"Normal Values" For "Toxic Assets"

If you support the Geithner Plan, it has to be based on the premise that the "toxic assets" held by banks are worth much more than the market is willing to pay for them now. Thus, Geithner Plan supporter Brad DeLong writes:

[G]overnments should undertake additional measures to boost financial asset prices . . . It is this point that brings us to US Treasury Secretary Timothy Geithner’s plan to take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets. The US Treasury is asking the private sector to put $35 billion into this $500 billion fund so that the fund managers all have some “skin in the game,” and thus do not take excessive risks with the taxpayers’ money. Private-sector investors ought to be more than willing to kick in that $35 billion, for they stand to make a fortune when financial asset prices close some of the gap between their current and normal values. . . .

(Emphasis supplied.) What is the basis for DeLong's assumption that these "toxic assets" are undervalued? He does not say. And if they are not, then what? And even if DeLong's assumption is true, what is the economic purpose of this plan? DeLong posits:

The aim is to reduce unemployment. The appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets that other private investors will have to hold. And the sudden appearance of between five and ten different government-sponsored funds that make public bids for assets will convey information to the markets about what models other people are using to try to value assets in this environment.

This sharing of information will reduce risk – somewhat. When assets are seen as less risky, their prices rise. And when there are fewer assets to be held, their prices rise, too. With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms.

(Emphasis supplied.) Say what? DeLong is arguing that the slump in demand and employment is a result of the cost of money? That seems incredibly implausible, given the unprecedented easing by the Fed and frankly, contra to DeLong's argument for government stimulus spending. It is utterly inconsistent with DeLong's other writings on economic stimulus.

DeLong then adds his Martin Feldstein kicker - the Geithner Plan is too small:

The problem is that the Geithner Plan appears to me to be too small – between one-eight and one-half of what it needs to be. Even though the US government is doing other things as well –fiscal stimulus, quantitative easing, and other uses of bailout funds – it is not doing everything it should.

My guess is that the reason that the US government is not doing all it should can be stated in three words: Senator George Voinovich, who is the 60th vote in the Senate – the vote needed to close off debate and enact a bill. To do anything that requires legislative action, the Obama administration needs Voinovich and the 59 other senators who are more inclined to support it. The administration’s tacticians appear to think that they are not on board – especially after the recent AIG bonus scandal – whereas the Geithner Plan relies on authority that the administration already has. Doing more would require a legislative coalition that is not there yet.

This is utterly unsatisfying and unconvincing. First, DeLong implicitly accepts that in fact the Geithner Plan won't work because it is too small. DeLong argues it is too small because the politics won't allow it to be bigger. It seems to me this is a reason to look for another plan, not plow forward with one that will not work.

For example, DeLong states that the "the aim is to reduce employment." If that is the only aim, then a much more efficient stimulus (in terms of saving employment) would be to bail out Detroit in full measure (or even continuing to buy F-22s) and that would certainly be much more politically palatable.

Sorry, but I remain utterly unconvinced that the Geithner Plan makes sense. To recap, it is based on (1) the assumption that toxic assets are significantly undervalued, (2) it won't work because it is too small, (3) it is not much of a spur for employment and fiscal activity and (4) political constraints prevent the Geithner Plan from even being designed in a way that could be effective even if we accept these unlikely assumptions. It should be scrapped.

Speaking for me only

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    DeLong (5.00 / 1) (#1)
    by Ga6thDem on Tue Apr 07, 2009 at 08:06:25 AM EST
    seems to be saying that we need to create another artificial bubble to prop things up. IMO, that's doomed to failure. When is going to dawn on a lot of these people that supply side plantantion economics do not work? It seems if we all just give the "plantation owners" everything they want then this will all work out. It's tiresome.

    "Scrapped." Heh. (5.00 / 1) (#2)
    by oldpro on Tue Apr 07, 2009 at 08:16:21 AM EST
    Nice choice of words, contrapuntal to the treatment of Detroit/GM.

    RE political constraints, I am surprised to learn that one of my senators is sorry she ever supported Geithner (what was the other choice?) and agrees with Bill Black camp re what's really going on.  I doubt she'll be an easy vote for the next Geithner variation, much less more of the same.

    I'm guessing that's Patty (none / 0) (#31)
    by Inspector Gadget on Tue Apr 07, 2009 at 10:11:19 AM EST

    Wrong. Try again. (none / 0) (#76)
    by oldpro on Tue Apr 07, 2009 at 02:02:12 PM EST
    No need to respond in writing!

    My head just hurts reading this (5.00 / 2) (#3)
    by Militarytracy on Tue Apr 07, 2009 at 08:25:47 AM EST
    and it isn't from margaritas.  I've never PAID so much for the "hope" of a job in my life!

    This'll make your head hurt more (5.00 / 3) (#4)
    by Big Tent Democrat on Tue Apr 07, 2009 at 08:38:15 AM EST
    I also believe that conventional monetary policy is tapped out, and unconventional monetary policy is of doubtful efficacy. So I am in favor of doing something else on the banking/finance side. My favorite idea right now is that of nationalizing Fannie Mae and Freddie Mac completely and unleashing them to buy up every single mortgage in the country at market rates. Their ability to borrow at the Treasury rate means that they should be able to make money by doing this. When they own mortgages they can renegotiate and refinance them all with the public interest in mind. And as they squeeze banks out of the mortgage business the fact that banks are looking for yield should push other financial asset prices up--and make it possible for those businesses that should be expanding to get financing right now on terms that make expansion profitable.

    The zero lower bound? Nationalizing the mortgage business? More fiscal stimulus? who is the person behind these crazy ideas, so anathema to the Geithner Plan?

    Why Brad DeLong of course.


    I'm stumped (none / 0) (#15)
    by Militarytracy on Tue Apr 07, 2009 at 09:44:46 AM EST
    He isn't someone I read unless he was linked to.  The link is a very good read.  It had never really occured to me that nationalizing mortgages could also provide taxpayers with a return on their investment until I read it here from you.  I knew that it could preserve middle class assets and some middle class wealth though.  I didn't have a full understanding of his viewpoints until now. Where could this have come from?

    HOLC (none / 0) (#25)
    by Big Tent Democrat on Tue Apr 07, 2009 at 10:00:40 AM EST
    was all about nationalizing mortgages.

