Bernanke: Bailout shouldn't be done at 'fire-sale' prices

The government’s plan to buy $700 billion in bad mortgage assets from banks shouldn’t be done at "fire-sale" prices that could push the financial system deeper into a hole, Federal Reserve Chairman Ben S. Bernanke told Congress today.

Testifying before the Senate Banking Committee, Bernanke addressed one of the critical issues of the bailout plan: What price to pay banks and other financial institutions for the troubled assets they are desperate to unload.

Purchases should be made close to "hold-to-maturity" prices, the Fed chief said -- meaning, prices that reasonably reflect how much of a loan is likely to be repaid in time, as opposed to a price that reflects only the current panic to dump the assets.

The question is whether that strategy would result in the government overpaying the banks, ultimately costing taxpayers more money.

Here’s what Bernanke said, according to a Reuters transcript:

"Let me come to the critical point: I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

"First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down.

"Second, liquidity should begin to come back to these markets.

"Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital.

"Fourth, credit markets should start to unfreeze. New credit will become available to support our economy.

"And fifth, taxpayers should own assets at prices close to the hold-to-maturity values, which minimizes their risk.

"To make this work, we do need flexibility in design of mechanisms for buying assets and from whom to buy. We do not know exactly what the best design is. That will require consultation with experts and experience with alternative approaches.

"Second, understanding the concerns and the worries of the committee, we cannot impose punitive measures on the institutions that chose to sell assets. That would eliminate or strongly reduce the participation and cause the program to fail.

"Remember the beneficiaries of this program are not just those who sell the assets, but all market participants in the economy as a whole."

Photo: Fed Chairman Bernanke testifying today before the Senate Banking Committee. Matthew Cavanaugh / EPA

Comments

[american friend]

incredible Bernanke. he knows everything, even the price of cdos in 5 years. What a deal ! he should put his own pay on that bet

how can american people believe such a programm ? for sure there is a crisis, but it has to be paid by shareholders first, bondholders secondly (the ones who has huge portfolio out any control from IRS in jersey, liberia, lichtenchtein, bermudas, ...) and at least by main street. It may be tough but much more shinning ahead than the reverse

[Gustavo Corral]

Here we are getting to the crux of the matter:

These bundled mortgages are selling below the hold-to-maturity price because there are real losses expected of them. ( My guess is that the most toxic mortgages will be sold first ).

When Ben Bernake says that the "banks capital will not unreasonably be marked down" he is quite correct. If you make a bad loan and someone is willing to take that loan off your hands at a price that is merely discounted by the interest to maturity then you can quick as a jiffy invest that money in a good loan and pretend that bad loan never happened.

Of course the couterparty to such a deal is left holding the bag ( and incurring the losses you would have had )

When Ben says that we should not ask for a discount to compensate for the losses we as taxpayers are almost sure to incur, he means it would stress the banks too much to ask them to incur these losses. It is better that you and I incur the losses for them. It is as if I buy your car, trash it and then sell it back to you at the price it would have had if it were new. Fair deal ?

Now here is another point to consider : ( assuming the liquidity crisis is at all real and cannot be made up by the banks who do not have this toxic debt on their books, like a lot of small banks don't ) Do you think that paying through all the banks' losses plus letting them have enough capital to recapitalize is the most effective way to restore liquidity or do you think liquidity can be restored by simply subsidizing new loans of good or reformulated banks ?

[Sadforpeople]

Unbeliavable! Either he is so in bed with bankers he can't hear the words coming out of his own mouth, or someone is threatening something he holds dear in his life. I say "something" because I am not hearing ANYTHING about the human beings being crushed by the blatant greed. Now he wants to REWARD those who threw all ethics and decency out the window by letting them get the money as if anyone could have paid those unconscionable adjustable mortgages anyway! This guy definitely is invited to the nuclear sheltertown after they destroy the world.

[andre sharp]

Did he say " close to "hold-to-maturity" prices"? Is this the same man who labeled these products toxic in pervious statements? Can we really have this both ways?

Seems to me that either they are toxic (meaning little or no value) or they have " close to "hold-to-maturity" value. These cannot be equal.

And, if they are not, then we should be paying the lesser value.

[Maggie Knowles]

Uh-huh, we want you, taxpayer, to buy all these toxic loan products at higher than market value, say, how about 125%, that will give us a little "wiggle room"...

