Wall St banks seek to ring-fence bad assets

Discussion in 'Wall St. News' started by ASusilovic, Apr 3, 2008.

  1. You thought they were all rotten already. But no. Rather like the monolines, the banks are clamouring to emphasise that their business falls into two pots - good and bad.

    The FT reports that Wall St may look to follow the example of UBS and hive off the illiquid, troublesome securities linked to US mortgages. The euphoric share price response to UBS’s announcement earlier this week may of course have had something to do with their thinking.

    As far as we can see the UBS move makes for good PR, draws some line (albeit psychological rather than in terms of potential writedowns) under the toxic nasties, and possibly sets the way for further options, such as a sale or partial sale to a bargain-hunting investor, or a alternate shift of this waste from the balance sheet.

    But there’s no magic wand here. As Yves Smith points out you’re still going to have knock the stuff down to a value where some chump is interested in taking it off your hands. So massive though the UBS writedowns were, and market response aside, there’s no guarantee that there won’t be more. In fact, to flog these assets they’ll almost certainly have to be more.

    The intention here, notes Smith, seems rather to engineer a way of dumping the troublesome securities onto the public sector. The FT story adds:

    According to people familiar with the matter, banks are discussing a joint proposal to regulators to set up a fund, which would absorb US subprime assets and other troubled securities, as a way of restoring confidence in the banking system and ending the pressure to recognise mark-to-market losses.

    In the wake of Bear Stearns, momentum is gathering behind the idea of the Fed, or central banks generally, acting as buyers of last resort. But the idea of buying up MBS to save the big banks looks very much like giving money to Wall St rather than struggling homeowners, adds Felix Salmon: the optics (read PR) are terrible.

    Any fund, regulatory-backed or otherwise, would likely be impaled on the same spikes that did for the ill-fated super-SIV, namely getting the banks to agree on terms and scope for the fund, and in particular, how assets moved into the non-SIV SIV would be valued.

    In the meantime, the “optics” of having another solutions to bat around can only be positive.


  2. 9999


    Does this mean that they're running out of ideas on how to cover all this crap?
  3. Excellent Commentary All

    The real question here can be looked at this way.....

    The only way the collective bad debt picture can improve is if the valuations improve.....so how can this happen ?

    Here is a sample case....

    The legal aspects of a mortgage agreement have been broken....which renders the sold bond in default....

    The reason is that the AAA bond relied on a changing stream of payments whereby no protective equity was collected....The agreement was made because of the AAA rating....The only possibility is for the teaser payments to remain the same....which would mean that the borrower would never be paying any principle....and not all of the interest.....

    Thus the question is.....How can this get better ? The bank can forgive the portion that when eliminated would result in a normal type mortgage whereby at the same teaser rate payments ....some principal would be paid along with all the interest....and therefore would be called good debt....not in default....but would also be considered BBB type debt at the very best.....

    This means that all of the surrounding derivative adjustments have to occur as well....which are in the many trillions of dollars....

    Thus it is inevitable that many trillions have to be lost by some entity....because a significant portion of the debt is bad....and nothing can change it....
  4. dont


  5. Look like the tax payser will help the banks a little more as congress spends more and more money.

    Lets fix up these forclosed homes that the banks now own with tax payer dollars.



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    Senators Move on Housing Relief
    Momentum Gathers
    For Aggressive Steps
    To Aid the Economy
    April 3, 2008; Page A3

    WASHINGTON -- Key senators agreed on a $15 billion bipartisan plan to spur the housing market, a surprisingly fast compromise that shows how political momentum is shifting toward a more aggressive response to the struggling economy.

    The housing package, which the Senate will begin debating Thursday, represents compromise on both sides. Republicans were leery of starting a process that may lead to greater intervention in the economy. But after hearing from homeowners and businesses during their two-week break, lawmakers said they couldn't afford to appear obstructionist. More Republican than Democratic incumbents are facing tough fights to keep Senate seats this year.


    • Summary of Bill
    • Senate's Housing Gridlock Eases
    04/2/08Democrats, for their part, dropped a bankruptcy provision opposed by Republicans, even though it was a major part of their housing agenda. They, too, are under pressure to show accomplishments this year, amid low public-approval ratings for Congress. They may try to add the provision as an amendment, but it faces an uphill fight.

    Democrats also agreed to halve funds for counseling at-risk homeowners to $100 million. Republicans accepted $4 billion in block grants for communities to buy and refurbish foreclosed properties, and they agreed to a smaller tax credit for homeowners than they initially wanted.

    The plan would raise the size of loans backed by the Federal Housing Administration to $550,000 and increase the down-payment requirement to 3.5% from 3%. The bill doesn't include a controversial Democratic proposal to give the FHA the ability to insure $400 billion in mortgages. Sen. Chris Dodd (D., Conn.), the concept's sponsor, said he will hold hearings later on the idea.

    The legislation includes a $6 billion tax break for home builders and other troubled companies, an additional $10 billion of mortgage-revenue bonds that states can issue for refinancing and for first-time home buyers, and a provision to allow an estimated 28 million homeowners who don't itemize their taxes to get a deduction on their property taxes. In addition, people buying a residence facing foreclosure would get a two-year, $7,000 tax credit.

    The White House greeted the compromise with muted enthusiasm. Spokesman Tony Fratto praised senators for agreeing to include the FHA revamp and the enhanced bond-issuance authority, although "we obviously want to see the details to see if they're in a form we can support."

    The White House continues to oppose funding the purchase of foreclosed homes and the tax credit for home buyers. Mr. Fratto didn't say whether Mr. Bush would sign a bill if it reflected Wednesday's compromise. "This bill is a first step," he said. "It's going to the floor. It's going to be debated. We hope it will be amended."

    Some parts of the Senate plan face an uncertain future in the House, where Democrats are less focused on tax relief. Brendan Daly, a spokesman for House Speaker Nancy Pelosi (D., Calif.) said the Senate package is a "good first step" but "we will need to review the details and fine-tune specific provisions that need to be stronger."

    Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, is likely to balk at the increase in the down payment required to get FHA backing for mortgages.

    Election years often tempt lawmakers to score political points. This year, voters could see pre-election fights over Iraq and fiscal policy, especially whether to renew President Bush's income-tax cuts.

    --Damian Paletta, Greg Hitt and Michael M. Phillips contributed to this article.

    Write to Sarah Lueck at sarah.lueck@wsj.com
  6. Suss------Cooperative/stabilization efforts never work in a bear market. This ought to be no different. :cool: