A Public-Private Partnership?


Dave is a part-time blogger that writes about whatever suits him at the time.

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2 Responses

  1. God do I love having an economics guy on staff. Thanks Dave, you’ve started some wheels turning in this cobweb strewn attic!Report

  2. jake says:

    Several problems:

    1) Why would we guarantee 5 to 15% returns for private investors? It would be more efficient to just invest directly in the crap assets and take our chances.
    2) What would be the macroeconomic ramifications of the government guaranteeing a 5% return? If the government were to guarantee 5%, why on earth would anyone buy a treasury with a 4% coupon (10 year note is at 2.5!!!)? And if the government were to GUARANTEE a 5% return, you would have every private equity firm levering up and gobbling up the crappiest assets around knowing that they will be assured 5%.

    3) What of the political implications of the government handing over a check for $200MM to the KKR or Blackstone to “make them whole,” while kids go without health insurance?

    4) The problem is larger than the banks are letting on. The banks have written bah bah billions of bond default insurance in the form of credit default swaps, hidden in special purpose vehicles off the banks’ balance sheets. The notional value of these credit default swaps exceeds the value of the assets, acc. to some estimates, by ten-fold. In other words, you can buy all the crap assets you want, but the banks will still be on the hook for default insurance that, if triggered, would wipe them out… maybe 10 times over. Of course, you could encourage the holders of default insurance to close out their position, but that would cost the government as well.

    The only solution is for the banks to get real about the valuations of their holdings of crap mortgage backed securities. The last large-scale purchase of MBS was a few months ago (by lonestar) at 20 cents on the dollar. Banks are currently valuing these assets far higher by using exceptions to mark to market accounting. Banks should be forced to value their crap assets at 20 cents on the dollar or lower. This would wipe out shareholders, and likely bondholders, but who cares… yes, pension funds, poor widows, blah blah blah, but i have no appetite to pay for any more baby boomer screw ups. our generation is already forced to pay for trillions of dollars in debt b/c of the bad decisions of the boomers… who i have renamed, in the spirit of tom brokaw, the “Worst Generation.”

    Anyway, the banks would give bondholders their worthless stock, thereby shedding debt. This solution has its own problems, but it seems more equitable to wipe out those people who make bad investments.Report