Saturday, March 14, 2009

Toxic Assets

Newsie after newsie tells me that the US banking system would be OK if only those toxic assets would some how go away. Presumably they are talking about those securities backed by mortgages that are now in foreclosure, the underwater mortgages that will likely default in a few weeks, and the bond insurance ("credit default swaps") issued on the bonds of Lehman, Bear Stearns and other losers.
"Somehow go away" means Uncle Sam takes this dodgy paper and gives the banks some amount of cash for the privilege.
Why do the banks care so much? Probably 'cause of the "credit default swaps". These are legally enforceable contracts. In the event of some company (Citi? GE? GM? Plenty-of-Others) goes bankrupt, the proud owner of the "credit default swap" has to pay off the bond holder, the full face value of the defaulted bond. These deals looked really good a couple of years ago when the banks were stuck on stupid, and they look like instant bankruptcy bombs now. Some big outfit is going to go broke, and when that happens the "credit default swaps" will take down the holders. Where as if the banks could get good old Uncle Sam to take these things they are home free. When the big bankruptcy happens Uncle has the money to pay them off, or Uncle has good lawyers to weasel out of them, or Uncle runs the courts in which the creditors have to sue. One way or another, Uncle, using our tax money, can cope, whereas the tottering banks cannot. This is why bank stocks have dropped into in dollar a share (next thing to worthless) area.
Question for Obama. Is Uncle gonna take this loss, or is it cheaper to let the stupider banks take the fall?

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