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Getting the Banks to Sell

Posted by: Matthew Goldstein on March 23

There’s one big problem with the Obama administration’s plan for detoxifying the banking system: it won’t work if the banks remain unwilling to take write-downs on troubled loans and securities.

With the federal government providing big subsidies to buyers of toxic assets, finding private investors to participate in the new $1 trillion program shouldn’t be hard. But those buyers won’t have much to do, if the banks continue to refuse to sell assets at a steep discount.

There’s been justifiable criticism over the Federal Reserve’s decision in the initial AIG bailout to make whole banks like Goldman Sachs, Societe Generale and Merrill Lynch, all of which purchased credit default swaps on a collateralized debt obligations. But here’s the thing: some of those banks probably wouldn’t have sold those CDOs to a Fed-sponsored entity for anything less than their face value. And that would have greatly complicated the Fed’s rescue of AIG.

It’s not clear then why Treasury Secretary Tim Geithner believes the banks will be any more receptive now to taking haircuts on their debts. After all, Geithner was the architect of that initial AIG bailout during his stint as head of the NY Fed. Clearly, Geithner didn’t have any success getting the banks to face up to their losses in his former job.

Reader Comments


March 25, 2009 11:55 AM

The U.S. Treasury is a major stockholder to a lot of these banks. It's time they asked for a seat on the board, and put out a resolution forcing the sale.

Word Carr

March 26, 2009 03:54 PM

The word fraud comes to mind,as to why the banks might cooperate.If the fed can expost-facto a 90% tax rate they can increase the penalties for bank fraud. Do like is done for drug smugglers appoint a sub prime crime czar go after the criminals that did these fraud deals.Take all asset of any who took part in anyway.Allow those that rat out their cronies to have reduced sentence.Or the fraud loans can be reduced to the actual value in the market, sold to the fed, with the bank taking the "hair cut". The assets aren't toxic the loans are and they were made with the intent to defraud.

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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