Why would I want to buy TOXIC assets?

[Bolimomo]

Per today's news headline:

The surge in the markets today was attributed to Treasury Secretary Timothy Geithner indicating that they want private investors to help buy up banks toxic assets


I have a question. Geithner wants private investors to buy up banks' TOXIC assets. Knowing that they are TOXIC, why would I want to buy it? What's in it for me? Isn't that like he is asking me to take a cyanide pill?

[Albert0373]

This was posted by omortezaei on a different forum:

Here's how the plan would work
Step One: A bank decides what pool of assets they would like to sell.
Step Two: After determining that it would be willing to leverage the pool, the FDIC will conduct an auction. For instance, mortgages with $100 face value would be bought for $84.
Step Three: Of the $84, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step Four: The Treasury would then provide 50% of the equity financing. In this example, Treasury would invest $6 and the private investor contributing $6.
Step Five: The private investor would manage the servicing of the asset pool using managers approved by the FDIC.

[Horsefish]

Somebody like BX will probably come out with a fund of toxic assets that a retail investor can buy into. Those will be mortgages that they bought for 40 to 50 cents on the dollar. About 70% of those loans will be performing loans and at some time in the future, when markets return to a more normal status, those loans will be trading at 80 to 85 cents on the dollar. Think of them like bonds. There is potential for significant capital gain.

[freakscene]

Per today's news headline:

The surge in the markets today was attributed to Treasury Secretary Timothy Geithner indicating that they want private investors to help buy up banks toxic assets


I have a question. Geithner wants private investors to buy up banks' TOXIC assets. Knowing that they are TOXIC, why would I want to buy it? What's in it for me? Isn't that like he is asking me to take a cyanide pill?

Well, you would be leveraging some of your money, with Fed money (match and *loan*), in the hopes you are buying the assets lower than what they will be worth....................someday

If you are right, you gain handsome profits.
If you are wrong, the bigger loser is the tax payers leveraged money. you only lose your portion, not the entire enchilada.


http://www.zacks.com/stock/news/18441/Simplifying+the+Toxic+Asset+Plan

good description of the 2 scenarios.

[cramerica1972]

the credit market is being used by the banks as a tool 4 the blackmailing of taxpayers.

[Mastajab]

OK $100 face value bought for $84 where the FDIC pays the most how would you profit greatly? Wouldn't the gov. profit? Or in reality this $100 mortgage isn't worth the $84 inflated government price, so who takes that loss? Seems like a strange undercover bailout, b/c the FDIC will prolly not get its $72 back...:confused:

[Bolimomo]

Thanks for the explanations guys. It makes a little more sense now. It is a matter of taking higher risks for a higher return.

The term "Toxic" has a very negative connotation. You think the government would have some marketing people to help them label these things better.

I mean... if I sell something that is called "cyan-aide" instead of "cool-aide" you think anybody would drink it?

[XOM]

Looks like the main problem would be at step two; who knows what these auctions will bring? Wall Street being the pack of vultures that it is will certainly try to buy that $100 mortgage for $30. I know the above was just an example but I don't see investors being so generous especially with some economists predicting another 20% drop in home prices before a painfully slow turnaround. Time is of course money and there is interest to reckon with so who wants to wait that long unless the deals are incredibly cheap?

I don't see how foreclosed properties in dire disrepair are being addressed in this plan either. Who's going to buy those? How does the investor know he's not being suckered into those? How does the bank even know what it has in those myriad packages to begin with? Wanna buy a few hundred properties in Detroit?

I think that once the realization of the many problems involved in removing the most undesirable assets from the bank balance sheets becomes obvious, the markets will dish out some severe pain in the financials. Smart investors will want to pick up waterfront property in Florida, Texas, California, etc and the banks I'm sure aren't going to want to offer those up unless they are more stupid than I have already deemed them to be.

But then again I miscalculated yesterday's rally so what do I know anyway.

[Gordo]

Here is an interesting perspective from a Bloomberg interview with Krugman.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ardgK6NSMTUk

[XOM]

Obama wants to seize companies that would cause serious economic problems if they failed, one would think that this will scare some long term holders of AIG, C, BAC etc. It all smells like bullshit socialism to me and naturally the current administration will use the same tactic to gain the approval of congress that Bush did to get the Patriot Act passed; we must act now, we cannot delay, blah, blah, yada, yada.

[cramerica1972]

America has been socialist for over 300 years.

[freakscene]

so we may as well take the next step towards full state control - aka communism, under the dictator now in charge?


XOM's post was spot on

[Mastajab]

But the question is, can Obama do this all in 4 years?

[cramerica1972]

so we may as well take the next step towards full state control - aka communism, under the dictator now in charge?


XOM's post was spot on
SOCIALISM exist ln america already,always has.

[freakscene]

why do you keep repeating that, as if to almost apologize for the communist policies of obama?

one can not support the governing philosophies of Jefferson, Madison, Washington and support hugo obama.

they are polar opposites

[cramerica1972]

i dont support the slave owners like gw,tj and others.