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Friday, September 19, 2008

Bailout: Few Details Yet

by Calculated Risk on 9/19/2008 07:36:00 PM

From the WSJ: U.S. Bailout Plan Calms Markets, But Struggle Looms Over Details

The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid.

However, the government may find itself in a quandary: Does it pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar? The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets. The Treasury department ... hasn't commented on specifics about the plan...
One of the keys to moving forward is to bring transparency to the assets, and to mark them down appropriately. As the article notes, this will mean the banks will need to recapitalize with substantial dilution for shareholders.

Some details from the Lehman bankruptcy suggests asset prices are falling quickly:
On Friday, there were a number of changes to the terms of the sale to Barclays. The originally agreed total sale price of $1.75 billion could be lowered by $100 million to $200 million. The British bank will take on $47.4 billion in assets and $45.5 billion in liabilities, instead of $72 billion in assets and $68 billion in liabilities. The drop in the assets reflects the decline in the value of Lehman securities during the past week.

The purchase price was lowered because of lower appraisals of real estate in New Jersey.
The plan needs to bring transparency for these assets.

Also there are many competing proposals - I've received many emails with proposed plans - and it appears this plan is still being worked out.