Banks May Say 'Thanks, But No Thanks' To That New $700 Billion
from the hello-adverse-selection... dept
Last week, in that big post about the financial crisis, one thing I mentioned is that despite all the talk of "moral hazard" -- the bigger fear might be moral hazard's sister problem: adverse selection. That is, it would only be those with truly awful assets and no other options that would take the government up on its offer to buy its "toxic" assets. That may be happening. Reports are coming out that some on Wall Street are considering saying "thanks, but no thanks" to the new ~$700 billion that the Treasury Secretary has been given. The article paints the issue as being about the strings that come attached to it, such as limits on executive pay and golden parachutes. That almost certainly could be a part of the reasoning, but a much bigger part may simply be that these banks recognize that the assets they have aren't quite as toxic as they're being made out to be.Yes, there are bundles of highly questionable mortgages, but contrary to what the media tells you, plenty of the people who possess those mortgages are still paying -- and even if they're not, the property and houses they represent still do have some value on the market -- or will someday. Thus, it may be that the only banks that really take up Paulson on a buyout offer, are those with really toxic assets that aren't likely to appreciate in value. That's not good for anyone. The more you look at this bailout, the worse it seems. It also makes you wonder why there isn't more of a focus on using a so-called "stock injection" plan, whereby the gov't becomes an investor in the banks, rather than just buying out certain questionable assets. That would, in theory, help avoid sticking the taxpayers with only the worst of the worst assets.
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Filed Under: $700 billion, adverse selection, bailout
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Just wait
Here's the deal. If you are a CEO that has screwed up so badly as to require this bailout to survive, you don't deserve a high salary. And, if you are a CEO who is taking taxpayer money to rescue your private company, you had better be willing to take a pay cut to be in at least the same financial universe as those who you are mooching off of.
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Re: Just wait
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Re: Just wait
Another problem is that if you put in such limitations, then you can't possibly attract quality bank leaders...at least none who are focused on their own personal wealth...which I would think would be all of them.
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Re: Re: Just wait
If someone is offering to obsolve you of your debts (for some 'strings' of course - nothing is 'free') and you don't take it...me thinks a nice lawsuit would be quickly forthcoming. Shareholders aren't exactly in a forgiving mood these days...
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Re: Re: Just wait
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I lol'd
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Well the upside...
...
...right?
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Re: Well the upside...
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Re: Well the upside...
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Facts?
I will ask a question and try not to sound like a prick, because that is not my intention. Mike, you state that plenty of those people are paying, but then immediately state "even if they're not." Do you have any facts to prove the media wrong? I am a home owner, and see a lot more home auctions than ever before.
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Re: Facts?
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Re: Re: Facts?
Although, since McCain and Palin are such a bunch of Mavericks, I'm sure ultra rich don't support the R ticket time with all the "change" they are "sure" to bring to D.C. /sarc
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Re: Re: Re: Facts?
"media manipulation by the media owners to drum up republican vote"
I am not sure what country you are living in, but in this country, the media is OWNED by the libs. The only candidate benefiting from the economy right now is Obama... And I can show you article after article on how the clinton administration pushed Fannie/Freddie to loan money to people who could not afford their houses, including a great one from the ultra conservative new york times.
Now I know that no one person/group/administration is to blame for this "crisis" but the way I see it, it started way before the current presidency...
In case you were interested the article can be found here:
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=& amp;spon=&&scp=2&sq=holmes%20fannie%20mae&st=cse
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Re: Facts?
A lot more home auctions hardly means that everyone in your neighborhood has stopped paying their mortgage, right? The point is that even if MORE people aren't paying their mortgages, the majority of people ARE still paying their mortgages, meaning those securities do have SOME amount of revenue coming in, and therefore are not worthless.
And the reason I stated that even if they were not, was to set up the hypothetical to prove that these assets are not "worthless." Even if EVERYONE stopped paying their mortgages, these properties would still have value.
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Re: Re: Facts?
Um, no!
if EVERYONE stopped paying their mortgages, then the properties will have zero value due to the fact that no one wants them. because if some one wants even one of them they whould buy it an be paying a mortgage on it. deffinition of everyone is all thus no one with a mortgage thus no one wants and if no one wants you have too much supply they walue drops to zero.
if you said if most people stopped paying their mortgages, then some one could still want the properties and your statment whould be correct but because you said everyone you are dead wrong.
