Amid Bailout, Value Of Assets Debated

The Treasury Department's bailout plan will turn on how it values billions of dollars of securities backed by troubled subprime mortgages. There is little agreement on how to value those assets. How the question is resolved will determine whether the plan succeeds.

MELISSA BLOCK, host:

If and when the bailout passes, the U.S. government will have to do something that nobody has figured out how to do. They'll have to put a dollar value on financial instruments that many on Wall Street call radioactive toxic waste. Well, NPR's Adam Davidson is here to help us understand that challenge. And, Adam, first of all, we're talking about such huge numbers overall, $700 billion, maybe more. How much dothe exact amounts for individual assets really matter?

ADAM DAVIDSON: I think it matters a lot. We're talking about the U.S. taking this extraordinary step to save our financial system. If they price these assets that they're buying from crippled banks, if they price those assets too low, then they're giving too little money to the banks to save them. They don't solve the problem. On the other hand, if the U.S. pays too much for each asset, then we are talking about a level of subsidy from the U.S. taxpayer to major financial institutions that's unimaginable. So, getting it somewhere between too low and too high seems politically and financially crucial.

BLOCK: So, if they're trying to figure out value for these individual assets, how do they do it, these toxic assets that you're talking about?

DAVIDSON: The problem is nobody is buying and selling them, virtually nobody. There's no market. And this the thing with capitalism. What's an apple worth? What's an hour with a therapist worth? It's worth what people are, you know, where supply and demand meet. If there's no demand, if no one's willing to pay anything, there is no price. The market does not come up with a price. It's just a question mark.

BLOCK: Well, in the absence of a market, as you're describing it now, how are these assets valued right now?

DAVIDSON: Every bank makes up a number on its own. That might sound ridiculous, that might sound like, no, that can't possibly be it. That is what is happening. Every bank makes up a number. And what we see is for the exact same identical asset one bank might value the asset at 80 cents on the dollar, meaning it's only lost 20 percent of its value. Another bank might value it at 8 cents on the dollar. It's lost 92 percent of its value. Everyone's making it up every day. They're making it up as they go along.

BLOCK: Well, looking forward, somebody, or probably a lot of people, are going to have to figure out how to establish a value for these radioactive assets that you're describing. What are they going to do? How do they do that?

DAVIDSON: The current leading contender is something called a reverse auction, where, you know, in a regular auction the prices keep going up and the high bidder gets to buy, you know, gets the painting by Monet, or whatever it is. In a reverse auction, basically the U.S. government says you all bid, all you banks. You have these toxic assets. You bid lower and lower and lower. We'll buy from the lowest seller, whoever's willing to part with these at the lowest price.

There's also an idea that the U.S. government will subtly, or not so subtly, pressure these banks into feeling that this is their last chance at a good deal, that maybe they think the asset is worth, say, 60 cents on the dollar, but if they don't take the 30 cents on the dollar, just to make up a number, they're not going to get anything down the road.

BLOCK: And again as you pointed out earlier, if the price is too low, that could backfire as well.

DAVIDSON: If the price is too low, if the banks feel pressured or forced into accepting a price that's below what is reasonable, you'll probably see a lot of banks collapsing. But if the price is too high, I think politically you're talking about a really untenable situation in which the very people who caused the crisis profit the most.

BLOCK: More good news from you, Adam. Thanks a lot.

DAVIDSON: Always happy to help.

BLOCK: NPR's Adam Davidson in New York. And you can find out much more about this financial crisis at our "Planet Money" blog and podcast. It's at npr.org/money.

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