Assets For Sale

Treasury Secretary Tim Geithner announced the details of his plan to purge balance sheets of toxic assets. The program provides for the selling of legacy loans held by banks and legacy securities backed by toxic mortgages which are decaying bank balance sheets. Treasury stated that it will sell the toxic assets to up to five asset managers "with a demonstrated track record of purchasing legacy assets," but it could add more asset managers if necessary.


The question remains: What will assets managers pay for the toxic assets? The probable answer is: Not much. This could discourage banks from participating. That may be fine for the stronger banks (stronger banks generally do not have problematic exposure to toxic assets), but banks who have received multiple rounds of government assistance could have their arms twisted. This could keep the pressure on some banks. Treasury Secretary Geithner and FDIC Chairman Sheila Bair agree. Secretary Geithner stated that banks could remain under "acute pressure" and Chairman Bair stated that the plan to remove toxic assets from balance sheets may be too late to save some lenders.

Banks may be forced to sell toxic assets at depressed prices and some lenders may not survive, why did the markets (mostly the stock market) respond as positively as it did today? Because the assets finally appear to be leaving the banks. As I stated previously, no one will board a ship with a breached hull, regardless of the number of pumps employed to keep the ship of float. Passengers want the holes fixed before boarding and investors want the toxic assets gone before they invest in the banks.

Why hasn't the bond market jumped on board? Because if toxic assets are sold at relatively low prices, the balance sheets of some banks may not warrant current credit ratings (never mind better ratings). Corporate bond prices are all about credit quality, real or perceived. This creates buying opportunities among the biggest and best banks. JPM, PNC and USB appear to be the best of the bunch, but opportunities can also be found with GS, MS and WFC bonds. In fact, it is unlikely that senior note holders of ANY large U.S. financial institution will be harmed in the long run. Investors looking for yield, but an added bit of safety, why not buy bonds within the TLGP period, which has been extended until December 2012. Note: I am not suggesting buying TLGP FDIC-backed bonds for retail investors. Small investors needing FDIC insurance can do better with CDs. Buy uninsured senior notes issued by large TARP banks and you should be just fine.

What about mark-to-market? The FASB vote in the issue by April 1, 2009. Some investors are hoping that mark to market will be suspended or modified for banks. They had better be careful of what they wish for. If banks are encouraged to hold onto toxic assets because they do not have to acknowledge losses, many large investors will once again avoid investing in banks. That is, if the government really gives the banks a choice of participating or not. Basically, take TARP money, sell your assets.