Is Buying Toxic Assets The Answer?
MICHEL MARTIN, host:
I'm Michel Martin, and this is TELL ME MORE from NPR News. Coming up: Oakland is searching for answers after four police officers are fatally shot by a single gunman over the weekend. We'll get an update in just a few minutes.
But first, it's time for our regular visit with our Money Coach. Some good news for a change about the stock market. It surged almost 500 points on Monday, after the Obama administration revealed details of it's plan to help banks clear toxic assets from their books. Under the new Public-Private Investment plan, the government will offer billions in loan guarantees and incentives to investors who buy troubled assets from banks. It's a move that many hope will get banks to start lending money again and help the economy out of the recession. Joining us to talk more about this is TELL ME MORE Money Coach, our personal finance expert Alvin Hall. Welcome back.
ALVIN HALL: Glad to be here. I'm in London today, Michel.
MARTIN: I know. We'll try not to express our rage and envy, since none of us can afford to go anywhere. But first of all, we keep hearing this phrase toxic assets. What's a toxic asset? It's an awfully vivid phrase. I have this sort of image of sludge, you know, wafting through the hallways of these, you know, these banks.
HALL: Oh, yes, nuclear waste. Exactly.
MARTIN: What are they?
HALL: Toxic assets, also called legacy assets, are really the products from all of the mortgages that were bought up and pooled together by the investment banks. So when they bought up all these subprime mortgages and put them into the pool, they sold off various slices of them to banks, to pension funds, to other institutions around the world. Banks often held these assets on their books. As people began to default on their mortgages or simply couldn't make the mortgage payments, the value of the mortgage backing these assets dropped. So the bank had bought them at one value. Now these assets have a completely different value, and no one wants to buy them.
In short, they lack liquidity. Hence, they're toxic, because they're going down in value. No one can determine the value of them, and the government - the banks are left holding them.
MARTIN: So one alternative is for the government to take over all of these assets? From the standpoint of the taxpayers, why is this plan better? Or why does the administration think it's better?
HALL: Well, I think the government wants to try to clean up the banks' books. As long as these toxic sludge assets - and sludge is really a good image, Michel. It's sitting on the banks' books. Nobody wants to go near Citibank, Bank of America, or any of these entities because they're afraid that tomorrow they could go poof and be bankrupt, just like that, or go out of business. So the government believes that by removing all of these assets, the banks' balance sheets will look better, cleaner, free of problems, and maybe the banks themselves - having been unburdened of these assets - will then be willing to loan money to other investors in the marketplace.
MARTIN: That's - oh, I understand that part. But what I'm asking you as what -there are various ways to structure this kind of arrangement. One is for - have the government to takeover the assets completely. The other is for what they're doing now, which is this kind of public and private partnership.
MARTIN: And so one of the things I'm curious about is why would private investors want to participate? They have no protections. These assets just disappear.
HALL: They do have a little protection. The one reason the private investors want to do this is for the upside. If the government is able to clean up - help clean up these toxic assets and create a secondary trading market through this auction facility they're just creating, then the private investors will share in the gain. But by private investors, Michel, we're not talking about people like you and me. We're talking about institutions like hedge funds, private equity and pension funds who can actually buy and sell these type of assets. That is the advantage for them.
MARTIN: And what's the advantage for the taxpayers?
HALL: The advantage for the taxpayers is that they're putting up less money. The risk is being shared by both the government and by these private entities up to a certain point.
MARTIN: And (unintelligible) a little of the upside?
HALL: The upside is that the government also shares in the benefits if the government is able to make it work.
MARTIN: How will we know if this plan is working? We've already seen this rally on Wall Street. And first of all, do you buy the fact that the rally was, in part - that yesterday's rally was, in part, motivated by this plan? And when will we know overall if it's working?
HALL: I do think yesterday's rally and the rallies leading up to it were definitely motivated by this plan. I think that people wanted to hear some good news, and I think anything, when Tim Geithner all of a sudden becomes concrete in what he's talking about, the market will rally because all of a sudden we have something to hold onto. How do we know it will work? That's so far down the road. I think the first indication will be when they attempt to auction off these securities. The toxic assets right now have no value or can't - the value cannot be determined.
So the government plans to hold an open auction in which buyers and sellers, the institutions will bid for these products and therefore establish a bottom-line price. If that happens and the auction is successful we'll - able get a sense of what these assets are worth in theory, and the government will then be able to see if the value is likely to go up or go down.
MARTIN: When will we know, though, on the ground, as it were, where we are, whether this is working? I mean, when will people - businesses that have been crippled by the credit freeze expect to get some relief? When will people who are trying to buy homes expect to get some relief? When will we - when is it possible that we could actually see some effects in loosening up the credit market?
HALL: That's a great question. On the business side, when they start having more credit from the banks, when the credit lines are made available and when they see that their revenue streams start to stabilize. Right now, all businesses are watching their revenues go down, down, down. They keep wondering, when is this going to hit the bottom? When is it going to flatten out? As soon as it appears to flatten out, I think businesses will feel more comfortable and banks will feel more comfortable lending to them. For the homebuyers, I think it will really depend upon how Obama's plan to stabilize housing prices becomes effective over time.
If by buying up all these mortgages and helping people to refinance and extend their mortgages sort of sets a bottom for prices dropping, then we'll feel more comfortable with that. That's where we'll see this on the ground, both in the pockets of the businesses where we work and the in value of our own homes.
MARTIN: That's our personal finance expert, Alvin Hall. He joined us from our bureau in London. So Alvin, are you feeling encouraged?
HALL: I'm feeling more encouraged than I have in the past. I thought Geithner handled this very well. And I think the three prongs of the program - the government extending credit to help finance this, they're holding the auction and bringing in some private investors to help share in the risks so that we the taxpayers don't have to eat the entire mistake of all of these institutions, those are good signs.
MARTIN: Well, that's encouraging, because you've been a critic. It has to be said. Alvin Hall, thank you from London.
HALL: You're welcome.
MARTIN: As the president works to solve the nation's financial crises, many of us are struggling to balance our own domestic budgets, and that means holding onto jobs, even as millions of Americans suffer layoffs. So what should you do if you still have a job but are worried that the next layoff could be you? We'd like to hear your thoughts. What are you doing to make sure you're prepared for a layoff? Are you already searching for a new job? Or do you have questions about how to kind of, sort of pursue other options, you know, just in case? This week on the program, we'll get advice from our Culture Coach. So if you have questions, you can call our comment line at 202-842-3522. Again, that's 202-842-3522. Please remember to tell us your name. Or can always log onto our Web site. Just go to npr.org and click on TELL ME MORE.