The Back Alley Archives

what's wrong with what vikram pandit of citibank suggested this morning while testifying before congress?

he suggested 'billing' the gov't if they want to help.

instead of throwing money at the banks to help create and encourage liquidity (remember - liquidity will help credit flow...credit flow will help the process of buying and selling 'troubled assets'), why not 'quarantine' these assets on the banks books, accrue losses, and submit a bill to the gov't?

saves the gov't from having to question what banks are doing with the money right? also saves excessive spending right?

thoughts?

I take it there would be a determination of what is considered a 'troubled asset'? Over time we may find that the assets don't accrue losses at the rate we are anticipating now, since with greater liquidity the credit may flow again and the economy may turn thus salvaging the borrowers on the notes of the 'troubled assets'.

How do we quarantine the assets in such a way that doesn't create 6 (or many more) massive zombie banks who are simply biding their time until they can submit their bill to the taxpayer for the losses?

And I still don't understand how the valuation would work in the end--this potential solution feels very much like "kicking the can" down the road. We would still have to decide, from what point do we calculate losses? From par value? No fucking way. From 90 cents on the dollar? No fucking way. I feel like the banks need to share in the losses over time...I'd be OK with guaranteeing part of the value of the assets but I still don't understand why it's the taxpayer's responsibility to save these fucks who apparently can only make money when they get it for free.

Agreed, there should be a sharing of the losses, they made the loan in the first place.

I take it there would be a determination of what is considered a 'troubled asset'? Over time we may find that the assets don't accrue losses at the rate we are anticipating now, since with greater liquidity the credit may flow again and the economy may turn thus salvaging the borrowers on the notes of the 'troubled assets'.

2 things...

the definition of 'troubles asset' is open to interpretation...you're right that they'd have to tie that down...most probably something related to mtg backed securities, probably something related to credit default swaps, something related to anything unregulated...one thing we know, it can't be labeled 'illiquid' assets...theoretically, that could include a ford motor credit bond.

2nd thing is the point you make about the assets gaining value giving the taxpayer a profitable position...it's true, the object of this game is to invest the taxpayer money in profitable transactions...this will occur over time and when the economy and credit flow improve...that being said - the taxpayer has the 'exclusive' rights right now to those inevitable profitable positions...as you've explained it in your post, why not assume that role and take on that risk?

And I still don't understand how the valuation would work in the end--this potential solution feels very much like "kicking the can" down the road. We would still have to decide, from what point do we calculate losses? From par value? No fucking way. From 90 cents on the dollar? No fucking way. I feel like the banks need to share in the losses over time...I'd be OK with guaranteeing part of the value of the assets but I still don't understand why it's the taxpayer's responsibility to save these fucks who apparently can only make money when they get it for free.

the valuation would be interpretational on the upside as well as where it is now which is on the downside no doubt...but the transactions will be profitable...it will be more of an interpretation then on how much profit you want to make...how much for the taxpayer that is....that is better than wrangling about how much you wanna lose which is where we stand right now.

That's fine, but I worry the banks won't go for taking a 50% hit on the assets. They wanted 80/90 cents on the dollar guaranteed a few months ago...I don't see them agreeing to 50 cents. But I could be wrong.