UPDATE: What About the Bad Mortgages?
Monday, November 03, 2008
Last Tuesday, the government declared that it was going to use a good portion of the $700 billion rescue fund to invest in banks and give them much needed capital to keep on lending. To keep pace with European counterparts who initiated their own recapitalization plans the weekend prior, U.S. officials decided to take similar steps that would have an immediate effect on the health of the country's financial institutions – thus, the federal Capital Purchase Program and taxpayer ownership in the country's private banks. The Treasury alloted nearly half of its $700 billion for the capital injections, causing many, including us here at DSNews.com, to ask, “what about the bad mortgages?”
Treasury Secretary Henry Paulson has said that the program to buy up troubled mortgage assets could take weeks to get up and running. Nevertheless, previously planned auctions to buy distressed securities will still proceed, David Nason, the Treasury's assistant secretary for financial institutions told Bloomberg Television. “We're still planning to go forward,” Nason said last week after the recapitalization roll-out.
When Federal Reserve Chairman Ben Bernanke testified before House Budget Committee members earlier this week, he referenced the mortgage purchase part of the government's plan as a bold step that would increase the liquidity of financial markets and improve the ability of financial institutions to raise capital from private sources. And when Bernanke spoke at the Economic Club of New York last Wednesday, he insisted that both parts of the rescue plan – recapitalization and mortgage purchases – are still on track and are “highly complementary.”
Moving Forward
Officials have been pressing ahead with preparations to buy or auction off the banking system’s toxic mortgages, regularly announcing the engagement of financial agents to assist in the implementation of its Troubled Asset Relief Program (TARP). Last week, Bank of New York Mellon was appointed custodian to manage the program. PricewaterhouseCoopers LLP and Ernst & Young were hired to help the Department with accounting and internal controls. Chicago-based EnnisKnupp and Associates will serve as investment adviser and New York-based Simpson, Thacher and Bartlett will serve as legal adviser for the “complex portfolio of troubled assets the Department will purchase,” the Treasury said in a press statement.
In terms of asset management for the program, the Treasury is still evaluating candidates. LandAmerica Financial Group announced last week that it had thrown its hat into the ring to provide whole loan asset management services. Reports have been circulating this week that Fannie Mae and Freddie Mac, both now government-run entities, have also bid on managing whole loans as well as mortgage securities acquired through TARP.
“[The mortgage purchase program is] meant to be a stimulus, not a complete solution,” said Bernanke, who according to a report in the Financial Times, favored direct capitalization over asset purchases long before Paulson came around to the idea.
A Timeline?
There are some $14 trillion worth of mortgages and mortgage-back securities outstanding in the United States, and with each passing day the percentage of “bad assets” grows. Back in August, banks' write-downs from the U.S. subprime crisis crossed the $500 billion mark. The International Monetary Fund (IMF) said earlier this month that it anticipates mortgage-related losses to reach $1.4 trillion this year.
In the midst of all this red ink, the market is still waiting for clarity on the auction procedures of the U.S. rescue plan. There is no firm timetable yet for the roll-out of the process, Kevin Heine, a spokesperson for Bank of New York Mellon told the Associated Press. And even after the auction process is set up, it will take more time for banks to see fresh capital through assets sales, namely because both the sellers and the Treasury and its agents will have to evaluate each individual asset to determine pricing.
In the opinion of Herman Moyse, chairman of the baking department at Louisana State University, “It looks like this [the asset purchase part of TARP] will fall by the wayside. Treasury couldn't convince economists the plan was feasible,” Moyse said in an Associated Press interview.
A Congressional source, working on a finance committee, told the Associated Press that it was politically difficult to admit mistakes and suggested that if there are no auctions by January 20, when a new administration takes over, the program will likely be dropped.
Funding for Acquisitions
Even the government's deviation from its original plan has deviated. Secretary Paulson has urged banks to use the $250 billion in recapitalization funding to start lending again to consumers and small businesses. According to the Treasury, this is key to ensuring the “rescue” reaches Main Street citizens and the job market doesn't take a hit.
Now though, it is reported that the Treasury has plans to not only stabilize the banking industry, but to reshape it. According to the New York Times, senior officials said the selection criteria for those receiving government capital includes banks looking to finance acquisitions.
John Allison, CEO of BB&T Corp. told The Wall Street Journal that his bank would “probably participate” in the plan, partially as a way to fund takeovers. “We think that there are going to be some acquisition opportunities, either now or in the near future, and this is a relatively inexpensive way to raise capital,” Allison said.
“I think this [recapitalization] plan is far superior to the asset acquisition plan which I never believed made any sense at all,” said Richard Bove, a banking industry analyst with Landenburg Thalmann, in an interview with CNBC.
