Investors ready, but banks continue to balk at toxic asset plan
Filed under: Economy, Investing
The Treasury Department has over 100 applications from would-be investment managers who want to buy toxic bank assets under the Public-Private Investment Program (PPIP). While that sounds promising for the success of the plan, banks actually don't want to sell their assets at the price investors are willing to pay. Also, some major investment groups just don't want to get involved in another government plan for fear they will be demonized for making big profits on the toxic assets they buy.Yet these toxic assets continue to drain the health of big and small banks as the losses build and constrict their ability to lend. While big banks have raised $65 billion in new investor capital, smaller banks can't tap into that source of funds to prop up their balance sheets. Hundreds of smaller banks are sitting on commercial loans that have gone bad or soon will. But even the smaller banks don't want to sell the assets at bargain basement prices because it will hurt their balance sheets and dent their capital cushions.
Ever since the mortgage meltdown began, the government has tried to get toxic assets off banks' books, citing the success of the Resolution Trust Corp in the 1980s that helped to defuse the savings and loans crisis. But every plan so far has fizzled out and it looks like PPIP will as well. The first attempt was in 2007, when federal officials put together a plan for a bank-financed fund to buy securities held by bank investment funds. But that poorly designed plan quickly died. Then in 2008, the Bush administration established the $700 TARP bailout, but did a bait and switch and invested in banks through preferred shares rather than buy toxic assets. Banks can't wait to buy their way out of TARP, yet the toxic assets still weigh down on their ability to lend.
When PPIP was first announced, Wall Street loved it. The Dow jumped nearly 500 points, or 7 percent, on the day it was announced. But as the details filtered out, fewer and fewer banks wanted to take advantage of the program. Investors did surface to buy the toxic assets, but even small banks didn't want to accept the low prices they were being offered for the assets.
Small banks are particularly hard hit by the toxic assets because if just one or two large commercial loans go bad their portfolios' bad assets could swell quickly to 20 or 25 percent of their outstanding loans. In better times, the small bank might have been able to sell the undeveloped land or other real estate seized after a loan went bad, but in the current market, seized real estate just weighs down the banks assets, tying up money that might otherwise be used for new mortgages.
Since banks aren't jumping on board, the FDIC decided to use some of the PPIP funds to sell assets of banks that already have been seized under a program called the Legacy Loan Program. But until the FDIC figures out how to entice small banks into cleansing their balance sheets, we'll most likely see even more small banks fail under the weight of their bad loans.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies.
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Reader Comments (Page 1 of 2)
7-05-2009 @ 11:42AM
jj said...
I wonder how much investors wants to pay for the so called assets. Voulchers shall be at the zoo. Anyways, banks are taking properties from buyers that didn't qualified for loans, the irony is, that after banks defraud the people, now they are willing to sell to voulchers for a small fraction but not to the people. What a world.
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6-29-2009 @ 11:04AM
Donovan said...
It seems these greedy banks are finding themselves between a rock and a hard place at the moment. They know they need to get rid of these toxic assets, and FAST. However, their unwilling to take a financial loss, selling them off at bargain basement prices. This is going to prove to be very interesting to see just how long these banks can afford to financially hold out. I would say NOT long at all. Once the commercial defaults start hitting. The banks are really going to financially go belly up. It seems the banks are running out of excuses for not lending. However, they (the banks) fail to admit. Its the consumers, who are now saving, paying down, or even paying off their debt. And doing a great deal less borrowing.
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6-29-2009 @ 1:13PM
cmorse1052 said...
I'm not sure how long the Banks can hold out but I can tell you they are not willing to work with homeowners. My income was cut in half last year, I'm self employed and have been in business for 10 years. I can prove income but the bank is unwilling to do a loan modification. Wells Fargo has denied my request 4 times. I owe 240K, the house was recently appraised at 140K. If the bank were to modify my loan I could easily afford it. Instead, they are selling my home of 20 years on July 7th at auction. They'll probably get 100K or less at auction. Makes no sense to me.
6-29-2009 @ 4:25PM
DaveT said...
