The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets. . . .
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
I don’t think I’ve ever done this before, but . . . Simon and I, March 24:
The problem in the market today is that the prices demanded by the banks are much higher than the prices that private buyers (hedge funds, private equity firms, sovereign wealth funds) are willing to pay. The government has no way to bring down the banks’ minimum sale prices . . .
The subsidy may not be sweet enough to close the deal. According to one analysis, a specific mortgage-backed security was held on a bank’s books at 97 cents, while its market price was about 38 cents. Even if you limit the buyer’s potential loss to the capital he put in, it’s unlikely he will raise his bid from 38 cents to anything near 97 cents. . . .
Just last week at least some banks wanted to participate in the program – to buy assets from themselves. Once Sheila Bair rejected that idea, I guess they lost interest. Essentially the stress tests placed a big government stamp of approval on their balance sheets, so their current strategy is to wait out the recession and hope the prices of their legacy loans recover. There’s no downside risk, because if the economy gets worse and they ever need to unload those loans, they can count on the plan being resurrected.
I guess we were, however, wrong to worry about inter-bank collusion in the legacy loans program.
(Note that this does not apply to the legacy securities program, which may still be going ahead.)
By James Kwak