Comments on Employment, Interest, and Money: What are Illiquid Assets Really Worth?

Interesting article. It would be even better if yo...

2009-01-25T06:07:00.000-08:00

Interesting article. It would be even better if you defined "toxic assets". Do you mean primarily Collateralized Debt Obligations? Or, is there a broad mix? What disturbs me about your proposal is that this is almost exactly what Wall Street firms would do to a "client" whose assets still were paying, or still had value, but had become difficult to sell. They would take away their funding and buy assets on the cheap. Why is this a function of the Government? If indeed these assets are worth "more" than they can be sold for, the actions of the Government should be looking for ways to make them marketable (don't ask me what), not to squeeze their holders out of existence.

Private buyers risk all losses on illiquid assets ...

2009-01-23T17:07:00.000-08:00

Private buyers risk all losses on illiquid assets while the the banks will likely have further losses subsidized. Private buyers will also pay taxes immediately on gains while banks will have reduced losses that will reduce offsets against distant discounted taxes (and the government does not pay any taxes on gains). The exact same cash flow is worth more to the government than to the banks and more to the banks than to private buyers. This means that we cannot expect any private buyers for the banks' illiquid assets in the current environment.

The government should probably pay the minimum price needed to keep the banking system functional. It definitely looks like City and BofA make up the margin. If all banks less solvent than them fail the system should be OK, add them and it's not. That would make the price needed to make City and BofA barely survive should be the target clearing price for a government auction. Hopefully that price is less than what the assets are worth to the government.

“These assets really are worth a lot more than any...

2009-01-22T16:19:00.000-08:00

“These assets really are worth a lot more than any private entity is willing to pay for them.”

Is that so? And you know this after how many hours of painstaking examination of these very complex securities?

Call me a dumb wild-eyed free market ideologue, but I tend to believe that if there isn't a market for these assets, someone smarter than me who’s actually looked at them decided they're not worth what the holders want. So why do the holders keep holding out, striking aggrieved poses and declaring they will not sell at “fire sale" prices?

Because there’s a fat-wallet chump waiting in the wings: your friendly U.S. taxpayer. The banks know if they play their cards right, they can offload a lot of this junk for more than what it's worth to the U.S. government.

Liquidity issues? The biggest one is the one Wall Street created: it hoisted itself on the petard of its own financial engineering. These securities are too damn complex to sell easily and freely. But other than that, be very very suspicious of the liquidity argument. This is being very much oversold by banks trying to wash their hands of blame.

If you have $100 million of distressed assets, and you say they're worth $60 million, and the market will give you only $20 million, and you don't want to sell because that could trigger an implosion of value in your mark-to-market portfolio, guess what?

The assets become “illiquid.” It's not YOUR fault you can't sell them. (Point of curiosity: why not look at some of the few “fire sales” of these assets last year on the private market and what prices they fetched and how their value is holding up -- my guess is you’d find that the "fire sale" price doesn't look so cheap anymore.)

"But isn’t it obvious that the toxic assets are wo...

2009-01-22T11:22:00.000-08:00

"But isn’t it obvious that the toxic assets are worth much more than anyone is willing to pay? The value of an asset depends on the rate at which one discounts its cash flows."

And what if the cash flows don't come, if the underlying homeowner or shopping mall defaults? What if the asset used leverage to puff up its returns as long as underlying prices were rising? What if the asset assumed the independence of events that are now highly correlated?

I can't see how people can possibly make blanket statements like "toxic assets are undervalued" without going into specific detail about how these assets were constructed.

... then you hold them, chump.

2009-01-22T09:43:00.000-08:00

... then you hold them, chump.

Great post. I think the TARP approach (overpay, u...

2009-01-22T07:30:00.000-08:00

Great post. I think the TARP approach (overpay, undercapitalize, don't write down)comes from a fundamental misconception about equity capital.

"We need to attract private capital to fix this mess," is the rallying cry. Followed by, "so we need to treat shareholders well,".

What people don't understand is that the interests of current and future shareholders are diametrically opposed. Current shareholders, obviously, want their investment to retain value. Future shareholders want the most attractive unlevered returns they can get.

So the reason your idea makes sense is that it delivers big unlevered returns to new capital. In the process in wipes out old capital. This dichotomy seems too much for most "capitalists" to understand.