While many in the industry are wondering if the government's knee-jerk reaction of spending $700 billion to relieve banks of crippling mortgage loans will come to fruition (even at a fraction of the original purse), others in Washington are still crusading for explicit foreclosure prevention measures. For example, DSNews.com reported earlier today that House members Barney Frank (D-Massachusetts) and Maxine Waters (D-California) are calling for a nationwide mitigation movement, with FDIC Chairman Sheila Bair heading the charge.
Treasury Secretary Henry Paulson has said that the program to buy up troubled mortgage assets could take weeks to get up and running. Nevertheless, previously planned auctions to buy distressed securities will still proceed, David Nason, the Treasury's assistant secretary for financial institutions told Bloomberg Television. “We're still planning to go forward,” Nason said last week after the recapitalization roll-out.
When Federal Reserve Chairman Ben Bernanke testified before House Budget Committee members earlier this week, he referenced the mortgage purchase part of the government's plan as a bold step that would increase the liquidity of financial markets and improve the ability of financial institutions to raise capital from private sources. And when Bernanke spoke at the Economic Club of New York last Wednesday, he insisted that both parts of the rescue plan – recapitalization and mortgage purchases – are still on track and are “highly complementary.”
Moving Forward
Officials have been pressing ahead with preparations to buy or auction off the banking system’s toxic mortgages, regularly announcing the engagement of financial agents to assist in the implementation of its Troubled Asset Relief Program (TARP). Last week, Bank of New York Mellon was appointed custodian to manage the program. PricewaterhouseCoopers LLP and Ernst & Young were hired to help the Department with accounting and internal controls. Chicago-based EnnisKnupp and Associates will serve as investment adviser and New York-based Simpson, Thacher and Bartlett will serve as legal adviser for the “complex portfolio of troubled assets the Department will purchase,” the Treasury said in a press statement.
In terms of asset management for the program, the Treasury is still evaluating candidates. LandAmerica Financial Group announced last week that it had thrown its hat into the ring to provide whole loan asset management services. Reports have been circulating this week that Fannie Mae and Freddie Mac, both now government-run entities, have also bid on managing whole loans as well as mortgage securities acquired through TARP.
“[The mortgage purchase program is] meant to be a stimulus, not a complete solution,” said Bernanke, who according to a report in the Financial Times, favored direct capitalization over asset purchases long before Paulson came around to the idea.
A Timeline?
There are some $14 trillion worth of mortgages and mortgage-back securities outstanding in the United States, and with each passing day the percentage of “bad assets” grows. Back in August, banks' write-downs from the U.S. subprime crisis crossed the $500 billion mark. The International Monetary Fund (IMF) said earlier this month that it anticipates mortgage-related losses to reach $1.4 trillion this year.
In the midst of all this red ink, the market is still waiting for clarity on the auction procedures of the U.S. rescue plan. There is no firm timetable yet for the roll-out of the process, Kevin Heine, a spokesperson for Bank of New York Mellon told the Associated Press. And even after the auction process is set up, it will take more time for banks to see fresh capital through assets sales, namely because both the sellers and the Treasury and its agents will have to evaluate each individual asset to determine pricing.
In the opinion of Herman Moyse, chairman of the baking department at Louisana State University, “It looks like this [the asset purchase part of TARP] will fall by the wayside. Treasury couldn't convince economists the plan was feasible,” Moyse said in an Associated Press interview.
A Congressional source, working on a finance committee, told the Associated Press that it was politically difficult to admit mistakes and suggested that if there are no auctions by January 20, when a new administration takes over, the program will likely be dropped.
Funding for Acquisitions
Even the government's deviation from its original plan has deviated. Secretary Paulson has urged banks to use the $250 billion in recapitalization funding to start lending again to consumers and small businesses. According to the Treasury, this is key to ensuring the “rescue” reaches Main Street citizens and the job market doesn't take a hit.
Now though, it is reported that the Treasury has plans to not only stabilize the banking industry, but to reshape it. According to the New York Times, senior officials said the selection criteria for those receiving government capital includes banks looking to finance acquisitions.
John Allison, CEO of BB&T Corp. told The Wall Street Journal that his bank would “probably participate” in the plan, partially as a way to fund takeovers. “We think that there are going to be some acquisition opportunities, either now or in the near future, and this is a relatively inexpensive way to raise capital,” Allison said.
“I think this [recapitalization] plan is far superior to the asset acquisition plan which I never believed made any sense at all,” said Richard Bove, a banking industry analyst with Landenburg Thalmann, in an interview with CNBC.
While many in the industry are wondering if the government's knee-jerk reaction of spending $700 billion to relieve banks of crippling mortgage loans will come to fruition (even at a fraction of the original purse), others in Washington are still crusading for explicit foreclosure prevention measures. For example, DSNews.com reported earlier today that House members Barney Frank (D-Massachusetts) and Maxine Waters (D-California) are calling for a nationwide mitigation movement, with FDIC Chairman Sheila Bair heading the charge.
