Toxic Assets: Is the Proposed Cure More Toxic Than the Assets?

What's so toxic about the banks' toxic assets? As I understand it, they consist, mostly, of overleveraged, securitized mortgages. Historically, the average rate of default on home mortgages has been quite low. For the short and medium-term this rate is likely to grow and, undoubtedly, many of the underlying mortgages in mortgage-backed securities are underwater. However, mortgages are long-term instruments and, in a few years, most morgaged homes are likely to be worth once again more than the mortgages and the value of mortgage-backed securities is likely to be back to nearly par. The current problem is that, since no-one wants these securities at present, thay have no market value and banks holding them are virtually bankrupt because of the requirement to mark them to market. But today's market value is way lower that the real value. Allowing banks to value their toxic assets realistically, rather than at market, would be the simplest way to solve the problem but governments always try to scratch their right ear with their left hand: it makes it look like harder work. The main problem with private-public partnerships that will be set up to buy toxic assets is that they will give the greedy jerks who created the present mess an opportunity to earn huge profits with little risk and government fianancing. Since this would be a disgrace that rightly would come back to bite the rear end of the Administration, anyone who was involved in any way in the creation and marketing of the toxic assets should not be allowed to participate in their leveraged purchase at a discount. The very likely large profits to be derived by this operation should be made available only to others and, possibly, through some form of mutual fund, to small investors who sustained heavy losses and who are never close enough to the table to get any of the good food.

Comments

[Alex the larger]

The problem is that the abuses were so widespread that it will prove impossible to come up with "untainted" talent. For sure, if there is a new program, "new" companies' staffed by graduates of the old players, will spring up like mushrooms. I read that some of the graduates of Angelo Mozillo's scam school have done just that. All we can realistically hope for is that the profit skimming doesn't prevent fixing the system -- remember the RTC?