Start Aggregating Already!

Feb. 4.09 | About: Financial Select (XLF)

From Bloomberg:

Top officials continued their series of meetings yesterday as they examine options for the next phase of the government’s financial-industry bailout. The biggest challenge is finding a way to value banks’ toxic assets so that the government can buy or insure them while providing some limit to taxpayer losses, Dugan said. An announcement on the strategy may come early next week, an administration aide said. [Emphasis added]

Maybe I’m missing something, but I don’t see why determining the right price the government should pay for a bank’s impaired assets ought to be so hard. The government will know where the banks have the assets marked, and will have its own estimate of net asset value, as well. (As Gary Townsend notes, the difference between those numbers can be large.) The “right” amount to pay will be somewhere in between those two prices.

John Dugan says he wants to limit taxpayer losses on the purchases, but (and I don’t mean to sound like a spendthrift) isn’t his concern about “taxpayer losses” a bit misplaced at the moment? Congress hasn’t shown a lot of concern about saving the taxpayers money as it considers the $800 billion-plus stimulus package. And Congress has already approved another $700 billion to recapitalize the banking system, with more apparently on the way. The government has set aside hundreds of billions more to backstop everything from commercial paper to corporate debt.

So, lately, saving money doesn’t seem to be at the top of anyone’s priority list. Given all this, who cares if the government overpays by, say, 10% for a bank’s impaired assets? The “overpayment” would serve to strengthen the selling bank’s balance sheet, which the government is trying to do, in any event. What’s more, the marked prices of most financial assets are so depressed by now (witness, for instance, the marks Merrill Lynch took in its fourth quarter), that the government is apt to turn a profit on the purchases even if it pays a material premium to those marks.

In the end, it will be impossible to determine what the exact “right” price for an impaired asset should be. Why try? Besides, most impaired assets have been marked down so severely that any transactions are apt to work in the government’s favor in any event. It’s more important, it seems to me, to get an aggregator bank up and running quickly than it is spending a lot of effort figuring out how to come up with the lowest possible purchase price. Better to come up with a price that’s merely reasonable, and get on with things.