents on the dollar and under. One measure of the success of Geithner's TAP should be the price that is paid for these toxic assets since it will represent a risk exposure to taxpayers. If the the price is over 50 cents on the dollar then the intention really was to transfer bank losses to the american taxpayer.

Mar 24, 2009 03:23 AM
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

Clarification - If an asset's value is zero then any price that is paid represents a risk to the taxpayers. Additionally, since there is no provision for an independent appraisal to help the FDIC assess the risk of loaning taxpayer dollars on these toxic assets then the price paid should be closer to 20 cents on the dollar than 50 cents on the dollar. Some assets may be worth more than 20 cents on the dollars which is why I provided a very generous upper limit of 50 cents on the dollar to use as a very general guideline. We all have to pay attention and encourage our representatives to establish some oversight guidelines and enforcement tools to protect taxpayers interests.

Mar 24, 2009 04:36 AM
Laura Higgins
ERA Advantage Realty - Sebring, FL

Great Blog George.

Mar 24, 2009 05:11 AM
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

Thanks Laura and thank you for stopping by.

Mar 24, 2009 05:47 AM