Obama Administration Toxic Asset Plan: I Just Don’t Get It.
By: Ainsley Brown
I must say that I consider myself a relatively intelligent person – though admittedly not an economic guy – I believe myself able to grasp practically any concept once explained. And the Obama toxic asset plan, I just don’t get it.
Please do not read this as either a general criticism of the President or the specific criticism of the plan, for it is not. I am a big fan of Mr. Obama and I wish him all the success in the world. In fact I hope, even thought I don’t understand it, that this plan does indeed work; for as much as non-Americans don’t like it, it remains as true as ever: so goes America, so goes the world.
The plan unveiled yesterday is designed to buy up the toxic assets, for example those now infamous sub-prime mortgages, in order to remove then from the banks’ balance sheets. In so doing it is hope that this will unclog the credit markets and get credit flowing again without the need to fully nationalize the major financial players. This is the part of the plan that I fully get, it sounds all so logical. However, it is the rest of the plan that I just don’t get.
You will see what I mean or at least empathize with my confusion when you consider the following questions I have:
- What exactly is a toxic asset? Surely this will vary with in and between the financial players. That is to say as between banks and banks; banks and insurers; insurers and insurers, etc. Will there be an object if measure of what is and is not a toxic?
- Who will define what a toxic asset is? Please don’t tell me it will be the financial sector, the very people who got us in the mess in the first place and who continue to just don’t get it – AIG, need I say any more.
- If an asset is indeed classified as a toxic asset, must it relate to the current economic crisis or can long standing toxic assets be included?
- What if the financial players do not wish to sell these assets, is here any way of forcing a sale? It might seem obvious that they would jump at a chance to off-load these toxic assets but it must always be remember that these are the people that got us in this mess and so far they have show very little in terms of change in behavior.
- How will the price be set? Surly it cannot be book value, if these assets were sold in the market they could not fetch that value, in fact there is no market for them, the market is being created.
- Even with government guarantees, why would I buy some that is called a toxic asset? I know I am not all that investor savvy but toxic just doesn’t sound good.
- What is to stop the troubled financial players from buying the toxic assets of another financial player once the market for these assets get going?
- Is there any provision made for the un-bundling of mortgages and other assets bundled together, to form a new asset – a derivative? It strikes me as oh so simple; if they can be bundled they can be un-bundled. As well un-bundling will assist in the over all freeing up of the credit markets by allowing people to know which institution holds there mortgage; and it will facilitate re-negotiations for lower more affordable rates as there will no longer be one derivative asset but individual mortgages.
- And lastly I really don’t get the Public-Private Investment Program. Yes I get that there will be government guarantees but where are the private investors going to come from? Why would they want some one else’s toxic assets? The fund managers that are going to manage this whole thing, how much time will they be given to raise funds? What if they fall short?
May be it is my lack of economic/ financial knowledge that is the reason for my confusion or maybe I am just jumping the gun and I need to give the plan some time to work before I can get my answers. In either case, I just don’t get it.
Best of luck President Obama, I really hope this and your other plans work.
