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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  1. identicon
    James, 6 Oct 2008 @ 12:31pm

    Who's fault???

    Dont blame the Dem. or Rep. alone, they both contributed. The CEO's even if they inherited the problem still knew about it and did nothing to fix it, they just piled on(have to show growth or I don't get my bonus)(can anyone say sheer greed). The initial morgage writers that didn't check the income of the applicant becouse they were getting their % of the deal regardless (this is the point at which a person making $40,000 a year and got a $300,000 loan). Lets not forget the people borrowing the cash to begin with and not really looking to see if they could afford the payment (understanding that the "variable rate" morgage took a payment that might have been under control and made it impossible to keep up, thanks for the wonderful idea). Finally lets look at Wall Street and their wonderful idea of taking a piece of paper and treating it as a commodity or a actual stock in a specific company and trading it as if they actually had a clue to the true value of what that paper was worth. Anyone in control of credit or the lending and loan end of the banking industry is a little responsable for this meltdown.
    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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