Plan for Banks' Bad Debt May Be Unveiled Next Week

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cat233
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Joined: Aug 20 2008
Posts: 575
Plan for Banks' Bad Debt May Be Unveiled Next Week
Plan for Banks' Bad Debt May Be Unveiled Next Week
By: Steve
Liesman
| 27 Jan 2009 | 05:04 PM ET
The Obama administration is close to deciding on a plan to purchase bad—or
non-performing and illiquid—assets from banks, according to industy sources. The
plan could be announced early next week.
The so-called "bad bank" plan, would address the key problem of how to
price the assets by using a model-pricing mechanism.

The model would take account of
the government's ability to hold onto assets, even to maturity, and pay for the
them with cheap funding. Result: the government might end up paying more than
current market prices for the securities.

On the other hand, if the
government paid less than the value at which the asset is carried on the bank's
books, the bank would issue common equity to the government.

In previous Troubled Asset Relief
Program deals, banks issued preferred equity to the federal government. But the
conclusion is growing within government circles, sources say, that preferred
equity is not sufficient to make the banks healthy.

Clearly, the idea of a
"bad
bank
" is gaining momentum. On Capitol Hill today,
Senate Banking Chairman Chris Dodd said he was aware the idea is under
discussion and "it makes some sense to me."

The move toward a bad bank concept
comes amid growing speculation that banks may need another government
bailout.

Goldman Sachs economist Jan
Hatzius recently said global credit losses may approach $2.1 trillion. Of that
total, banks worldwide have already absorbed about $975 billion in losses, he
estimated in a research report, suggesting the worst is far from over.

FBR Capital Markets analysts said
eight of the largest U.S. financial institutions need up to $1.2 trillion in new
common equity and that "the government is the only entity that can provide
bridge capital to get past the current credit crises."

In the developing bad bank plan, it's unclear how the
government would pay for assets. There has been discussion of a "certificate of
net worth" in which the government gives the banks a piece of paper that
essentially can be applied to capital levels. But sources could not confirm that
funding mechanism for the plan or what role existing TARP money or the Fed would
play in funding the so-called bad bank.

A Treasury official said nothing will be announced this
week and would not comment "on specific policy decisions that have yet to be
made."

 

 

cat233's picture
cat233
Status: Platinum Member (Offline)
Joined: Aug 20 2008
Posts: 575
Re: Plan for Banks' Bad Debt May Be Unveiled Next Week

Does anyone know what this means in regards to a banking holiday? 

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