    I've never seen so much gibberish (5.00 / 2) (#17)
    by ruffian on Tue Apr 07, 2009 at 09:47:29 AM EST
    used to obscure the simple truth of the matter, which is that the 'assets' are nearly worthless. I live in Florida, ground zero of these 'assets'. The houses are empty and the money is gone, folks. Geithner can pay the banks back for their losses,which is essentially what he is doing, but let's stop pretending there are assets worth anything backing that up.

    I was in Florida the past few weeks (5.00 / 2) (#19)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:49:41 AM EST
    The empty houses are simply depressing. Sooo many of them.

    It really is sad (5.00 / 1) (#21)
    by ruffian on Tue Apr 07, 2009 at 09:57:10 AM EST
    I walk my dog around the whole circumference of my 180+ house subdivision every day. I know of at least 5 houses standing empty, and many more lived in, but up for sale or rent.  We've had 18 foreclosures in the last year.

    I'm sure many of those loans should not have been written - including mine. I still owned a house in Colorado (up for sale at the time) when I bought here. No way anyone should have loaned me money, and I should not have gone for it. Only luck made it work out in my case.

    So there is plenty of blame to go around, but it is still a sad situation.


    There are probably five empties (5.00 / 1) (#26)
    by Militarytracy on Tue Apr 07, 2009 at 10:00:57 AM EST
    in my walk around the lake now.  We live in what was a much sought after hood.  Even with as much stable military wage that pours in here you can still see the signs.

    I find my (5.00 / 2) (#34)
    by Inspector Gadget on Tue Apr 07, 2009 at 10:18:29 AM EST
    shoulders dropping every time I drive by a house with a Uhaul being loaded and no for sale sign or rent sign out front.

    There are brand new condo developments here that have been finished, but not one has sold...the developers are offering to pay most closing costs, and guarantee they will pay up to 6 months of mortgage payments should a buyer lose their job in the first year after purchase.

    I'm guessing AZ looks much like FL. Both are popular destinations for the "snow birds" and the baby boomers used to have the money to afford those winter homes.


    I was in SouthWest Dade (none / 0) (#24)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:59:47 AM EST
    last week and the entirely empty developments - developers built them expecting to sell them - is astonishing.

    Not to mention that half built places.


    We have tons (none / 0) (#32)
    by Ga6thDem on Tue Apr 07, 2009 at 10:14:16 AM EST
    of that here too. Complete new neighborhoods that have sat empty for years. We've had a number of people simply walk away from their houses. Very sad and also making me think that it's going to quite a while before housing values increase. I'm imagining in the Atlanta metro area with the huge inventory we have of houses that not another one could be built for literally years with out a housing shortage.

    When there's too many houses (none / 0) (#36)
    by Militarytracy on Tue Apr 07, 2009 at 10:20:38 AM EST
    my father taught me that's when you become a remodeler.  He was always such a good one because he had worked his way up to a finish carpenter in his youth when building was more unionized.  Time for homes to be remodeled green and save people big money on their monthly energy bills!  Then all the construction workers would have a job again.  Why couldn't I have been born a burly man?  I know so much more about how to use that.

    Fiscal stimulation in the shape of (5.00 / 1) (#37)
    by Militarytracy on Tue Apr 07, 2009 at 10:26:31 AM EST
    greening homes.....who loses in that one?  Didn't FDR electrify everyone?  Now we could just make it all efficient.

    I've been reading about those (none / 0) (#44)
    by ruffian on Tue Apr 07, 2009 at 10:53:58 AM EST
    down in Dade and thereabouts. Some amazing stories down there.

    Walk around Metro Detroit (5.00 / 2) (#61)
    by jbindc on Tue Apr 07, 2009 at 11:52:42 AM EST
    2 years ago, I worked in a building in an industrial park.  Most of the commercial property had big signs in front of them - "For Lease".  It was sad to see all those which had once been small businesses all empty.  We were one of the few places in the whole complex who had people working.

    Then you go into the neighborhoods - lots of empty houses and for sale signs. Right before I moved in the summer of 2007, there was an article in the Detroit papers that said in the metro area alone, there were almost 150,000 homes for sale.  It's only gotten worse in the last two years.

    It's so sad.


    I'm worried that these abandoned houses (none / 0) (#23)
    by andgarden on Tue Apr 07, 2009 at 09:57:50 AM EST
    are going to end up like many of the inner cities in america. Dilapidated and unsold.

    Probably (5.00 / 2) (#27)
    by Militarytracy on Tue Apr 07, 2009 at 10:03:26 AM EST

    I wonder whether there will be a racial angle (none / 0) (#29)
    by andgarden on Tue Apr 07, 2009 at 10:04:45 AM EST
    this time. No redlining to blame in the burbs.

    Not in my neck of the woods (5.00 / 1) (#42)
    by ruffian on Tue Apr 07, 2009 at 10:48:48 AM EST
    This part of Orlando, anyway, is the most diverse area I have ever lived in. I don't see any pattern in the foreclosures either - equal opportunity there.

    So far the yards are the worst part (none / 0) (#39)
    by ruffian on Tue Apr 07, 2009 at 10:46:26 AM EST
    The grass dies, and the weeds take over. The banks don't seem to care if the lawns get cared for while they are deciding what to do with the properties. Makes the whole block look bad. Our HOA is trying to stay on top of it. Luckily the houses themselves seem to be in good shape, on the outside at least.

    If you can get a steep discount (none / 0) (#41)
    by andgarden on Tue Apr 07, 2009 at 10:48:29 AM EST
    you might consider getting together with the other HOA members to but the vacant properties. That takes money, though. . .

    We're probably going to have to raise (5.00 / 4) (#43)
    by ruffian on Tue Apr 07, 2009 at 10:52:14 AM EST
    our fees to make up some of the shortfall anyway - the other thing the banks don't care about is paying HOA fees. The people move out, and don't pay them anymore, and the bank does not take over. I've thought of paying my yard guy to mow one of the other lawns just so I didn't have to look at it every morning. The worst ones got fixed, so I didn't have to do that.

    People are so worried about their own financial situation right now, I hate to ask them to take on anything more.


    Asking people for time, not money (5.00 / 2) (#46)
    by Cream City on Tue Apr 07, 2009 at 10:59:12 AM EST
    may be a way to work it.  My county's beautiful park system (designed by Frederick Law Olmsted) was being poorly maintained under our awful (Repub) county exec.  People organized Friends of the Parks and offered to "adopt a park" in their neighborhoods -- mow, weed, plant, and more, even doing rebuilding of hardscape.  Some can donate money, others did fundraisers, but some could only give their time to work.  And it's working; some parks at least are not getting worse (until we can get rid of this county exec), while others are better than in a long time.    

