This is the way I read the proposed fix from Hank and Ben. LINK: http://www.marketwatch.com/news/sto...2210564344DF}&print=true&dist=printMidSection START QUOTE At issue is a proposal to create a new government entity that could take bad assets off of banks' and financial firms' balance sheets and sell them at auction, according to published reports. The online edition of The Wall Street Journal, citing unnamed sources, reported that Treasury officials have been studying the creation of such an entity for weeks, "but have been reluctant to ask Congress for such authority unless they were certain it could get approved." The Journal reported that the entity would not mirror the Resolution Trust Corp., which was created to address the savings and loan crisis in the 1980s. Rather than hold and sell the assets of failed banks as the RTC did, the new entity would "purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market" through an auction, the Journal reported. END QUOTE So a govt clearing house or derivative exchange - Create a Govt controlled entity - Buy illiquid assest at deep discount (the major debate will be the price) - Auction them back to the market at best prices So the PRICE they buy the assets at DEEP discount must mean a huge hit for the bank having the assets taken off their balance sheet. This means a loss is still a loss. But the loss for the bank is hoped to be the full and final loss of this bear cycle, I assume. So (say) BAC sells its assets for $0.20 cents in the dollar to the govt entity and they hope to sell them for more or less. Who takes the profits or losses if the auction does not go well ??? Losses are still losses, and if the buyer buys this paper and it falls further, I guess more losses via the govt clearing house ??? sooooooo I assume my understanding is correct. GCH = Govt clearing house. Lets Say Wachovia have $100 of level 3 assets valued at $0.30c in their last 10g report. They sell this to Govt (after tough negotiations) for $0.25c and take a loss on this immediately of $0.05c. This paper is sold at auction via GCH for $0.10c, the GCH takes a loss of $0.15c ( ouch !) Surely the next time the Govt buys similar paper they would NOT pay more than 15c, surely, wouldnt you think ??? So if your first to sell to GCH you may get the best prices !!!
For it to work you have to close the insolvent institutions first otherwise they will never agree to a clearing price.
I understand that the reason why this setup failed in Japan in the early 1990s, is the initial price to the clearing house could never be agreed. And once the paper starts being sold a auction at very low prices, how can the Govt buy NEW Level 3 paper higher than recent auction prices. So unless all LEVEL 3 assets are sold all at exactly the same time to the clearing house, all I see is trouble !!
this makes no sense, the problem is that most institutions aren't marking to fair value. So lets say its .20 cents, they have it on their books at .60 or .50. now maybe the govt is going to buy it for .30 but even then its a problem because even if they sell it for .30 (and its worth .20) it messes up their books even worse because its listed at .50 or .60.
Thats correct, a massive HIT NOW and then its over, they hope. Intial PRICE is the determination that will be the ruin of the bank or the taxpayer !!!
the government sets up an entity that buys all the bad paper for pennies on the dollar and then later when all the termoil ends,they auction it off? what if they can sell the shit,i guess they print more money? c'mon! its insanity but in reality its the only thing they can do or else the turmoil will be devastating.
If house prices fall another 10% , then the Govt will will lose more. The free market should let big banks become small banks, and small banks become big banks. Let the strong survive, otherwise we will repeat this all again in a few months.
more.... HERE: http://calculatedrisk.blogspot.com/2008/09/what-would-new-government-entity-look.html START QUOTE However this new entity would be very different from the RTC in a number of ways. The RTC was created to dispose of assets accumulated from failed Savings & Loans. The new entity, according to the WSJ, would purchase illiquid assets "at a steep discount from solvent financial institutions and then eventually sell them back into the market". With the RTC, the government already had direct responsibility for the assets since they acquired them from insured S&Ls that had failed. The role of the RTC was to liquidate certain of these assets. In the current situation, the government has no financial responsibility for the assets, except for a few exceptions like the assets of Fannie and Freddie, and the NY Fed's assets acquired in the JPMorgan / Bear Stearns deal. The new entity will both buy assets "at a steep discount" and eventually sell the assets. So unlike the RTC, this new entity puts the taxpayers at risk. Details of how this will work aren't available yet. But one of the key problems - in addition to the risk to the taxpayer - is that this program will actually reduce regulatory capital as losses are realized. The opposite of the goal! END QUOTE There all mad....LOSSES ARE LOSSES, why is the market up...stupid !