"What If Geithner Threw A Toxic Asset Party And No Banks Came?"
Time’s Massimo Calabresi reports that “for all the bailout money they’ve received, some of America’s biggest banks are still unwilling to sell many of the toxic assets clogging their balance sheets”:
The prices being offered, they say, are simply too low, and neither massive government subsidies for buyers nor encouragement from President Obama has thus far been sufficient to change their minds. […] [A]fter politely voicing support for the programs in principle, the bankers said that in practice, the prices for the toxic assets were still going to be too low when the programs are launched in coming months.
JP Morgan Chase CEO Jamie Dimon has confirmed that his bank has no intention of participating in Treasury Secretary Timothy Geithner’s plan for clearing away toxic assets. “We don’t need it. We have our own assets. If we want to sell them, we’ll sell them,” he said. “If we want to buy them, we’ll buy them.”
This highlights one of the problems with the Geithner plan: the banks don’t want to take a hit on the assets, and therefore are only willing to sell at an inflated price. But an inflated price means that taxpayers are getting the short end of the stick.
More importantly, though, it shows the trouble with the administration explicitly stating that all banks will pass their stress tests, while at the same time promising that taxpayers will provide “exceptional assistance” to a bank if necessary.
If nothing else, some miserable tests would have given regulators “ammunition” to “force banks to shore up their balance sheets by selling assets, even at prices lower than the bankers would like,” or have provided the justification for nationalizing a hopelessly insolvent bank. But with its chosen message, the administration has given the banks no incentive to sell their toxic assets for anything other than an inflated price, because they’re operating with what amounts to a government guarantee.
The International Monetary Fund has estimated that there are $3.1 trillion in U.S.-originated toxic assets stuck in the financial system. And as economics professor Sung Won Sohn pointed out, the failure to address the toxic asset problem in Japan contributed to that country’s lost economic decade, as banks kept bad loans on their books, preventing them from resuming normal lending.
So either taxpayers take a hit by overpaying for assets, the government simply pumps more capital into the banks, or we remain stuck with a zombie banking system. In each case, the banks will have won out over the public interest.