    A thousand points of light? ; ) (none / 0) (#89)
    by Spamlet on Tue Apr 07, 2009 at 04:42:36 PM EST
    Not paying property taxes, either (none / 0) (#53)
    by Inspector Gadget on Tue Apr 07, 2009 at 11:21:15 AM EST
    I noticed a couple of houses I've been watching are delinquent in their taxes. Wonder if eventually people will be able to pick up some homes just by paying back taxes.

    Xeriscaping is your friend. (none / 0) (#106)
    by Fabian on Wed Apr 08, 2009 at 04:28:51 AM EST
    "Grass dies, weeds take over."

    A) Grass dies from lack of irrigation.
    B) The soil is so compacted/sandy/infertile that grass can't survive without significant chemical inputs.

    Even buffalo grass (naturally short, heat tolerant, drought tolerant) would be better than weeds.  


    A lot of inner cities (none / 0) (#55)
    by CST on Tue Apr 07, 2009 at 11:24:43 AM EST
    are turning around.  They didn't see a building boom so there aren't as many extra houses and people are moving back to the city due to demographic shifts and gas prices.

    I would love to see some of the burbs become more rural - but that would mean those toxic assets are worth $0 + recycling.  More likely to just stay run down.


    That describes (none / 0) (#97)
    by cal1942 on Tue Apr 07, 2009 at 05:17:13 PM EST
    many areas of Detroit.  

    Seems like a good (none / 0) (#38)
    by Farmboy on Tue Apr 07, 2009 at 10:40:48 AM EST
    location for the FEMA re-education camps!

    DITTO (none / 0) (#64)
    by Amiss on Tue Apr 07, 2009 at 12:13:15 PM EST
    an asset is only worth (5.00 / 1) (#22)
    by cpinva on Tue Apr 07, 2009 at 09:57:27 AM EST
    what a willing, ready and able buyer will pay to an equally willing, ready and able seller. no more or less. it's the standard definition of "Fair Market Value", pretty much since the dawn of economics as a formal profession.

    a mortgage, collateralized by real property, is only worth what the underlying property is worth, up to the current balance of the note. no more or less. the ability of the borrower to pay the note factors into the level of risk associated with the discounted value of said note, if it's sold. but mostly it's the value of the collateral.

    regardless of how you jigger it, if you have a note with balance of $100,000, but the collateral only has a FMV of $80,000, that note also has a FMV of $80,000. in my simplistic way, that's the essence of the mortgage problem the banks face, and all those who bundled, sliced and diced those loans, assuming property values would forever rise, and so would employment.

    the government creating funds, to "bid" for these assets at their face value, simply creates another level of fraud. the only difference this time is that it would be officially sanctioned fraud, instead of that bad, brand X fraud.

    unfortunately, the net effect would still be the same: defaults and foreclosures, and the tumbling down of all other securities predicated on them.

    I always liked this quote (none / 0) (#28)
    by Steve M on Tue Apr 07, 2009 at 10:03:53 AM EST
    "Suspending mark-to-market accounting, in essence, suspends reality."

        -Beth Brooke, global vice chair at Ernst & Young

    I accept that there can be occasional blips in the market.  For example, if I can't find a ready market for my asset on 9/12/01, I don't think I should be required to mark it down to fire-sale prices.  I'm allowed to wait a bit for the markets to return to "normal."

    But there has to be a time limit on how long I, or anyone else, gets to wait.  How long have the banks been holding these toxic assets now, patiently waiting for the market to "return" to where they imagine it should be?  Is this the newest generally accepted accounting principle - if you're in a recession where the market is slower, you get to wait a year or two for the end of the recession to value your assets?


    Not true (none / 0) (#49)
    by ericinatl on Tue Apr 07, 2009 at 11:02:05 AM EST
    Assets do have a value if you hold onto them, even without a buyer.  It's the amount of money you could get from the asset, discounted back to account for the time value of money.  So, if a bank holds a mortgage that has not been defaulted on -- even if the bank cannot sell it, the mortgage has value.  That value is the money that will be paid on the mortgage over time, discounted back by the risk of default and the time value of money.  The problem is that people do not feel they can adequately quantify the risk of default, so the market has collapsed, bringing the value of these mortgages to virtually zero.  However, if a bank continued to hold all of these mortgages, it is a virtual certainty that they would be worth greater than zero (not everyone is going to default).

    The Zero value straw (5.00 / 1) (#51)
    by Big Tent Democrat on Tue Apr 07, 2009 at 11:11:29 AM EST
    Of course it is not zero. The problem is not that it is zero - but that it is 30 and we are about to pay say 80 for it.

    I used zero as an easy example (none / 0) (#52)
    by ericinatl on Tue Apr 07, 2009 at 11:16:11 AM EST
    But, let's use your 30 cents on the dollar example.  That would essentially mean that we are looking at default rates in excess of 70%.  Even in the bleakest of neighborhoods, we are looking at default rates at closer to 20%.  So the 80 cents on the dollar looks a lot closer to reality than your 30 cents on the dollar.



    No (5.00 / 1) (#58)
    by Big Tent Democrat on Tue Apr 07, 2009 at 11:41:23 AM EST
    That is not the bundle that is known as "toxic assets."

    But the reality is the numbers are not relevant to this discussion - in my view at least - either you trust themarket's operation in the "toxic assets" - it's been quite a while now that they have been toxic, or you do not.

    For what is the Geithner Plan but a demand for a rigged market?

    But ultimately, if what you say is true, then why have private parties in the game at all? Wouldn't it be better and more transparent to have the government negotitate and purchase the toxic assets? Let's say $500B of them? Or we can start at a lower number, to see how it goes.


    Because it would cost the taxpayers a lot more (none / 0) (#62)
    by ericinatl on Tue Apr 07, 2009 at 11:53:37 AM EST
    If the US has to buy the assets, it would cost us trillions up front (money that we really do not have, but hedge funds do).  If we have to only guarantee the assets, while the US is guaranteeing trillions of dollars of assets, in reality we will only be paying a fraction of that price and not until some future date.

    My only problem with the Geithner plan is that the US should be an equity participant in the deal -- not at 100%, but we should get some upside if we are issuing the guarantees.


