Risky Assets

U.S. vs. UK on bailout plans

Jim Kim — Wed, 08 Oct 2008 12:03:26 -0400

We're seeing lots of governments move to announce bailout plans. In the U.S., the Treasury is working all-out to implement the freshly passed plan. Britain just announced its own three-part plan. There's a key difference in the approaches of these plans: the U.S. plan will buy up risky assets, while the U.K. plan aims to facilitate intra-bank lending as well as directly support ailing banks. Breakingviews suggests the U.S. should switch courses and follow the U.K. model. It would allow for better targeting of the banks that are really tottering and would also allow a mechanism to give taxpayers upside in the newly recapitalized entity--in the form of warrants and preferred shares. It might also have been wise to allow vulture funds to invest at the same terms. The new law might actually warrant such a twist, but it's way too late to change. That train has left the station. But if the TARP doesn't work out, there will be plenty of second guessing.

For more:
- here's the Breakingviews article
- here's a New York Times article on the British plan

Related Article:
Can we improve on the RTC bailout model?

Bill Gross: Writedowns to hit $1 trillion

Jim Kim — Wed, 30 Jul 2008 13:41:01 -0400

According to the Financial News Online writedown-o-meter, banks collectively wrote off $205 billion as of June. Since then, the total has climbed higher. While we've heard many people suggest that the worst is over, Bill Gross, the outspoken bond manager at Pimco, is not one of them. He suggests that banks may ultimately be forced to write down more than $1 trillion, according to Financial News Online. Whew! He told clients there's about $5 trillion in mortgage-related risky assets on bank books. The flip side is that these potential losses will require additional capital, which may prove hard to come by. We'll see more asset sales, more dividend cuts, and less lending. None of this is good news. I'd like to think that $1 trillion is way high, but who knows.

For more:
- here's the article

Are Lehman Brothers' options dwindling?

Jim Kim — Thu, 24 Jul 2008 07:42:54 -0400

Will Lehman Brothers be forced to sell its Neuberger Berman asset management unit? There's been a lot of talk that it might be forced to find a buyer, or sell shares to the public. A UBS analyst just told clients that the bank will likely take that step in concert with a sale of risky assets, basically about $30 billion worth of mortgage-related stuff, reports the New York Post. I'm sure the bank has considered these options. My guess would be that the valuations just aren't there. But Lehman, like other banks, may not have a lot of choice. It could take its dividend from 17 cents to zero and not raise much. Foreign investors do not seem to be biting. A leveraged buyout looks iffy, so short of selling the entire company, what else can it do but sell assets? Of course, in a best-case scenario, the capital it has already raised--$12 billion--will be enough. Of note, its stock is now back above book value.

For more:
- here's the article

Is fair-value accounting just?

Jim Kim — Thu, 26 Jun 2008 14:35:52 -0400

In the wake of the Enron crisis, "fair-value accounting" seemed like a good idea. It was designed to create reporting uniformity and make it harder to play games. But it's turning out poorly for Wall Street in the on-going credit crunch. "Rather than making things clearer, the fair-value accounting rules only point to the futility of pricing assets every day in highly volatile markets when the credit markets are frozen solid," Forbes reports. All the while, the problem of risky assets continues to mount. Wall Street still has not fully dealt with Level 3 assets. But you have to ask: What is the alternative? Can we afford to go back in time? The SEC will convene at a conference on this vexing issue July 9. For now, the pain--and possibly more writedowns--will continue.

For more:
- here's the Forbes article