Our View :
The Treasury departments trillion Dollar public to private partnership deal, attempting to finance the selling of the toxic mortgages held by the 19 large and affected Banks is starting to roll. Early in March the Treasury had asked these Banks to conduct stress tests to ascertain their financial strength and liquidity. Initially it looked like a positive step, to identify the toxic assets that each of the Banks held, before a treasury backed assistance package to help these beleaguered giants were estimated. It was assumed that the new Obama Government wanted transparency, and it would force financial institutions to write down their bad assets, after which the Banks would be given taxpayer support to make up for the revaluation losses.
However in a surprising move, that made a mockery of the exercise, it was soon announced that this will be only a self test, where Banks will conduct the stress tests internally without any external auditing. Additionally it was announced that $ 1 Trillion of TARP (Toxic Assets Relief Program) funds shall be provided to these Banks from the Treasury to help them to sell these toxic assets to private investors and spread the risk amongst the American people. This meant that the Banks would be funded to recapitalize the toxic assets and not to revalue the sub prime mortgages they held and determine the Banks true worth. Now the Treasury is contemplating a massive PR exercise to hold up the results of these self tests to the public and tell us that the Banks are as fine as a fiddle, and can be trusted.
As per a Bloomberg report early this month, the Congressional oversight panel report of April 7 had questioned the practice of the Bank’s resorting to pricing their assets as per original book value instead of the present market value, which should be normally done as per any normal accountancy practice. Now after the PR exercise declaring the Banks healthy after this self diagnosis, it is assumed that self medication will begin by the Banks with TARP funds.
As per a recent Bloomberg analysis on the effort to prop up failed Banksters
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNMQDysdnKRcthis could mean the Banks & Financial Institutions will be encouraged to swap their most toxic mortgage-related assets with one another at inflated prices. The TARP funds will provide the liquidity required for such deals. Since the purchases will be financed by big government loans, it will actually lead to very little Bank or client exposure . The exposure if any will be the taxpayer’s who will be funding the deal and hence be at risk for the bulk of any losses. However to ensure that such deals do not face public ire, it was important that the Government showed the people that it had duly stress tested the Banks and then declared them safe for operations.
Even if the above contention is right and the toxic assets are swapped one time amongst themselves, by the Banks through a net-work of brokers and middlemen at exorbitant prices, will it enliven the now dormant mortgages market for the unsubsidized buyer. Rather it may make the asset a proverbial poison pill, which investors will never buy unless backed by massive treasury subsidies. Thus what is toxic today and can be revalued and sold at a lower price may turn poison, that can be never sold without a treasury backed subsidy to finance its funding.
In this blog from “ecology to economy” we deal with discussing sustainable practices which includes sustainable profits, market values and stock prices. We feel that this is an astute piece of financial engineering that will come under scrutiny and lead to further erosion of the already diminished asset value of the securities. We could be wrong. Tell us if we are & why? We encourage diverse opinion even if it is from commercially interested groups opposed to our thinking
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