Readers may recall that we were early to deride the Paulson Master Liquidity Enhancement Conduit, and its different in name, same in intent and basic form successors.
Every one of these had the same premise: find a way for banks to offload their dreck. But the only way the banks would do that voluntarily was to sell it at the simply ridiculous prices at which they held it on their books. And as the crisis has progressed, the gap between optimistic marks and real world prices has grown only greater.
The cover story has always been. "Oooh, this stuff is really hard to value and doesn't trade." That has been true only for an itty bitty subset of the damaged goods. The vast majority of it is readily salable. The banks just don't like the prices.
We have said from the first sighting of this idea that it works only if the banks fetch at least the carrying value of the rubbish on their books. Even that isn't a clear boon. Many banks are now plenty liquid, so as long as they can preserve the fantasy marks for the nuclear waste, they have no compelling reason to clear up the bad assets. They'd need to realize at least carrying value prices so as not to lower their equity levels (a loss on sale is a direct hit to their book value), or better yet above, to bolster their capital.
So this has every and always been an indirect and opaque subsidy to the banks. We have said it would never get done unless the powers that be found a way to manufacture at least carrying value sales prices for the dreck, since those sales prices would serve as market prices. If banks took a loss on any sales, they'd have to mark similar paper down too.
The New York Times after what, more than 18 months of the officialdom trying to wedge this square peg into a round hole, says in a pretty straightforward fashion for the MSM that the premise is flawed:
The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.
In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
Yves here. Of course, this being America, we still have to give credence to official face-saving:
In a statement, the F.D.I.C. acknowledged that it had not been able to get banks interested in its so-called Legacy Loans Program....
F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.
“Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” said Sheila C. Bair, chairwoman of the F.D.I.C.
Yves here, With commercial real estate losses expected to mount drastically and residential real estate and credit card losses not past their peak? If you believe this, I have a bridge I'd like to sell you. Back to the story:
But some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans.
“What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”