Quality of toxic assets

There has been some optimism that the mortgage assets held by the banks may not be as bad as they are made out to be. That would be a great plus for the bank rescue package that Geithner is, finally, going to unveil in the next few days, because his plan will try to find buyers for those assets. If willing buyers come forward, even with the large government subsidies that the plan makes available, that will at least establish market prices for assets that have been sitting there frozen. Once these assets are priced, the financial condition of the banks that hold them will become known, and presumably the assets themselves will attract enough buyers to get them off the banks' books.

But so far no one has any good idea just how bad those loans are.

Here is an examination by Fitch, one of the rating agencies, of a small sample of subprime loans ; it is quite discouraging. For example, 69% of the loans were made with "Low/No Documents" -- proof of income, credit history, etc. "There was the appearance of fraud or misrepresentation in almost every file." If this sample is at all representative, these assets really are of extremely low quality (see the table of problems on pp. 4-5). That would mean that they will be bought only very deep discounts, and most of that will be taxpayer money.

Byron