Monday, September 22, 2008
More Thoughts on the Bailout
I am still having difficulty wrapping my head around the mechanics of the bailout. It will be a reverse auction, thus, instead of having multiple buyers and one seller there will be multiple sellers and one buyer. My first reaction was that it would be impossible to establish a "fair-market" value for the assets because they are too heterogeneous. A lot of concern right now centers around the fed overpaying for toxic assets, essentially being gamed. However, if you have many sellers and you are taking the lowest price it seems that the pricing could skew in the other direction. Consider the following scenario: Healthy Bank inc. (didn't involve itself much in the subprime frenzy, pays a fat dividend, and as a result is currently doing well relative to other financial firms), Marginal Bank Corp. (they have a significant amount of toxic assets and are under captialized but not grossly so; given a moderate capital infusion they should be able to weather the storm), Slimy Brothers Investments (they are neck deep in toxic shit). It would seem in such a scenario Slimy Brothers Investments has the greatest incentive to offload their assets onto the Fed, however, they also need a generous price to stay afloat. Whereas Marginal Bank Corp. and especially Healthy Bank inc. can afford to price their assets at a bargain basement value just to get them off their books.