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Gov't to take over bad debt?
I heard it briefly yesterday and this morning, but could not take time to research it. So, I am throwing my hat in the ring in hopes of understanding it better. I am trying to look at this objectively and hope someone can offer some light on why this is a good thing and not just a band-aid.
http://www.cnbc.com/id/26779080
The plan would have two parts. The largest part would be the purchase of private-label (those underwritten by Wall Street) mortgages by some as-yet unnamed vehicle. Financing would occur through the sale of treasuries, the official said. That part of the plan would require congressional approval. The idea is to hold the securities to maturity. The average mortgage has a life of about 7 years.
A second part of the plan would involve the purchase by Treasury of additional government-backed (Fannie Mae and Freddie Mac) under a plan it announced several weeks ago to rescue the two government-sponsored entities. Back then, it said it would purchase $5 billion initially. The idea is to ramp up those purchases more quickly. It does not require approval by Congress.
The administration is contemplating hiring a private investment manager to run the mortgage vehicle. Yet to be worked out with Congress are the amount of mortgage securities the government would buy and from whom the government would accept them.
The price to be set on those purchases and the process for setting it was also unknown.
I am all for private companies being more in control, but this sounds a little to, I don't know and do not want to sound too conspiracy-theoryish-skull and bones to me. Who will choose this firm? Will they relinquish this 'power' once the market has stabilized? Etc. I am conflicted here since my conservative side is battling my tin-foil hat side.
Re: Gov't to take over bad debt?
I think the government still has to work out the details but someone in Washington will pick the firm that will manage this mortgage vehicle that will be created. From the articles that I have read, this asset management firm will only have whatever power Congress assigns to it.
However, the mortgage securities themselves will have an average life of 7 years. The asset management firm (I work for one, btw) will make sure that it will recover as much money as possible from these risky loans. It will probably have to do workouts of these mortgages for the majority of the time they manage these securities for the government.
My bosses don't even think this will get approved by Congress in the end. There are so many issues to consider, like what price will the government pay to remove these assets from the balance sheets of these financial institutions? The companies themselves can't just literally hand them over b/c that would mean they would also have to write off the amount of the bond to 0. That, in turn, would defeat the purpose of this whole "bailout" by the government.
I believe there will be many more tumultuous weeks ahead in Wall Street, especially when you add 3rd quarter reporting into the mix.