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Re: Re: Re: Facts?
Not quite. The properties may still have value to *others*.
Plus, you seem to be confusing value and price. The two things are different.
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Re: Facts?
I have a sub-prime mortgage. We had a hard time securing financing because the only things we'd ever gotten loans for were vehicles, and those loans were paid on time and usually paid out before the due date... Which is apparently bad in an industry that lives off of interest. :)
We secured our loan on our own based on our actual income and we have no problem paying it every month. I buy less fresh fruit now, and the better cuts of meat are out of range. For my birthday (today, woot!) we're having a home-cooked meal instead of going out... But the mortgage is not a problem.
If anything, the financial issues have made us take a good look on what we were doing with our 'disposable' income and rearranging accordingly... Which is a good thing no matter what the market is like.
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But this crisis isn't about the regular Joe Smoe paying his bills and who has good credit. It is about the loans given to people with no credit at insane %'s. And loans far beyond their means to pay back. And with current unemployment numbers being what they are .... well.... More people will fail to pay their bills.
It is about a system proposed by government and abused by companies allowing the sheriff of Nottingham to tax the hard working people of his city beyond their means. Except in the real world there is no hero in fancy tights to save the day and ensure ultimate fairness.
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stock injection
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Wrong Solution to the Problem
Money is going to be needed to help correct the economy, but a single approach solution will not work.
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Re: Wrong Solution to the Problem
The current US economy is equivalent to peeing your pants to stay warm. Feels good now..... But wait a few minutes.
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Re: Re: Wrong Solution to the Problem
That is fantastic - I gotta relay that one to people at work.
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property values
So in a way, the bailout plan from the S&L debacle directly set up this current situation by causing the property values to be propped up instead of allowing them to devalue to the proper price point and steady the market. Estimates of the S&L bailout plan having a 5-10 year economy impact are in fact false. It continues to this day.
Thinking on Capitol Hill is that the government will make their (our) money back by selling the toxic assets at a later time. But they will inevitably prop up the property values again instead of allowing them to return to the levels that will ensure good growth in the future. The analysts hope that a 5-10% drop in prices will be sufficient. I suggest that they really need to drop 70% to put them back to the growth rate before the S&L bailout and the 5 preceding years.
Now is the best time for that price adjustment so the real estate market can have a bright and steady growth prospect. Otherwise the same thing happens again in 15 years, if the economy doesn't collapse anyway in the next year due to marginalized price adjustments in the real estate market. They should take their medicine now and force the economy heal itself instead of just using a band-aid. Because the real estate prices were so inflated, investment vehicles in all sectors relied on those false values to make their profits. And so goes the self-fulfilling prophecy.
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Parachutes
Let's see, run the company into the ground, take my parachute, and go elsewhere, or save the company and cut my salary and benefits in half?"
"Hmmm......"
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Its Christmas . . .
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I hope not like Palin
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Who's fault???
At the start of this mess the Banking industry was crying that we "need this money". Now that they have it, they don't want it?? Could this be that suddenly someone out there in bankland realized that with Gov. funds, comes Gov. oversite. Well we cant have that, since we've done such a wonderful job so far of regulating ourselves.
"If were the people who don't understand, and the people in charge are the ones that do understand. How did we get here to begin with???
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Stock injection is probably what will end up happening.....
If the CEOs don't like the compensation limits they should remember that as far as I can tell there are no indemnification terms either. They could be sued by their shareholders for breach of fiduciary duty. Note that I haven't read all 400+ pages of the bill yet so I might be wrong on that.
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Nothing's that simple...
As for stock injection, short of a wholesale collapse of the banking system, with forced nationalizations a la AIG, that's not going to happen. The banking shareholders will join forces with the radical free market Republicans in the House to make sure of that.
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Were we lucky at $700 billion?
http://www.cnbc.com/id/26751385
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It's not houses/mortgages...
Borrowed money is very hard to get now for businesses and soon to be for individuals which means ...reduced capital improvements, companies having trouble meeting payroll obligations and eventually a bad Chri$tma$.
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stock injection plan
There's a tremendous site about the stock injection - it has 4 parts that are must viewing! Check it out http://www.StockInjectionPlan.org - go there it's your duty!
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