Interest Rate Roundup

Tuesday, March 31, 2009

All I can say is "Amen"

Here's a good read over at The Daily Beast on the Obama banking recovery plan (my emphasis added). An excerpt:

"Timothy Geithner, Larry Summers, and a host of other economists—myself among them—spent the late 1990s yelling at Japanese and other Asian officials to clean up their banking crises. A typical conversation would end with the American adviser bursting with frustration: “Don’t you understand? The money is gone. If you just wish for the banks’ asset values to come back, any recovery will be short-lived and you will only get more losses in the end. We all know this from long experience.”

"Then we would go to conferences and discuss what it was about Japanese (or Korean or Indonesian) political economy that prevented resolute action.

"So it is with some irony if not humility that we should approach Treasury Secretary Geithner’s Public Private Investment Plan presented on March 23. A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the U.S. government taking so long to perform “stress tests” and trying to get expectations of overpayment for some of the bad assets on the banks’ books before the test results are out? In short, the U.S. government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation.

"That is just like the Japanese government in their lost decade, or the U.S. officials during the 1980s before they really tackled the savings-and-loan crisis. In those cases, the delay simply made the problem worse over time and in the end the government had to put more money into the troubled banks directly, taking over or shutting down the weakest of them. Whatever the political culture, it would seem we have not learned from experience. Or perhaps we cannot act on our learning. The universal barrier would appear to be the political difficulty of recapitalizing banks. That seems obvious, but the constraint it puts on good policy is enormous."

Meanwhile, I hope you didn't miss the just-completed foreclosure auction of the John Hancock Tower in Boston. The premier, trophy piece of commercial real estate sold for $660.6 million. Its purchase price? $1.3 billion in late 2006. Total decline in value? 49.2% in less than three years.

Policymakers claim that all the paper that's tied to the performance of the underlying housing and CRE markets is being "mispriced." Bankers say that the vulture buyers are being unrealistic and that the prices of these securities are "artificially" low and signs the market is "broken."

But maybe -- just maybe -- the "false" value of these securities is really the true value after all ... and we should all stop pretending that isn't the case. It sure as heck looks like the value of the assets underlying all this toxic paper are plunging in value (See S&P/Case-Shiller post earlier for details on the residential side of the ledger).


  • Really appreciate your blog and point of view. Keep it up.

    By Anonymous Anonymous, at March 31, 2009 at 3:37 PM  

  • Thanks for your great posts. Check out Tyler Durden's analysis of the John Hancock trade. He qoutes some MS research. Bacically, when you account for the better-than-market financing implied in the deal, the real sale price is south of $500 million. Wow.

    By Anonymous Anonymous, at April 1, 2009 at 2:57 PM  

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