    Hold up (none / 0) (#70)
    by Big Tent Democrat on Tue Apr 07, 2009 at 12:38:31 PM EST
    You say that it would cost us more but you really do not even have a theory to back that statement up.
    I say you are wrong.

    But this was the really intriguing one - "If the US has to buy the assets, it would cost us trillions up front (money that we really do not have, but hedge funds do)."

    Hedge funds have more wherewithall than the US? You really are saying that? Come now. Let's keep this discussion serious. Hell, I have an idea why not sell T-Bills to these hedge funds and buy these great toxic assets for the government and make some money.


    Of course it would cost more (none / 0) (#82)
    by ericinatl on Tue Apr 07, 2009 at 04:13:27 PM EST
    If you are buying all of the toxic assets, you are paying for them up front.  If you are guaranteeing them, then you are only buying the ones that in fact are worth less than what they are paid for, and only for the difference.  

    For example, say you have a bundle of securitized mortgages.  Consider the 2 options on the table. It can spend $500 billion to purchase them now and then either try to sell them later or collect the future income streams.  Or it can not spend a dollar now, and simply guarantee the purchase of them by hedge funds for $500 billion.  In the first example, the government needs to come up with $500 billion now.  In the second example, the government only needs to spend in the future what the hedge funds lose on the initial investment.  Even if this is $500 billion in the end, the fact that we get to delay the payments means it costs us less.  The time value of money.  A dollar today is worth more than a dollar tomorrow.

    The fact is that we will not end up paying the entire $500 billion because these assets do have some value greater than zero.

    Now, I say that the US does not have this $500 billion -- I mean that politically it would not be possible to get through Congress an additional $500 billion to $2 trillion necessary to purchase all the assets.  However, a guarantee is politically feasible because it costs substantially less than $500 billion and it isn't due today.

    The bad part of this deal of course is that the US government gets no upside in doing the guarantee versus purchasing them outright.  I think the right answer is a guarantee, and the price of the guarantee is some percentage of the upside.


    Ha! (none / 0) (#83)
    by Big Tent Democrat on Tue Apr 07, 2009 at 04:18:55 PM EST
    Thanks for that "If you are buying all of the toxic assets, you are paying for them up front.  If you are guaranteeing them, then you are only buying the ones that in fact are worth less than what they are paid for, and only for the difference."

    My emphasis. Very good. We are only buying the crap here, therefore it costs less.

    funniest thing I have read in years.


    Glad I could make you laugh (none / 0) (#104)
    by ericinatl on Tue Apr 07, 2009 at 07:30:56 PM EST
    But you're dead wrong.  Again.

    I believe the plan calls for lending, (none / 0) (#99)
    by Green26 on Tue Apr 07, 2009 at 05:33:35 PM EST
    not guaranteeing, of 85% of the funds for the private funds, as well as half of the equity; and 50% of funds for the asset manager arrangements. Thus, the US is going to have to come up with all of that cash.

    Nevertheless, I think the US will spend less, in fact much less, money doing what they're doing and proposing now--compared to putting banks into receivership.


    Your economy has dumped how many (none / 0) (#54)
    by Militarytracy on Tue Apr 07, 2009 at 11:21:21 AM EST
    millions of jobs in the last six months?  This is what blows me away about people who want to attempt to base the worth of mortgage backed securities on how bad it is today (AND ITS BAD) and refuse to see that nothing can happen here except that mortgage failures will get worse.

    Even if mortgage failures get worse, they will not (none / 0) (#59)
    by ericinatl on Tue Apr 07, 2009 at 11:49:05 AM EST
    come close to approaching 70%.  

    My only point is that these assets are undervalued.  And that the market value of an asset is not the only way to value an asset.

    I will concede that there is a problem in actually valuing the assets.  This is in part due to the inability to quantify the risk of default on these mortgages.  But it is mostly in part due to the way the mortgages were securitized (or packaged).  What happened is that mortgages were packaged in 4 tranches based on the credit scores of the underlying borrowers.  So, the top tranche were packages of mortgages with the highest credit scores and the bottom tranche were packages of mortgages with the lowest credit scores.

    Now, you would think that particular mortgages went with particular tranches.  But instead, what happens in some cases, is that the top tranche has to get paid in full before the next tranche receives any money.  And so on down the line.  The last tranche to receive money is the bottom tranche.  So defaults on the mortgages with high credit scores actually affects the bottom tranche of packaged mortgages.  

    This is called the waterfall method of securitization.  And it is these securitized mortgages which are particularly hard to value, particularly the bottom tranche.  Because a default rate of 20% across the board could indeed result in the whole tranche being worth less than 50 cents on the dollar.


    You have zero evidence whatsoever that (none / 0) (#63)
    by Militarytracy on Tue Apr 07, 2009 at 12:00:18 PM EST
    70% can't happen and perhaps you should take a look at this.  And the ratings that were handed out were handed out for a fee and had nothing to do with the actual soundness of the loans........we have no idea how many such loans were made....only that loans based on lies were made because the business became about making loans so you could sell derivatives.  With so much fraud in what was securitized you are just pulling figures out of your arse.

    It seems to me that you're the one pulling (none / 0) (#66)
    by ericinatl on Tue Apr 07, 2009 at 12:23:26 PM EST
    statements out of your arse.  For one thing, I have never sold derivatives -- I don't know why you think I have.

    I don't disagree that there was fraud involved in securitizing the loans, but that does not mean that they are not undervalued.

    And if we reach a default rate of 70%, then we have basically reached armageddon.


    Okay, I did not mean to say that (none / 0) (#68)
    by Militarytracy on Tue Apr 07, 2009 at 12:32:59 PM EST
    you sold derivatives even though I said that :)  There is zero evidence indicating that any of our assets in the economy are "undervalued" at this time but there is evidence that our assets are experiencing a market correction right now. And I'm speculating here....but I think you will discover that 70% is not Armageddon....it's the Geithner solution.

    This statement is not accurate. (none / 0) (#73)
    by Green26 on Tue Apr 07, 2009 at 01:27:02 PM EST
    An income-producing asset's value is based more on the income stream, than on the value of the underlying collateral.

    Also, if there is no one willing to buy an asset at a particular time, that doesn't mean the asset has no value. Market value is accurate in valuing an asset, only if a market exists. For many of the toxic securities, there has been no functioning market. Most people believe that this situation is only temporary, and a functioning market will develop in the future.


