Wednesday, March 25, 2009

The tabular banking-PPIP disconnect

Zero Hedge has a very interesting table from Goldman Sachs. Click to enlarge.

It shows Goldman’s estimates for how banks are carrying assets like commercial mortgages and consumer loans on their books. According to the table, they’re carrying those assets at ludicrously optimistic averages of between 89 per cent and 96 per cent of their original purchase price. Yeah. Right.

That preposterous positivity has huge implications for Tim Geithner’s toxic asset plan, or PPIP.

As Zero Hedge notes, if banks have expectations for bid levels north of 90 per cent then the PPIP is likely to be “a lot of hot air”.

At current government subsidies and market uncertainties, private investors may not be incentivised enough to bid $84, or even $50, for a loan pool valued at $100 by Citigroup et al. At the same time banks may not be willing to accept lower bids for their assets, as doing so will cause a ripple of further writedowns and losses. Participating in the PPIP is, like valuing banks’ assets, entirely at the institutions’ own scurrilous discretion. For now, at least.

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