tag:blogger.com,1999:blog-4528146969570948529.post3531998689651864590..comments2024-03-21T22:51:03.977-04:00Comments on Models & Agents: Ben's still dancing...Chevellehttp://www.blogger.com/profile/10769905202655777736noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-4528146969570948529.post-88027888944418397872008-12-15T21:55:00.000-05:002008-12-15T21:55:00.000-05:00Matt, I’m glad to see you’ve been reading M&A!...Matt, I’m glad to see you’ve been reading M&A!… Or maybe this is more “great minds think alike”, in which case you can find a post with similar concerns here (http://modelsagents.blogspot.com/2008/09/ask-not-what-you-can-do-for-your.html). <BR/><BR/>These are not easy questions. But here are a few thoughts. <BR/><BR/>On the numbers, true, this is going to be a moving target so long as the “real” economy is still looking for a bottom. If I had to guess, a good starting point would be the banks’ so-called “level 3” assets—assets which are valued in banks’ balance sheets not based on the price in an active market, but based on the banks’ own valuations. The FT reported recently that, for the big financial firms, these stood at $610bn in Q3 (http://www.ft.com/cms/s/0/0627def0-c6f8-11dd-97a5-000077b07658.html?dbk). The numbers I’ve seen elsewhere are larger (by about a factor of two), but they include smaller banks, many of which are already in negative equity territory.<BR/><BR/>On the price to pay: Two broad options, as you suggest: <BR/>High price (in which case lower needs for capital refill); or low price (in which case a big hole in the banks’ books and a bigger need for a capital refill). From a fiscal/taxpayer perspective, once “you” have decided that the government will run the show, ie buy the assets AND recapitalize, it doesn’t matter which one you pick: The government bears the total cost either way. Personally, I would prefer the latter: It does less to distort the price discovery process, and it gives a better upside to the government, both when it comes to the assets purchased and the equity invested in the banks.<BR/><BR/>Finally: The government will have to draw a line on which banks to save and which ones will have to go. Resources are limited. Only that I hope that next time they let a bank fail, they are much better prepared than they were for Lehmans!Chevellehttps://www.blogger.com/profile/10769905202655777736noreply@blogger.comtag:blogger.com,1999:blog-4528146969570948529.post-87044240440998221762008-12-10T19:18:00.000-05:002008-12-10T19:18:00.000-05:00Since you sound like an intelligent proponent of t...Since you sound like an intelligent proponent of the "buy toxic assets" crowd, let me ask you an honest question, or actually two: how many are there and what should we pay for them? I'm concerned about the first question because it seems to me we've got a moving target - changing conditions in the housing market equal changing toxicity in the derivative assets. This is probably also becoming true of credit card, auto loan, college loan, and other debt, and the derivatives derived from it. So how much do we buy, and how do we know when we've bought enough? The second issue, price, seems to me a problem from a bunch of different standpoints. First, efficiency - if Treasury is the only buyer in the market, how do you find a market price? If you reverse auction, you'll end up fielding offers at prices at which the bank making the offer won't be insolvent - why would they go below that? That means healthier banks will offer the lowest prices, and sicker banks will look for some other kind of bail-out or go under. The resulting shake-out may have nothing to do with which banks are more or less important to the economy, so it seems to me an extremely inefficient way to get credit flowing. However, if you DON'T reverse auction, you'll have to set arbitrary prices (no market plus no auction means no intrinsically meaningful prices). How then, do you avoid the price setting process becoming politicized? One price will wipe out business as usual, a lower price will also wipe out equity holders, a lower one uncollateralized debt holders, and so on down the line. Who does the government close the door on? Isn't the answer, whoever has the pull? Also, assuming that the government isn't in a position to buy ALL toxic debt, how do you create a price signal for the rest of the market? Private investors will be aware of the process - what incentive will they have for accepting the government price as a given? I'd appreciate your comments on these issues.<BR/><BR/>Thanks,<BR/><BR/>MattMatt Chanoffhttps://www.blogger.com/profile/17018472648569489856noreply@blogger.comtag:blogger.com,1999:blog-4528146969570948529.post-72194197298767101272008-12-08T10:54:00.000-05:002008-12-08T10:54:00.000-05:00Have you recreated Bernanke / Gertler / Gilcrest's...Have you recreated Bernanke / Gertler / Gilcrest's models? If so I'ld love to see a post. Especially if it includes CDSs / CDOs / SIVs. I believe the later explains where thier analysis falls apart - which explains their policy moves. <BR/><BR/>The models would have to include a class of investment instruments that require capital infusions proportional to deviations from historical growth. <BR/><BR/>Additionallly, they would have to include the amount these instruments were leveraged PLUS the expected principal / interest payments required by the asset holders.Anonymousnoreply@blogger.com