We just need you guys, taxpayers, to cooperate, be bi-partisan here, give us $700B or else it all collapses... no strings, no accountability, no oversight, no regulation, no equity stake, no nothing.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Well, I think Karl Denninger, http://fedupusa.org was right this morning on the phone when he said, "This $700B bailout is like throwing money into a hurricane, you're (taxpayers) going to lose your money unless you establish trust in the market first by doing three things: 1. balance sheet transparency 2. give all banks 6 months to reduce their leverage (some are at 80:1!) to 12:1 and 3. credit default swaps - put these on a regulated exchange and null out the bad ones."

We have other choices and I want to know what they are before this senate banking committee decides hastily to run us deeper into the ditch.

Did you hear Bush's speech at the United Nations today? Is it just me, or was his tone and delivery arrogant? First he gave us the fear (terrorists) and then he said he has confidence we're going to wrap up this banking problem in a few days. I hope he is wrong and we stall this and all other bailout legislation until after the election, and even after swearing in the new administration.

[mr.smith.goes.to.washington]

If a financial institution has not filed chapter 7 or chapter 11 BK, the Feds should not buy any of their toxic debt. That's how RTC worked in the S&L meltdown. Healthy financial institutions should be banned from any of these bailouts, otherwise the Wall St. gurus will repeat their mistakes, only much bigger next time since they will be expecting the Feds to reimburse them.

[Dwight Nager]

Very disappointing.

Will diminish participation? What has been shown time and again is that the CEO's will only sell when they have to. Bear, Lehman, Merrill -- they tried to hold out and only faced the music when pushed.

Bernanke's solution for the taxpayer? Bow down to them.

First, pay high rates for the securities. Second, keep the CEO's making millions for their work of losing money.

To argue that limiting pay of participants will reduce particpation is absurd. They should only come if they really need it. If they don't want to sell to the government, and instead elect to have their company fold, their boards will just fire them, put in a more shareholder oriented management team who will work at 6 figure instead of 8 figure pay, and will sell the ailing bongs on to the TARP.

Bernanke and Paulson are stoolpigeons. Stooges.

Get them out of there, now.

[sadforpeople]

WARNING TO CONGRESS: Remember what happened the last time you were told you had to make a world-changing decision RIGHT AWAY OR ELSE???

[JS]

This is an example of free enterprise run amok. Financial geniuses devise ways to convert coal into gold, then sell the baubles to the market as bouillion. Apparently, nobody bothers to scrape the surface, and if they did, for the most part, they were so binded by the shine, they didn't care.

What's even more laughable is the room full of politicians trying to appear thoughtful and intelligent, when 99% of them have zero understanding (including Frank) of where this $700 bil would go. They are charged with deciding if this is a good idea or not?

I suggest we tell Obama and McCain they have 10 days to come up with a plan. They have access to all the bright minds at Fed, Treasury, etc, and must present to the American People (their theoretical boss) a plan to deal with this issue in a televised, 30 minute talk, followed by a mano-a-mano debate the next day. One of these guys will inherit this issue in a few months, shouldn't we have a true sense of what they'll do?

Ahead of gay marriage, oil prices, education and healthcare, this one event will affect the next president and the American People more than any other issue in the next 4 years.

Call it a pre-employment test.

[Mathew%20Andresen]

It's obvious from some of the comments here that they people don't really understand what Bernake is talking about. When he says close to held to maturity prices, he's talking about close to the eventual amount of cash you will get "after" losses.

The problem with the current fire sale prices is that they are forcing many banks to mark down securities that long term are worth more than current market. IE, you have 100 million in bonds, you expect 30% in losses so price should be 70 million. But because of market instability, you are having to mark it down to 50, or even 30 million. Thus forcing you to raise more capital when you probably can't, and shouldn't even need it.

When this gets compounded economy wide you get a melt down.

[Sal B]

How does valuing "toxic" mortgages at "hold to maturity" values impact the inflated price of housing? It keeps it artificially inflated until the next crisis comes around again. This is just a stupid game aimed at allowing the most greedy to win, yet again. What happened to the "magic of the marketplace" all of a sudden?

[Wow a sad day for capitalist]

Wow, I can not believe my ears. The chairman of the Federal Reserve of United States, the country that is synonymous with capitalism, is asking the tax payers of this nation to bail out the financial institutions, to bring socialist financial order. He than has the audacity to ask the tax payers to pay something other than the fair market value of these financial products. Is this guy serious?
Efficient market theory suggests that things will adjust and find their own equilibrium. It is about time that everyone from the CEOs to the homebuyers that could not afford to buy these homes to pay for their mistake.
If the Federal Reserve and Congress does not allow the natural course of failure to take place, United States is no longer a capitalist nation. Our law makers are puppets for the financial sector’s lobbyist. Shame on them.

