Gabriel F. Burczyk
What about the toxic bank waste?
Many believe that the future growth of our economy is dependent on the healing of our banking system. A big portion of these believers state that the banks’ bad loans (toxic waste) are at the center of this problem and a solution must come in order to move the economy forward.
Tim Geithner, Secretary of the Treasury, spoke many weeks ago about a plan to get the private investor involved. Little else has been said about his plan.
I have a nugget that I believe may indicate the beginnings of this healing process for the toxic waste.
The banks’ toxic assets are being marked to market. Assume Bank A has a pool of debt worth .75 cents on the dollar, and another very similar pool at Bank B is worth .75 cents on the dollar. Bank A sells 10% of their pool for .35 cents on the dollar. Next, mark-to-market will force both banks to mark those pools down to .35 cents on the dollar. I have simplified the above; it is a little more complicated. It would be as if a 4th grader in a class of 20 gets an “F” then the whole class gets an “F.” This does not seem fair.
The workings of mark-to-market are going to be discussed for many years in the future. My point is not on this issue but the following.
The FDIC recently sold a 1.5 billion pool of toxic loans. The big news is that it wasn’t 2 or 3 firms that bid on the pool, but 18 groups who put up 30 bids. If this is starting to happen, and small pools are being put out to bid with so many potential bidders out there, it is fair to say that better pricing of these pools is being established. So if banks can get a better price on these pools, they may also be able to sell at higher prices or have a net big positive impact on their balance sheets.
This could be an early indicator of good things to come.
As investors we need to pay attention to these positive headlines, and not ones that highlight the impact of the economy falling off a cliff like we did last quarter. The headlines mentioning current and future negative employment rates and reduced corporate earnings is the impact of things past. This news that the credit markets and toxic waste problems are slowly being improved will help guide us into the future.
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