    Ha ha ha ha ha ha (none / 0) (#78)
    by Militarytracy on Tue Apr 07, 2009 at 02:37:16 PM EST
    An income-producing asset's value is based more on the income stream, than on the value of the underlying collateral.

    So the actual worth of the house you have to foreclose on hardly matters, it's really about the income stream you HOPE to make on it :)  That's some terric effing la la land and exactly how we got here.


    The loan on the house in foreclosure has ALREADY (none / 0) (#80)
    by steviez314 on Tue Apr 07, 2009 at 02:49:34 PM EST
    been marked down, since it is non-performing.

    The point is that even though my next door neighbor, with the same house and loan as mine, is in foreclosure, that doesn't mean that MY loan should be marked down if I am current in my payments.


    Even though your house is now not (none / 0) (#81)
    by Militarytracy on Tue Apr 07, 2009 at 04:12:38 PM EST
    worth the payments you're making on it?  Have you read any Roubini at all, someone who has studied economies and what has happened to them when real estate incentive disappears for the borrowers?  In every case massive defaults have occured. God save me from the supply siders and those that feed at their trough.

    Most mortgages are not underwater, (none / 0) (#86)
    by steviez314 on Tue Apr 07, 2009 at 04:28:45 PM EST
    just those of the 2005-07 vintage and even those in certain states.

    "Have you read any Roubini at all" sounds so condesending by the way...as though that was the word of God as revealed to his true servant.

    Also, I DO happen to have a degree in Economics, and I will bet you I have read more bank 10Ks than Roubini.

    However this is about mark-to-market and the fact that there basically is no market for mortgage debt (stratified by year and zip code).  Why do you think that my house does not get assessed every year and I have to settle up with the bank any difference.  Because I am current on payments, as are most people in the pre-2005 slice.

    Loans in foreclosure ARE ALREADY marked down.  We are talking about tranches that are performing.


    We have had record foreclosures (5.00 / 1) (#87)
    by Militarytracy on Tue Apr 07, 2009 at 04:34:06 PM EST
    from Jan to Mar this year so far and no slow down in sight and no slowing of job loss in sight either.  There will always be the bottom half of every graduating class. If your writings and findings have been published or awarded in any way, shape, or form please share some links or something.

    Oh, touche! (none / 0) (#90)
    by steviez314 on Tue Apr 07, 2009 at 04:43:53 PM EST
    Thank you for that well reasoned economic argument.

    You are making claims that your (none / 0) (#94)
    by Militarytracy on Tue Apr 07, 2009 at 04:51:38 PM EST
    opinions are more credible than Roubinis.....like Roubini is some sort of wannabe.....BRING IT

    I am a trader. I put my 'opinions' on the line (none / 0) (#96)
    by steviez314 on Tue Apr 07, 2009 at 04:59:29 PM EST
    every day with my own money, and have done so for the past 25 years.

    The only thing I have published since I received my BA in Economics and MBA is my P&L on my tax return.


    A trader? (none / 0) (#102)
    by Militarytracy on Tue Apr 07, 2009 at 06:00:18 PM EST
    Sorry but count me as not impressed.  You hardly have the best interests of the country at heart.  And my cousin is in the Marine Corp and he has an MBA and one of my best friends here....her husband is a Lt. Colonel and he has an MBA......sorry but it ain't no big thang these days and I'm not sure if it helped my cousin buy better chicken breasts at the best price in Kuwait for the Marine Corp but I hope it did. Something tells me Kdog would have gotten a better price though.  Oh, and all these soldiers with these MBA's....do you know where they're going when they are done dressing silly?  They are going right into the military industrial complex to work for defense contractors building defense crap and selling it to dipsticks like me for top dollar plus change orders.  What a couple of b#st#rds.  They are both so close to retirement now they are practically drooling on me.  They don't have the best interests of the country at heart either, even if they are fully convinced that nobody has the best interests of the country more at heart than they do.

    I hardly have the best interests of the country (none / 0) (#103)
    by steviez314 on Tue Apr 07, 2009 at 06:26:31 PM EST
    at heart?  Because I'm a trader?  

    You don't know me.  You know nothing about me.  Who made you arbiter of what people believe?

    That really rivals the obnoxiousness of the right when they call people "un-American" and "unpatriotic".  I really am dumbstruck by that comment.


    The phrase "skin in the game"... (5.00 / 4) (#33)
    by Dadler on Tue Apr 07, 2009 at 10:16:17 AM EST
    ...better be retired and soon.  It's the operating cliche of an Obama administration that is currently failing quite well.  It is an empty piece of bullspeak that means less than nothing, which, so far, is what Obama seems to be about.

    My husband says that if he hears him (5.00 / 3) (#71)
    by Militarytracy on Tue Apr 07, 2009 at 12:57:24 PM EST
    say "Let me be clear" one more time he's gonna scream because nothing seems to be getting clearer.

    Obama is not our GWB (none / 0) (#92)
    by Spamlet on Tue Apr 07, 2009 at 04:48:03 PM EST
    He is our very own Richard "Let Me Be Perfectly Clear" Nixon.

    I sure as heck wasn't going to say that (5.00 / 1) (#95)
    by Militarytracy on Tue Apr 07, 2009 at 04:55:10 PM EST
    I was in fourth grade and I sometimes here that "perfectly clear" thing whenever Obama does the clear thing.  Nixon was a traumatic time.....leaves prints in your brain.

    Same Nixon echo heard here (none / 0) (#105)
    by Cream City on Tue Apr 07, 2009 at 09:55:46 PM EST
    when Obama does that -- except that without the adverb, my brain notices the blank every time and wonders why Obama is omitting it.  Does it mean he does not want, the brain says, to be perfectly clear?  Is he settling for being imperfectly clear?  Yeh, that echo of the past drives me nuts with what it does to my brain.  (That and the uhhhs, which echo another unfavorite person from the past.)  

    I remember when they were offering (5.00 / 1) (#60)
    by Militarytracy on Tue Apr 07, 2009 at 11:51:26 AM EST
    people that 125% of your home's value refinance.......my husband and I couldn't figure out how that could even happen :)  Obviously everything became about creating loans.  Black spoke about nonmortgage loans as well that are out there too that are fraudulent.  Even when we bought this house though and I insisted on using our VA loan it was horrible attempting to get quotes because I was told repeatedly that qualifying for a VA was "hard work" and that they had so many other loans out there that they could grant me with much less paperwork involved. And the house wouldn't have to pass an inspection.  It was freaky.......and nobody wanted me to have a VA loan but me.

