TARP ver 2.0, the Obama re-write.

[flamin lib]

What, exactly is a toxic asset? My subdivision has about 50 houses in it. At any given time half of them have a mortgage, a total of $2.5 mil. Suppose all those mortgages went through the same bank, Lib Bank inc. The Lib Bank bundled all those loans into a single fund, the Plum fund, (A mortgage backed asset) and sold shares of that fund to investors. When five or six sub-prime loans (20%) went into foreclosure the Plum fund wasn’t worth what it was sold for and the investors lost money. Now nobody wants the Plum Fund and it’s value on the open market it $0 although it represents $2.5 mil in property. (That’s Market Valuation as opposed to Asset Valuation.)

In reality, the five or six houses in foreclosure only lost 25% of their value, so the total value of the assets in Plum Fund are still $2.3 mil. TARP ver 1.0 was supposed to buy Plum fund at below asset value and take it off the bank’s books to hold it until the economy turned around. Then the Government could sell it back to investors to recover our tax money. Only thing is Hank Paulsen didn’t do that, he simply bought shares in the banks, which means there is no oversight at all on what the banks did with the money and the toxic assets are still on the books.

TARP ver 2.0; the Obama re-write.

Although nothing has been announced yet (as of Monday) some aspects of the plan have been leaked. Private investors are beginning to buy the toxic assets for as little as fifteen cents on the dollar and more would do the same if they could be assured that they wouldn’t lose on the investment by having the funds collapse further. The Obama plan is to set a Federally Guaranteed floor to the prices of these mortgage based assets. Then the private sector would buy up the funds and us tax payers would only be on the hook for any that actually have no real assets backing them, a very small number if any do really exist.

What this means is that the Federal Government would create an artificial Market Value for a specified time.

I don’t know about you, but if I could buy all the shares in Plum Fund for $500k and own the mortgages on $2 mil in assets with a Federal Guarantee that the fund would never drop below $500k I’d take that risk.

So would a great many other investors. Poof! Toxic assets gone, banks have liquidity and you and I don’t spend any tax money unless a fund’s assets drop below 20% (my speculation) of their original value, and then only as much as the difference between actual asset value and guarantee.

The source of the leak says the reason nothing is being announced today (Monday) is that the team is working out details on how to guarantee this won’t allow banks to ignore TARP ver 1.0 and treat it as a gift. They want to be sure we tax payers get our investment back. How refreshing!

edit to correct math

[Dawgs]

1. Thanks.

You did a really good job of explaining how this will work.

I hope that Obama can even dumb it down more for the average 'stupid' American.

[KharmaTrain]

2. We're Still Discovering Them...

In short...toxic means any asset (real estate, business) that is in default...insolvent. That their current "market value" is a fraction of what it was two years ago...or more important, what the person or bank paid for it. This is very simplistic as it gets hashed over and over by all the selling and reselling of debts over and over...truth is we really don't know the extent of these assets, but there are a lot of 'em.

Here's the rub...unless you isolate these assets and make banks solvent again, there won't be any flow of credit thus keeping the economy paralyzed and putting more people out of work...and creating even more "toxic" asset as they default on their mortgages and other debts. Unless the banks can write those losses off the books, they'll horde money rather than loan it.

Now what to do with the toxic assets? Not all will stay toxic forever. A healthier economy could lead to a future housing boom...or at least one where people will be able to buy...and at that time those empty houses will have a lot more value...but surely not what they once were (nor should they be). The question is does the government just hold these assets for a year or three and do nothing with them in hope of restoring the rest of the economy, or do you invite people in to buy into those assets and getting them off the government books. I'm not sure of an answer...but then we're not at the bottom of this problem.

[flamin lib]

3. The Market Value is what a willing buyer will pay a willing seller.

Currently the mortgage backed securities have 0 value because nobody is willing to buy them because of the issues you raise. Currently banks, by law, must declare only the Market Valuation of their securities.

In reality, like the Plum Fund, there are actual assets backing the mortgages that back the securities. The mortgages are in default, but the houses still have value albeit much less than they once did.

Some investors are beginning to realize this and buy up those securities if they can get them cheaply enough to assure a future gain.

What the speculated Obamba TARP would do is set a floor to the Market Value so that actual Asset Value would exceed the current market price of the securities.

It would shift the burden of bank liquidity from tax payers to private investors.