Toxic Asset Pass-The-Parcel

The equity markets had a huge jump yesterday, and I read that the reason was due to the plan to buy up some toxic assets:

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The US Government is to inject an initial US$75 billion to US$100 billion from the original US$700 billion bank bailout fund into two separate schemes. The money will hopefully be matched with private capital and leveraged to buy the most toxic assets held by banks, as well as illiquid secondary mortgage assets.

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Now I’m not an economist, or a lawyer, or even an active investor, but isn’t this exactly what got us into the trouble we are currently in? People without enough money (be it individuals or banks), buying crap assets with leverage? How is passing the parcel going to help?

If the buyers of these toxic assets buy them for fair value (pennies on the dollar), then the selling banks will collapse. If they buy them for inflated values, then the buyer will take a huge loss, or (more likely) will list them on their balance sheet for more than they are worth. Sound familiar? Seriously, can someone explain to me how this works?

I can understand the government buying the crap assets for inflated value, taking the hit, then slowly selling them off over decades to recover as much as possible from them, but don’t understand how private institutions can do the same. If they could, then why is there any problem with them holding toxic assets in the first place?

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2 Comments

    1. Yeah I have listened to that one, plus all the latest Planet Money podcasts which are equally as informative, so I’m pretty up to date.

      Even having all this information, it still doesn’t explain how selling crap assets from one private bank to another does anything at all to cure the problem.

      Planet Money talks about government guaranteed loans for buyers of the toxic assets, which I guess stops the buying bank from collapsing.

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