    I thought that was based on the (none / 0) (#65)
    by Inspector Gadget on Tue Apr 07, 2009 at 12:22:15 PM EST
    acceleration of the housing market anticipating the house would appreciate in value by at least 25% in the near term and eliminate the need for the owner to refi again in a couple of years. It seemed like kind of a "courtesy" move for people who were happy to keep pulling all the equity out of their homes.

    I thought it was nuts (none / 0) (#67)
    by Militarytracy on Tue Apr 07, 2009 at 12:25:55 PM EST
    What a giant speculation on the part of anyone making such an offering.  But there was money to be made today for making that speculation and they were happy to do it.

    Me, too (5.00 / 2) (#72)
    by Inspector Gadget on Tue Apr 07, 2009 at 01:12:28 PM EST
    completely nuts! Who would ever want to put themselves in an underwater situation on purpose? I knew people who pulled out all their equity and invested the money in things they thought were a better, faster ROI, though. Thought that was crazy, too.

    Of course there is a gap... (none / 0) (#5)
    by BigElephant on Tue Apr 07, 2009 at 09:03:22 AM EST
    Some, like Krugman, believe that the assets are still overvalued, and some believe they're undervalued.  The fact of the matter is that they're neither.  An assets only value is what people are willing to pay for them.  Thus they're valued perfectly.

    With that said the Geithner plan is about increasing the market value by reducing risk.  This is a legitimate way to do that.  

    The Geithner plan is NOT based on part on the fact that assets may be undervalued (this is one of the big myths of the plan), but rather its based on something even more important -- that private investors will be able to a decent job assessing value.  That is, they won't overpay by too much.  

    What overpaying means is that they buy the assets at a price they can't sell them for.  If they overpay by too much then its costly for the taxpayer.  But if they overpay by just a bit -- say 10% then it turns out that the tax payers come out of this relatively clean in exchange for these assets being off the books.  

    What motivation do the investors have for not overpaying.  Simply put they lose ALL of their investment if they overpay by more than 12%.  While they don't have to invest a lot in these assets, no business person likes to lose all of their investment.  

    Again, this plan isn't perfect -- but it's the best that has been brought to the table.

    This is no response to my post (5.00 / 3) (#6)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:08:55 AM EST
    But it does deal in fallacies.

    For example, risk is not "reduced," it is shifted - to the taxpayer. Of course an asset has more value when it has less downside risk. This is an artificial boost in the price of the asset.

    Now you may be fine with that and think the investment well worth it. I do not.

    you assert this is the best plan you have seen. Best plan for what? For the banks? No question. for the economy? No way. For the country? Absolutely not.


    Your post refuses to acknowledge (5.00 / 3) (#7)
    by Militarytracy on Tue Apr 07, 2009 at 09:14:45 AM EST
    the plan can be easily gamed as well. I don't see how investors are going to enable us to establish a market price when evidence is cropping up that they're already trying to figure out how to game the system.

    In theory (5.00 / 2) (#9)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:22:26 AM EST
    you could restrict the possibility of gaming the system, but the whole plan is gaming the system - its purpose is to OVER pay for these "toxic assets" to help out the banks.

    The Plan has to be designed to produce overpayment for the assets. Otherwise the Plan is intended to plunge these banks into open insolvency. The banks won't sell at true value because that makes it clear they are insolvent.

    The funny thing is even on these terms, the Plan does not work because it is too small. The hole the banks are in is bigger than what the Geithner Plan can fill.

    It is simply unworkable on any level.


    Yes (none / 0) (#20)
    by Militarytracy on Tue Apr 07, 2009 at 09:50:48 AM EST
    It just flames me that the gamers that did all this can't fricken stop trying to game every opportunity tossed at them while robbing us blind.  Their job is to make money though. So they are doing their jobs and my whining is like whining about getting bit trying to help a rattlesnake.

    The plan is not designed to overpay (none / 0) (#74)
    by Green26 on Tue Apr 07, 2009 at 01:31:17 PM EST
    for assets.

    The plan is designed to have private funds and management companies, with big financial assistance from the government, evaluate assets, determine prices, create bidding competition, buy assets, create a more functioning market and get some of the assets off the books of the banks.


    If there is no overpayment (5.00 / 1) (#85)
    by Big Tent Democrat on Tue Apr 07, 2009 at 04:22:07 PM EST
    then the banks eat the losses and are insolvent.

    Now, if you think the banks are going to sign up for that voluntarily, then I have a bridge, or better yet, some toxic assets, to sell you.


    Why do think the PPIP is going to buy the worst (none / 0) (#88)
    by steviez314 on Tue Apr 07, 2009 at 04:39:43 PM EST

    The problem now is similar to having 100 people in a room, 10 of whom have a communicable disease.  Do you want to go in and shake anyone's hand?  The odds are in your favor, but I doubt you would.

    Right now, all assets on the banks' balance sheets are considered the same--toxic.  They are not.  In that pool of loans marked at 50 cents are those from zip code X written in 2006 (worth 50 cents) and those from zip code Y written in 2005 (maybe worth 70 cents).  Yet, there is no discrimination--the market (as thin and nervous as it is will only pay 50 cents for both slices).

    Let's say the investors in the PPIP will have the market and leverage to buy the zip code Y tranche--they actually can pay more than the banks' mark and still make a profit.  And the bank is no worse off having the zip code X loans still on the books.

    The PPIP will help differentiate between loan slices and free up balance sheet room.

    It's easy to just say "toxic assets" but that fails to distinguish between year written, state, zip code or tranche.


    So they won't be buying the toxic assets? (5.00 / 1) (#91)
    by Big Tent Democrat on Tue Apr 07, 2009 at 04:46:37 PM EST
    So much for the "clearing of the toxic assets from the balance sheets" argument then.

    I would say an asset marked at 70 is toxic (none / 0) (#93)
    by steviez314 on Tue Apr 07, 2009 at 04:50:25 PM EST
    just like the one marked at 50.  But if the market doesn't discriminate between the two slices, they're both equally toxic.

    Will the PPIP buy THE worst assets--I doubt it.  But in my example, they don't have to in order to a) make a profit; b) free up banks' balance sheets; and c) avoid impairing the banks' capital.


    Hmm (none / 0) (#98)
    by Big Tent Democrat on Tue Apr 07, 2009 at 05:22:22 PM EST
    I think you are just plain wrong on b. Quite the opposite in fact.