I agree. That want their cake and eat it too. It was not enough they got taxpayer assistance for their rape and pillage - they still want us to cover their bets. They created this mess out of greed for the fees. We should never have bailed them out in the first place - let them go under and feel real pain. They believe they are above all of us and can pressure the system to save them. SCREW THEM!!!!
6-29-2009 @ 11:58AM
Tom said...
Well well well. Those of us watching closely (and with our noses pinched long and hard) as the govt. handed the billions over without nary an ounce of ink on paper demanding banks to cooperate with the public when it came to ultimate delivery on the goods those huge numbers of discounted (nee bad subprimies) knew exactly this would be the result. Obfuscation and stalling by the very jerks that started it all. And who by the way, REMAIN at the helm to create the ongoing profit at all cost no sell drama.
This is the result folks when we should have nationalized the hideous things vs. 'help' (bailouts -free of charge). These rogue banks believe the notion - if they keep these housing 'assets' tied up in the courts fighting everyone about value and 'fairness' - which, by the way, could be years, then so be it. Whatever it takes to hang on to 'em long enough to create enough bad feelings and enough enemies- enough time will have passed in the interim- never mind the money wasted in the atty dept., it won't matter anymore anyway. Those toxies will have already settled back to their original value. Leave it to the bankers to be the robber barons they always were. And the gov. to be the idiots they might have never have been otherwise.
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6-29-2009 @ 1:50PM
Donovan said...
It seems odd Lita stating she feels the smaller banks will be hit harder by these toxic assets. Smaller (local banks) usually personally know their customers/account holders. And these account holders usually have well established long time relationships with their local banks, therefore, I personally think these so called smaller (local banks) have a very low, to no risk factor, in writing mortgages and lending to local customers.
Whereas, the larger mega banks issuing mortgages, and loans only have and know paper work and numbers. And don't (personally) know the borrower at all.
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6-29-2009 @ 4:09PM
brian fox said...
not to mention that small local banks didn't turn around, chop mortgages into tiny bits and repackage them and sell them as securities. They also didn't participate in credit default swaps. They also didn't load up on subprime mortgages the way the big banks did (although the small banks will have much greater exposure to the commercial real estate tsunami on the way.)
6-29-2009 @ 2:07PM
David Huston said...
I suppose that the reason the banks won't agree to sell their bad loans at current market value is that many of them, including the largest of them, would then be insolvent and subject either to takeover by the FDIC or massive additional bailout by Uncle Sugar (read, "taxpayers"). Perhaps the reason that banks won't agree to reduce or even forbear to collect home mortgages at present market value is that they may fear a rebellion by homeowners who haven't lost their jobs, or suffered divorce, health problems, etc., and who might be tiring of paying mortgages twice the size of the fair market value of their homes, and seeing other homeowners less fortunate in their lives getting mortgage relief when they don't get any.
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6-29-2009 @ 2:35PM
whosemarie said...
The banks are as bad as the borrowers. We see homeowners who are upside down on their loans yet they still think that the market is going to go back up to the unrealistic high where it was when they overborrowed. I'd really like to know what color the sky is in THEIR world!
They're just going to ride that big ole shipwreck to the bottom - and the banks are doing the same. The consumer and the banks were all greedy. The banks made loans that clearly should have never been made. The consumers treated their homes like ATM machines, taking money out as if there was no tomorrow and never considering the loan docs and repayment agreements they made.
Greed got them into this mess and greed will take them down once and for all.
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6-29-2009 @ 2:37PM
ajgorm said...
The dominoe effect. California , Florida the two highest real estate markets are now down 60 % in most cases and still no one buys. Total tax revenues from all the lossses will sink us all. Other areas across the country will sink 80% because of this>> ride the wave it is ready to hit the states that have not been hit as hard. Figure it out if you can live in a nice area of cali for 100k for the same house now why stay in the mid west. If prices ever rebound then cali will be first. So banks need to lower rates but they will raise them we are toast.
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6-29-2009 @ 3:55PM
R. C. Jackman said...
I am thinking that banks are limited in the amount of loans they are allowed to issue, and that they are limited to some percentage of their total capital assets. If banks don’t sell their toxic loans, then they can pretend that those loans are undiminished from their original values. Whereupon assets would be undiminished, and banks can continue to issue more loans. In reality, the money for loans already extended is not available to be loaned again and should not be counted as part of the bank's capital assets. We should make this change. The toxic assets would sell. And loans would become available where they are justified.
