November 17th, 2008 8:29 AM by Lehel Szucs
Buying Toxic Mortgages: Hank and Ben made it sound good
Remember how brilliant an idea Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke thought they had in September: Take $700 billion of taxpayer money and buy up toxic mortgage loans from banks.
Freed of that garbage, the banks would lend again.
And by providing a market for the debt, the Treasury would help with "price discovery" -- that is, other investors would see what this stuff was worth to a buyer willing to hold it to maturity, and might follow with bids of their own that weren’t at extreme fire-sale levels.
On Wednesday, Paulson scrapped the asset-purchase plan, saying the Treasury would focus on better ideas for the remaining bailout funds, which so far have been used to make direct investments in banks.
Asked at a news conference whether he had misled Congress into approving the bailout plan, Paulson invoked John Maynard Keynes:
"We were focused on the problem. And the -- and when we went to Congress, the illiquid assets looked like the way to go. As the situation worsened [in the credit markets], the facts changed. . . . And I will never apologize for -- for changing an approach or a strategy when the facts change."
True, many on Wall Street said from the start that there was no workable plan for the government to buy up mortgage junk and feel confident that it was doing so at prices that were 1) high enough to help the banks yet 2) low enough to eventually pay off for taxpayers.
But Bernanke, for one, sure did sound confident that a plan could be constructed.
And even as Paulson pulled the plug on Wednesday, the securities industry’s chief trade group was insisting that the program was, in fact, needed.Tim Ryan, CEO of the Securities Industry and Financial Markets Assn., said in a statement:
"I am disappointed Treasury is choosing to de-emphasize the asset purchase portion of the TARP program. Based on my experience with the Resolution Trust Corp., I believe a key ingredient to a strong recovery is the creation of price discovery through some type of transparent purchase program."Until we have a functioning marketplace -- where buyers and sellers agree on prices and institutions can subsequently judge the value of the assets they hold -- uncertainty could keep many financial players on the sidelines, restricting lending capital for the larger economy. Treasury is uniquely positioned to bring these buyers and sellers together."
He also hinted that the industry would raise the issue with the next Treasury secretary. "As we move forward, and in planning for the next administration, we hope there will be further opportunities to comprehensively revisit this important program," Ryan said.
But one train of thought on Wall Street is that, with the Treasury now out of the way as a potential competitor, investment firms that focus on distressed assets (and there are many of them) will begin looking more seriously at what’s a fair price to pay for complex mortgage junk.
The manager of the $30-billion mortgage portfolio that was spun out of defunct Bear Stearns in March said Tuesday that the loans were generating cash flow as expected, and could end up being worth more than the portfolio’s current market value implied.
Some portion of this depressed mortgage debt is going to make a lot of money for brave investors, in time. For better or worse, the Treasury just won't be in that game.