From the head of the IMF...

From the IMF Survey Magazine (February 7, 2009), taken from a speech by the IMF's Managing Director, Dominque Strauss-Kahn:

"The United States and Western Europe could learn from the previous experience of countries like Korea, Malaysia, Thailand, and also Sweden, which set up public resolution agencies, and often recovered a lot of public money."

Sweden's "public resolution agency" nationalized those banks that couldn't make it, cleaned them up, then re-privatized them.

http://www.imf.org/external/pubs/ft/survey/so/2009/NEW020709A.htm

Oops

Treasury Secretary Geithner's long-awaited announcement didn't convince the markets, which see two major stumbling blocks. First, the money pledged isn't enough. Second, just how will the plan's different features be implemented? For example, what will bring private money into the public-private partnership part of the plan?

What's that asset worth? (continued)

The Congressional Oversight Panel, which was set up by Congress to monitor the use of TARP funds (aka, the bank bailout), released a report Last Friday. It concludes that the government overpaid for the equity it received in banks. The Oversight Panel "estimated the Bush Treasury Department spent US$254 billion to buy assets actually worth only $176 billion". That's a US$78 billion gift to stockholders.

What are those assets worth?

Is the question that no one knows what those toxic assets are worth or that they don't like the price?

Way back last July -- before things got ugly and before the government stepped in -- Merrill Lynch sold US$31 billion in securities on its books to Lone Star, a group of private quity funds. Lone Star paid US$0.22 on the dollar. There was more to the deal. Lone Star had to make a down payment equal to 25% of the purchase price but had the right to walk away from the deal if it turned out that the securities were worth less than the agreed price. If Lone Star walked, it would forfeit only the down payment.

Values in the financial sector

When Bank of America and Merrill Lynch inked their deal back in September, BofA agreed to pay US$50 billion in stock for Merrill. The market value of the combined companies then was US$176 billion. Now, it's about US$39 billion. And this, after the US Treasury committed US$20 billion more in capital to BofA a few weeks ago.

Treasury Secretary Geithner should announce the new Administration's strategy for attacking the financial crisis in a few days. The announcement was to be made tomorrow, Monday, February 9, but it looks like it has been postponed until the 10th. It's a very sticky political problem and, as events have demonstrated, there's no guarantee it will end the carnage.

How low can they go?

November auto sales were bad, December's were worse, and January's were just plain horrible.
"The heads of sales analysis for both GM and Ford said that the total industry will end with seasonally-adjusted annual sales rate, or SAAR, below the 10 million mark for the first time in more than 26 years. GM's Mike DiGiovanni said that January will mark the first month on record that auto sales in the United States trailed sales in China."

For comparison's sake, sales between 2005 and 2007 were running about 17 million new vehicles a year.

http://money.cnn.com/2009/02/03/news/companies/auto_sales/index.htm?postversion=2009020314

What is that asset worth?

An example of how an asset might be valued...

"The financial institution that owns the [mortgage backed] bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors."

So, which price should the government pay (or guarantee) if it opts to buy (or guarantee) loans from banks?

Source of quote: http://www.nytimes.com/2009/02/02/business/economy/02value.html?th&emc=th