Bailout "plan" resolves nothing

Financial institutions have stubbornly refused to recognize trillions of dollars in losses on distressed assets. Hedge funds have offered to buy those assets, but almost always at a price far below what financial institutions are willing to sell for because: 1) banks think the government will pay them more; and, 2) many banks would be officially insolvent if they recognized their losses to date.

Yesterday’s “plan” does not provide details on how much of the bank bailouts will be paid by taxpayers because it fails to reveal what price will be paid for distressed assets:

Frank Pallotta, a former managing director at Morgan Stanley and a veteran mortgage trader, said the gap was so wide between what banks were valuing their assets and what investors were willing to pay that the government would attract investors to buy only if it provided a subsidy of one form or another.

“Right now, the banks aren’t selling anything,” said Mr. Pallotta, now a consultant to both buyers and sellers of distressed mortgages. “You have Chase thinking that its assets are worth 75 cents on the dollar, and Joe Hedge Fund who thinks they are only worth 45 or 25.”

Posted by James on Wednesday, February 11, 2009