Friday, September 19, 2008

Off-Topic: Wall Street -- Analytics of Considering the Proposed RTC-like Suggestions


Okay, a lil' refresher, here -- for this is off-topic, afterall: if you saw this, and this later one, of mine, over the weekend past -- please do consider this comment/addendum (given subsesquently unfolding events) and scratch your head for any consistent message -- from last night's news that an RTC-like solution may well win the day, here:


. . . .“What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,” said Henry M. Paulson Jr., the Treasury secretary. “And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions’ balance sheets,” he added.

One model for the proposal could be the Resolution Trust Corporation, which bought up and eventually sold hundreds of billions of dollars’ worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions. And it is not clear that a new agency would be created to manage and dispose of the assets, or whether the Federal Reserve or Treasury Department would do so. . . .

Object Lesson: No one is driving this bus. [Or said another way -- perhaps, more darkly -- pure Presidential Election Year politics just may be.]

Act accordingly.

3 comments:

Anonymous said...

I'm just a scientist and don't get all this financial stuff but it seems to me that the Resolution Trust Corporation dealt with commercial real estate loans. (Boy did we see a lot of empty office buildings with gold plated toilet fixtures go up in the 1980's.) So there were actually real assets to take over (devalued but still real). Plus the developers got their money and the banks got bailed out.

Even though some of the current mess appears to be real estate with subprime loans. It seems that what we're now talking about is bailing out financial institutions that INSURED real estate and I don't know what else. So in many cases would there actually be any real assets that would be obtained that could be sold off. It seems to me for somebody maybe but not for the insurance guys. If so are we agreeing to pay off a debt without getting any assets in return and wouldn't this be fundamentally different from the RTC.

Personally I think the present situation is much worse because a lot of individuals who didn't deserve to got hurt and lost everything whereas I doubt there was nearly as much of that in the 80's.

In fact just this week I was driving down the street and saw 12 nearly identical homes in a starter neighborhood in a high cost metropolitan area for sale within a span of 0.2 miles.

Salmon

Condor said...

Salmon -- Here's what I think:

The RTC-esque structure DOES NOT contemplate forgiving individual mortgages -- that is, the BORROWERS (our neighbors!) will still be expected to pay on these largely-ridiculous loan to value equasions.

What it does contemplate, is that the people who run, and own AIG, Wa Mu and Wacovia (for example) will be able to wipe the loans off their books -- without having to fully-write down the asset. They'll "sell" them off to the RTC-entity, and realize an accounting (non-cash) chunk of revenue -- which will be absorbed, immediately by the already existing bad-debt expense on their books. Neat. Tidy. Fast.

In this way, it is argued, these institutions should NOT fail. They will go on.

That smells. . .

. . .Smells like MASSIVE welfare-dole for the ultra-rich. But the little guys -- the ones who borrowed money to buy houses they could not ultimately have ever afforded (in a more rational lending environment) -- what happens to them, in this grand-scheme?

They will have to declare bankrupcty (completely ruin what little credit score they had remaining) -- and start over -- with only about $6,000 worth of their OWN value protected. Everything else will belong to. . . [wait for it!]. . .

Yep! Their creditors -- the AIGs, Wachovias and Wa Mus of the world.

How is that sensisble -- or fair?

Anonymous said...

So the big guys mess up the little guys and then arrange a mechanism so they're protected and walk away with everything the little guy has.

In the drug world it works like this.

Market a drug to patients that don't really need it (antipsychotics like Zyprexa to kids with bipolar spectrum disorder). Cause horrendous side effects that you cover up (diabetes, hepatotoxicity, etc.). Have Medicaid pay for the treatments and monitoring that you make or that are made by other companies owned by the same investment firms that are the primary shareholders in the drug company. Get Supreme Court preemption so you can't be held accountable.

Same song different words.

Salmon