Viewpoint: It’s Déjà Vu, All Over Again

The government’s next set of gyrations over “bad assets” is about to unfold this coming week, and if the leaked details over at the New York Times this weekend are any indication of the reality about to be foisted upon us, we’re all about to get a nasty case of déjà vu, all over again. Remember the discussion about ‘intrinsic value’ that we had to endure when the Troubled Asset Purchase Program — which never did purchase any assets — was first announced? Get ready to hear the same debate, all over again; but this time, the idea is that someone from the Holy Triumverate© of the Treasury, the FDIC, and/or the Fed will be buying something troubled that may once have even resembled an asset. The Times’ story paints a picture of this latest plan — this one has THREE PRONGS, so it must be better, right? — to subsidize overpaying for “bad assets” that are still stubbornly clogging up bank balance sheets from San Francisco to New York City. This plan uses the collective resources of all three prongs to allegedly entice private capital into purchasing debt/securities/assets, but private investors would be putting up as little as 3 percent of the equity in this so-called public-private partnership, ostensibly to be led by the FDIC. Heck of a partnership, there. It’s like we’re chasing our collective tails here, forgetting where we’ve already been. And for Obama, this may be a misstep that could mark his next four years; he may not have enough political capital to head back to the well for another spin on this. Since at least early 2007, I’ve urged readers here at HW to keep their eyes focused on one very simple truth: no matter how complex the financial instrument, or the derivative based upon it, what matters most here is the underlying collateral. As the Times notes, we have an estimated $2 trillion in “bad assets” out there, the vast majority tied in some way, shape or form to residential or commercial mortgage credit. Which means that any argument over the real value/intrinsic value/future value of a debt/security/asset — call it what you will — ultimately comes down to a question of what you believe about the underlying collateral here. Investors have clearly spoken in terms of what they believe that collateral to be worth. And it’s far less than what many banks can afford to sell at. (So we have to hear more nonsense on mark-to-market accounting, which is an issue I’ll save for a later rant, and for better versed colleagues to parse). Do you still believe that we’re facing irrational panic by investors and an entire global market? Or do you believe banks are holding truly bad assets that are surely worth something, but not worth anywhere near the marks banks have placed on them? These are the questions Paul Krugman would have each of us ponder, as he discusses in his own commentary. The answer should be amply clear to all of us. Reading about the likely old-is-new-again solution about to be rolled out this week, with its sure-to-be requisite bells and whistles, I can’t help but wonder: where is the Resolution Trust Corp.? Can someone please explain that to me? Why aren’t regulators pursuing a model that actually has worked in the past? Is it really, as Krugman opines, that this administration “is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets”? Or is there another reason that none of us, except those in regulatory seats of power, have been able to thusly divine? This plan, as leaked, isn’t the RTC — it’s not even close. The RTC pioneered public-private equity partnerships in the liquidiation of real estate, yes. But don’t be fooled by the partnerships that appear likely to be unveiled here; the RTC existed to sell assets of already-siezed financial institutions that didn’t have enough assets to cover their debts — not to see investors put up 3 percent equity as part of a strategy that will see the government buy and hold “assets” to maturity. And asset managers? AMs were selected by the investor and not by the government, since the investor had an partnership interest in liquidation. None of what I’ve seen discussed thus far even remotely passes the smell test for something like this — instead, we’ve got the Treasury selecting its own asset managers, since it’s the investor, and ever-expanding its purchases so long as there are bad assets to be had. (No doubt we’ll see Bill Gross’ name on that asset managers list, and perhaps Goldman, too.) Let me be as blunt as I’ve been in a awhile in this space: we need the RTC. We don’t need to clean up a few bad assets here; we need to clean up likely thousands of banks and financial institutions that made bets tied to mortgages that they never thought they’d lose on. We need to restore faith in our banking system, no different than we need to restore faith in our nation’s mortgage markets. We have the model. The only question that remains is this: will we use it? Write to Paul Jackson at [email protected].