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Nickelless
Administrator
USA
5580 Posts |
 Posted - 02/02/2009 : 19:39:38
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By DANIEL WAGNER
AP Business Writer
WASHINGTON (AP) - It was one of the earliest proposals to address the banking crisis last year: Use a $700 billion government bailout package to buy up the "toxic assets" that have clogged bank balance sheets, locking up the institutions' money and preventing them from issuing new loans.
The idea quickly ran into problems, and then-Treasury Secretary Henry Paulson decided instead to directly invest most of the first $350 billion in the banks. Months later, the financial sector is still in trouble, and the asset purchase idea is back _ with a snappy new name.
The offspring of what Paulson called the "Troubled Asset Relief Program" is known, simply, as the "bad bank."
Here are some questions and answers about this latest proposal to relieve banks of their toxic assets and try to get loans moving again.
Q: What is this "bad bank"?
A: The "bad bank" would be a government-run entity set up to buy assets that are weighing down the balance sheets of financial institutions. By replacing these assets _ many of them mortgage-backed securities _ with cash, Treasury hopes to free up the banks to begin lending again.
Q: What's so bad about the "bad bank"?
A: It's not the bank that's bad _ it's the assets the bank will purchase. Some are non-performing, meaning that they are based on mortgage loans that borrowers have stopped paying. Others are illiquid, which means they may be valuable but no one wants to buy them in this uncertain economic environment.
Q: Why is this being considered now?
A: The money the banks already took helped them stay afloat, but it didn't solve the fundamental problem: Too much of the banks' money is tied up in these problem assets, and that's limiting what sorts of loans and investments they can make. As the Obama administration looks for new solutions, Treasury Secretary Timothy Geithner and others are returning to the idea of asset purchases as one tactic that could restore stability to the financial sector.
Q: Does the government have any experience creating "bad banks"?
A: The plan is somewhat similar to the Resolution Trust Corp., which was established to sell off assets from defunct Savings and Loan organizations in the late 1980s and 1990s. In that case, though, the government entirely took over the banks.
The "bad bank" is designed to excise only the parts of the banks that are causing problems. It would allow them to continue normal operations despite the government intervention.
Q: What are the advantages to doing it this way?
A: Many economists say the toxic assets are the fundamental problem at the banks, and until these are removed from balance sheets, banks will remain unstable. The reason: The bad assets make it difficult for investors and others to understand how much the banks are worth.
Q: What are the downsides of the "bad bank" plan?
A: It is extremely difficult to determine how much the government should pay for these assets, since there is no market for them right now. If the government pays too much, it will waste taxpayer dollars. If it pays too little, not enough banks will want to participate and the program won't do any good.
Also, accounting rules state that all asset prices have to be set at the current market value. That means that without rule changes, any lowball prices the government offers could be applied to assets the banks choose not to sell _ forcing them to take massive write-downs that would reduce their overall worth, threatening their survival.
Q: How can the Treasury Department deal with the pricing problem?
A: Geithner said in his confirmation hearing that he was considering three possibilities: pricing the assets based on the price of others that do have active markets, asking regulators for input on pricing or developing computer models that determine the price based on historical market performance and other factors.
Industry associations have proposed "net present value" pricing, which would attempt to price mortgage-linked assets by determining how likely it is that the underlying mortgages will be paid off.
Q: Why hasn't this been done already?
A: Paulson abandoned early efforts at a similar scheme because markets were crashing so quickly that he needed a faster solution _ direct injections of money into the banks.
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Meltdown 101: What's good about a "bad bank"?
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