Posted by
Kenneth Hanson on Monday, March 23, 2009 3:04:36 PM
So for the first time, an Obama administration announcement about the economy is received positively by the market. But tomorrow, Geithner testifies before Congress so it is too soon to know if a rabble rousing Congress will kill the positive buzz.
Nevertheless, there are three very serious challenges with the newly announced plan for a public/private partnership succeeding:
- Private capital is extremely hesitant to participate due to the
risk that they will be retroactively punished if they make money in the
program, or otherwise act in a way that Congress decides is inappropriate
while they are a participant in the program. Every source of private
capital that has been asked about the program acknowledge that it is
financially attractive, but that they just don’t know if they can trust
Congress not to change the rules retroactively or put compensation
restrictions in place that will damage their ability to compete. In
interviews the last two days, several senior administration officials have
refused to say unequivocally that restrictions on profits or compensation
are off the table. The reality is that the Obama administration
can’t promise that – Congress can pretty much do what they want.
- The long overdue adjustment in mark to market accounting should
be issued soon. If you are a bank that is holding performing assets
at 20 or 30 or 60 cents on the dollar, why would you agree to sell them to
the public/private partnership when it is likely you can hold these assets
without the risk of further writedowns? In fact, it may be possible
to write some of these assets up based on a mark to cash flow model.
The degree to which mark to market accounting has magnified the
financial crisis is enormous. Collateralized securities with
unimpaired cash flows have been marked down severely, making the holders
of these securities, or the sellers of swaps insuring against default,
insolvent.
- The challenge of how to price the assets remains problematic.
It is not clear if the “bids” and the “asks” can be brought close
enough together to facilitate transactions. If the bid is 30 cents
and the ask is 60 cents, that is a wide cap to resolve.