    How can b not improve banks' (none / 0) (#100)
    by Green26 on Tue Apr 07, 2009 at 05:39:13 PM EST
    balance sheets?

    It is highly likely that the aggregate purchase prices will be above what the banks are currently carrying the securities at on their books, as well as the loans (net of loan loss reserves) on their books. Recall the write downs under the mark-to-market rule.

    Also, there will be a benefit to the balance sheets for just decreasing the amount of toxic assets on the balance sheets. These assets are one of the primary reasons for the uncertainties impacting the banks, and how people view them.


    I know you don't think there will be many (none / 0) (#101)
    by steviez314 on Tue Apr 07, 2009 at 05:49:16 PM EST
    buyer/seller agreements, but to the extent there are, the simple math says that it would free up capital for new loans once old loans are off the books.

    Now, what the banks will do with that new capacity..who knows?  Reducing their existing loans is a necessary condition for making new ones, but not sufficient.


    I actually think the toxic assets are undervalued (5.00 / 1) (#45)
    by ericinatl on Tue Apr 07, 2009 at 10:55:34 AM EST
    Only one measure of value is what someone else is willing to pay for an asset.  Another measure is how much money would you get over time (discounted back) if you held the asset.  The problem is that the market value of these assets is essentially zero because the market for these assets has absolutely collapsed.  Banks are then forced to write down virtually all of the asset based on marked-to-market accounting rules.  However, if they held onto these assets, the value would be substantially greater than zero (while foreclosure rates are up, they do not come close to approaching 100%).  Thus, the assets are undervalued.

    The result is that banks are actually not as undercapitalized as people think -- because their assets are worth more than what they are booked at.  Unfortunately, the perceived undercapitalization in turn results in a liquidity crisis -- no money coming in or going out.

    The solution isto jump start the securitization market.  I don't like the fact that hedge funds will benefit from this solution, since in large part they are the ones that go us in the mess.  But hedge funds and private equity funds have A LOT of money that is sitting on the sidelines right now.  The only way to get the money into the system is to lower risk.  Geithner's plan does that.


    If this plan is so favorable to the taxpayers (none / 0) (#11)
    by joanneleon on Tue Apr 07, 2009 at 09:26:04 AM EST
    and to the market, then why not give the owners of the toxic assets properties (who are also taxpayers) the opportunity to purchase back those properties under the same terms?

    Why not? (none / 0) (#107)
    by BigElephant on Wed Apr 08, 2009 at 07:14:50 AM EST
    The main reason is probably because they no longer have the credit to do so. There's nothing in the rules that prevent you from doing it (that I know of), but it's probably just not feasible for most individuals that have had a house foreclosed.

    The FDIC can offer guarantees no? (none / 0) (#108)
    by Big Tent Democrat on Wed Apr 08, 2009 at 07:23:12 AM EST
    So? (none / 0) (#109)
    by BigElephant on Wed Apr 08, 2009 at 07:43:19 AM EST
    The FDIC isn't making the guarantees in the legacy loans program because they want to pay for the toxic assets.  They're doing it because they think they won't have to.  Now we can debate back and forth if that's how it will turn out, but that's certainly the intent.  

    Now if you give loans to people with a history of poor credit, you're really asking to have to deal with the foreclosures.  That's not the business they're in.  

    Everybody is doing risk management.  The gov't is taking on a lot more risk than it usually likes to, but it feels it is necessary.  But asking them to take on this additional level of risk is probably too far.  

    With all that said, I hope your diversifying your currency  :-)


    A history of poor credit (none / 0) (#110)
    by Big Tent Democrat on Wed Apr 08, 2009 at 07:53:26 AM EST
    Heh. That is funny.

    Anyway, I was snarking.


    Getting money "on more attactive terms" (none / 0) (#8)
    by joanneleon on Tue Apr 07, 2009 at 09:15:30 AM EST
    This sounds just like an industry jonesing for the big fees and profits of the subprime markets from the last few years.  

    I would really like to know what kind of attractive terms this man is thinking about.  Negative interest rates for the banks?  We're nearly there already!  

    As for the Geithner Plan, I see it as just another way to bail out the banks and soak the taxpayer.  This time it will be harder for the public to protest about though, since the process will be more complicated and it will be more difficult to quote the dollar figures handed to the particular institution.  Changing the "mark to market" rules just before auctioning these things is very special too.  They still think we are stupid.  Meanwhile, more and more people have been reading and learning about what's going on.

    I'm conflicted on the issue of reflating asset values in real estate.  I'd love to see that happen, but whenever I think about it, this question pops into my mind: "When is everyone going to understand the meaning of 'bubble' and realize that those inflated values were not real and are not coming back?"  It just amazes me that all these free market true believers would attempt to do this (along with all the other contradictory things they are doing).

    A banker who truly believed in the free market would come clean about what's on his/her balance sheet and accept the consequences.

    It wasn't the free market that overinflated real estate values.  It was fraud that did it.

    Hm (none / 0) (#10)
    by Steve M on Tue Apr 07, 2009 at 09:24:00 AM EST
    Don't miss this interesting link!

    Lies frankly (5.00 / 2) (#12)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:31:55 AM EST
    If this is true "Here's the F.D.I.C.'s explanation: It says it plans to carefully vet every loan that gets made and it will receive fees and collateral in exchange," then there will be precious few "loans."

    This is like a "non-Plan" then.

    I do not believe Sheila Bair will be making these calls at all. she does not know it yet apparently.

    If she is making the calls, then the Geithner Plan is DOA. there is no plan.


    Impossible lies (none / 0) (#30)
    by Militarytracy on Tue Apr 07, 2009 at 10:09:52 AM EST
    Blows my mind

    Some miscellaneous thoughts. (none / 0) (#13)
    by Green26 on Tue Apr 07, 2009 at 09:36:04 AM EST
    The credit markets are still not functioning properly. Banks and others are not lending enough. Thus, there are deserving borrowers who can't get funding for their businesses and projects, including loans on terms satisfactory to them. In my experience, it's more that unwillingness of banks to commit to projects, like acquisitions and expansions, than the cost of money.

    Saying the plan is too small is not the same as saying the plan won't work. The plan can work in increments. My view is that, if the plan starts to work, then additional funding would probably be made available.

    While I wouldn't describe the goal of the plan as increasing employment, additional lender for expansions, new businesses and acquisitions will increase employment.

