Today, Neel Kashkari, who oversees the Troubled Asset Relief Program (TARP), appeared before Congress. While he was brought in to discuss oversight of the program (or the lack thereof), Kashkari also provided some details about the public-private investment fund that Treasury Secretary Timothy Geithner is counting on to relieve banks of their toxic assets.
Last week, we expressed some concern that Geithner’s plan is based on Goldman Sachs’ word that the assets are not relatively worthless, but are merely depressed by market conditions. At the hearing, Kashkari confirmed that private investors have given Geithner this impression:
Q: What kind of feedback are you getting from the private sector side? Are they buying into this approach that you’re floating out there?
Kashkari: They are. In fact, we had received inbound, unsolicited proposals from people in the private sector saying we have capital on the sidelines, we want to go after these assets. [...] By marrying government capital, taxpayer capital, with private sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.
These “unsolicited proposals” seem to be what Geithner based his plan on, as it revolves around the belief that, somewhere down the line, most toxic assets will be worth something. This is a tough concept to sell, considering that analysts feel the assets are truly worth, at best, 35-40 cents on the dollar, with a lot worth far less.
And if Geithner is wrong and most of the assets are relatively worthless, savvy investors will be able to cherry-pick good deals, while leaving most of the junk untouched. If they find a truly undervalued asset, they’ll go after it, while the rest of the assets will just sit. As Tim Duy noted, for Geithner, “there are no bad assets. Only misunderstood assets.” But if the assets are truly junk, then Geithner’s plan becomes an expensive gift to investors able to spot the few good deals amongst the garbage.
At Baseline Scenario, James Kwak wrote that the idea that many assets will naturally return to higher values is “wishful thinking of the kind that has hampered responses to this crisis from the beginning. They could; but they could just as well not.” And if they don’t, then taxpayers are stuck with the bill, while the investors get off scot-free.