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6-29-2009 @ 4:15PM
Sharon said...
Like cmorse1052 said. He's been trying to do a modification. He owes $240,000 and the appraisal now came in at $140,000. Thats $100,000 loss of equity at the onset. If he has a negative ARM loan done in 2005-2008, due to reset, there is more loss expected as the difference between an interest only payment and fully amortized payment will be tacked back onto the mortgage. The bank would not want to do a modification as they are in the hole well over $100,000. So they will keep it on their books for now. Government imposed moratorium will keep the foreclosures coming at a stalled rate. BING the word moratorium.
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6-29-2009 @ 4:32PM
Cathy said...
If you really want hope and change, join ENDTHEFED.us and join FairTax.org
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6-29-2009 @ 5:01PM
tom Williams said...
Accretable Yields
Is "the difference between the value of the loans on the banks' balance sheets and the cash flow they're expected to produce," Note the key word here: "expected."
To give you an even clearer idea, here's Money Morning's Keith Fitz-Gerald on the subject:
Called "accretable yield," these mega banks will BOOK INCOME on loans that have "reduced credit quality" by recognizing the value of the bonds on their balance sheets and the cash flow those securities are EXPECTED to earn. Please understand, we're not talking about cash that's already been earned, and not cash in the bank...we’re talking about cash flow those banks are EXPECTED to earn. I'm guessing that the government is somehow behind this one too. After all, they've been acting quietly behind the scenes this whole time, forcing one bank's hand, twisting another, and intimidating everybody else.
You'd think that after months of manipulation and chicanery, the American public might start showing a little more distrust in both the government and the financial sector, but we continue to amble along relatively happily with our hands over our eyes.
To understand just how absurd this actually is, let's take a close look at JPMorgan Chase - which alone reportedly stands to reap as much as $29 billion in windfall income. It started when JPMorgan literally bought WaMu from the dumpster (technically acting as something called "the receiver") last year for $1.9 billion, and was allowed to mark the toxic debt that came with it down to "fair value" - which was 25% less than the $118.2 billion it was officially carried on the books for, or $88.65 billion. But now, the bank says that those same debts may appreciate by some $29.1 billion over the life of the loans. That's before taxes and expenses, of course.
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6-29-2009 @ 5:17PM
David said...
I am not sure why the smaller well managed banks would experience difficulty. Most did not participate in the mortgage fiasco. If you want to check on the financial rating of your bank go to the Bauer web site and find how your bank stacks up. If it does not have 5, or at least 4, stars I would change banks.
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6-29-2009 @ 5:42PM
BOOWAH said...
Want to see the banks rush to sell their toxic assets for pennies on the dollar? Eliminate their "Golden Parachutes" When the government takes a bank over, they must confiscate all of the banks assets (Including all severance packages and stock options) As it now stands, bankers have nothing to lose from the mess they caused. If their bank survives they win. If their bank fails, they win.
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6-29-2009 @ 9:54PM
Frank said...
They are all greedy. The bankers are bringing the entire banking system down regardless of the consequences, and the taxpayer is holding the bag.
6-29-2009 @ 7:02PM
bailoutsos said...
toxic assets? no problem. ebay them.
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6-29-2009 @ 7:25PM
Charles Carter said...
Face it. Banks are not buying into the Obama rosy sky. Everything he does makes the banks feel more insecure. Why should they risk on Obama hasty misconceived ideas.
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6-29-2009 @ 8:09PM
john said...
Here is the thing- this economic recession/depression has several VERY LARGE problems- housing, jobs, toxic assets... they ALL have not been addressed, they all need to be. The kicker to all of them is this- the reduction in LEVERAGE is going to cause the economy to spin slower(fewer dollars buying fewer goods less often)... so the outlook of a recovery NOW by some, is premature for 2 reasons- major issues are unaddressed, leverage is going to slow any attempt at recovery... they say time heals all wounds, something tells me we are about to test that philosophy...
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