    As I previously stated, I have read that some of these assets, or types of assets, have not been traded for over six months. Thus, there is no functioning market and there is no market price for those assets. The plan will start to establish market prices for some of these assets.

    Without saying the plan will be too rich for the private sector, I think there will be alot of money made by some of the bidders. Note that the US will participate in some of the upside too.

    I will focus on one point you make (5.00 / 2) (#14)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:40:09 AM EST
    "In my experience, it's more that unwillingness of banks to commit to projects, like acquisitions and expansions, than the cost of money."

    I think that is right - it is not the cost of money - it is that banks are trying to escape from receivership - they are banking (pun intended) the money they get from the government (and their other operations) to improve their balance sheets.

    This is prudent from their perspective. But it does nothing for the economy. As Soros says, the real economy is being crowded out by the desire by the government to save the banks.

    The Geithner Plan will fail in terms of helping the economy PRECISELY because the injection is not enough to make them willing to increase lending.

    It is simply a badly conceived policy.  


    However, if the things in the NY Times (none / 0) (#16)
    by Green26 on Tue Apr 07, 2009 at 09:46:09 AM EST
    article continue to occur and improve, there is going to be more lending. There are early signs that the government actions are starting to have more of a positive impact. Some of this is recent; some of it started last fall.

    If that is the case (5.00 / 2) (#18)
    by Big Tent Democrat on Tue Apr 07, 2009 at 09:48:58 AM EST
    then why do we need the Geithner Plan?

    Sorry, you can't cry for the Geithner Plan while at the same time telling me things are already better.

    Believe me, there are good uses for that gov't money. An unnecessary transfer of taxpayer resources to the banks would be outrageous.


    Sure I can. (none / 0) (#40)
    by Green26 on Tue Apr 07, 2009 at 10:47:18 AM EST
    Just because there are early signs of some things improving, doesn't mean there isn't alot more work to do and need for additional things, including the Geithner plan.

    Also, the plan to buy toxic assets is designed to address a different big issue, i.e. the huge drag of toxic assets on the books of financial institutions where there is virtually no market for the sale of those assets. Those assets are still clogging the system and creating a major issue.


    Well (none / 0) (#47)
    by Big Tent Democrat on Tue Apr 07, 2009 at 10:59:46 AM EST
    Let's put it this way, it certainly weakens your argument for its necessity.

    I don't agree that it weakens the argument. (none / 0) (#75)
    by Green26 on Tue Apr 07, 2009 at 01:37:28 PM EST
    Removing some of the toxic assets from balance sheets and starting to create a market for the assets will have additional and incremental benefits for banks/lenders, borrowers, the economy, capital-raising, employment, etc.

    It will also start to decrease uncertainty involving the banks.

    It may also ultimately result in the US making some money.


    You argue what is left of your argument (5.00 / 1) (#84)
    by Big Tent Democrat on Tue Apr 07, 2009 at 04:20:51 PM EST
    which, as you know, I find not convincing.

    The only part that was persuasive before was the necessity argument.

    And now you have tossed that away.

    Certainly it has been weakened in my eyes.


    A few more professors (none / 0) (#35)
    by standingup on Tue Apr 07, 2009 at 10:19:23 AM EST
    disagree with Geithner (and DeLong) on the pricing of the assets.  From Clusterstock where you can find the paper on their study:

    The striking conclusion is that the low prices of toxic assets actually reflect the fundamentals, rather than being driven by an illiquidity discount.

    The administration is taking such a big roll of the dice with PPIP.  I wish I felt more confident in Geithner but it is difficult looking at his record at the NY Fed and the number of people who disagree with his assessment that this is a liquidity problem.

    If this is the case, then (none / 0) (#48)
    by Green26 on Tue Apr 07, 2009 at 11:00:18 AM EST
    the new private investment funds and asset management companies probably won't bid much for the assets and may not be able to buy many of the assets.

    Personally, I don't believe that modeling done by academics who don't have the same information as that the banks, regulators and, soon, the funds and management companies, is the best way to evaluate and price these assets. Some in the private sector are apparently excited about the opportunities presented by the Geithner plan. This is more meaningful to me than the views of those in the Ivory Towers.


    How'd that work for you (5.00 / 1) (#50)
    by Big Tent Democrat on Tue Apr 07, 2009 at 11:09:57 AM EST
    the last 7 years in your investments in the housing market?

    My only direct housing investments (5.00 / 1) (#56)
    by Green26 on Tue Apr 07, 2009 at 11:25:38 AM EST
    are still considerably more valuable now than they were 7 years ago. None are in Florida or Arizona. My experience is presumably not the same as many others. I don't know what securites are in the various mutual funds in my retirement accounts, but, like others, I now have a 201(K).

    Heh (none / 0) (#69)
    by Big Tent Democrat on Tue Apr 07, 2009 at 12:34:59 PM EST
    Yes, presumably not.

    You wrote (none / 0) (#77)
    by me only on Tue Apr 07, 2009 at 02:29:18 PM EST
    "DeLong is arguing that the slump in demand and employment is a result of the cost of money? That seems incredibly implausible"

    While I am too lazy to look it up, I believe that Mish commented on GE having just that problem.  Why is Ford okay and GM and Chrysler begging for government money?  There are many reasons, one of which is that Ford got financing before the cost of money rose, GM and Chrysler did not.  Now they cannot obtain private financing.  M & A's are down, one reason is the cost of money.

    I don't think it is incredibly implausible.  It might not apply to residential mortgages (I don't know if it true in that sector or not), but in the commercial world, it appears to be more than plausible.

    M&A activity is not down due to (none / 0) (#79)
    by Green26 on Tue Apr 07, 2009 at 02:47:01 PM EST
    the cost of money. M&A activity is down in large part because the credit markets are frozen, i.e. lenders are not lending for many acquisitions and there aren't many buyers of private debt for acquisitions.

    In addition, capacity utilization is way down. Once the current capacity of companies and plants is better used, then it will make more economic sense to acquire more capacity via acquisition.

    Lastly, the valuations of acquirors' stock is way down. Acquirors who want to use their stock, as opposed to cash, are reluctant to use their stock. This is due to the low valuations and the related dilution that would occur if stock is used in the acquisition.

    The flip side of the last point is that some companies don't want to sell, due to their current low valuations. However, some of these companies are running out of money, so they are being forced to sell. There are alot of bargains for smaller tech companies, which are running low on cash and can't get additional financing from venture capital firms or otherwise.