[Rodolfo Acuna]

To pay the banks and mortgage companies anything but fire sale prices would be to compensate their malfeasance. Let's be very honest, it was the federal reserve and it chair who are also culpable. By manipulating interest rates they purposely created the bubble and wild speculation. Now they want to give their friends a break

[Sick-of-it]

The urge to price/buy bad mortgages above market value because the "public" will actually make money when the market turns around -- is it only me or does it sound remarkably similar to "We will use the oil reserves in Iraq to pay for the invasion."

Fool me once, shame on you. Fool me twice (or three times???), shame on me.

[H.%20Craig%20Bradley]

THE PENTHOUSES OF MANHATTAN

This is a bailout (TARP) in which the taxpayer gets all the downside (worthless paper) and no equity position in participating financial institutions. So, there is little upside for the taxpayers. This proposed Congressional bailout would also further inflate the currency, driving speculators back into commodity markets (oil, gold) and out of the U.S. Dollar. It won't solve the root problems in the housing industry which are declining valuations and an increasing inventory (one year) of unsold, preowned homes.

A $700 Billion rescue plan would enrich the same investment bankers who caused the problem in the first place. A bailout would allow bankers to receive their Christmas Bonuses once again, preserving demand for the penthouses of Manhattan.

[Joseph]

Okay, so we buy low value assets at top market value and dont get this value until sometime in the future. So if their is a miracle and these assets go up we get paid in future dollar (which of course wont be worth a whole lot the way we are going). At best we lose the amount the purchase price has defalted by inflation. At worst (much more likely) we only get fractional value at sometime in the future. Great were do i sign up! Just send the paperwork to
John Gullible Starr
C/O please at least kiss me first
1 seashore lane
Tucson AZ. 98997

[Gidon Ha Shofet]

At the end of the day the money is going out and nothing is coming in.. at least not in the foreseeable future. Has the US government considered the alternative of making the true culprits foot the bill.... Who are these.. The Arab oil nations and Iran.. who have decided to tigthen the screw raise oil prices to ridiculous levels and such all the money out of our country...So the answer is to invade Iran immediately.. knockout the thugs who threaten to destroy Israel and everything within a 1000 miles of this innocent country.. and move in and start pumping and selling their oil as reparations for what they have done.. and what they want to do.. take out a few of the other Arab countries.. and do the same there.. it is payback time indeed..

[Richard]

700 BLN is a big number. So big, that combined with a nice buzz-word (toxic assets) can hide anything you want – a big sting for example. And a robbery. Let’s start with the easier – robbery. “Give me your money or else something a lot worse will happen to you” – the basic plot for a robbery – this is basically what government tells us.
But wait, there is more – the sting. So, what are these “toxic assets”? Among other things, do they not in fact denominate ownership over real estates across all America? And the “toxic assets” will be disposed off by Paulson, at his own discretion, with no supervision, his actions are non-reviewable and are out of the reach of any court. So what stops him from disposing of them in such fashion, that eventually they end up in selected number of deep pockets? And we will pay hefty price because something very bad will happen, while they will pay the low price because "they are toxic"…
Can we have a dessert please? Let’s see… foreclosures we hear are bundled with healthy mortgages into packages called toxic assets. Now, how healthy are they? We know that some sort of recession is inevitable, and what does that mean? Doesn’t it include massive job losses, hence more foreclosures, hence new real estates becoming property of these same pockets?
Can someone please convince me I am too paranoid, this can't possibly happen, because XYZ... etc?

[Brian]

The reason we have fire sale prices on offer is because no one knows the true value of the assets. As of today, the fire sale price is as good an estimate of fair value as the hold-to-maturity price calculated by the "Bernanke experts."

[Steve Bigatti]

The Plan can work, as it has in Sweden, but it cannot be just a transfer of bad assets to the taxpayer, but rather an option for the taxpayer to pick up some assets at discounted prices and for banks to unload these assets at a value higher than meltdown.
The concept is to add liquidity and allow the financial system to continue working. Letting all banks die would not be good for taxpayers.
The higher species will step in and do something different that will allow it to survive in better shape.
The taxpayer uses his ability to wait and to the fund resources to segregate good from bad assets, then sell them with time and as opportunity allows. In Sweden they gave a 15 year mandate to get the assets off the gov't books. They did it in half that time.
There must be accountability for the return taxpayers get, and transparency.
The banks stockholders and CEO's are not the beneficiaries of this plan, they have or will pay with stock values and/or their jobs. That needs to happen within the plan as well of course.
The beneficiaries are all the rest -most of us -who decently use the financial system to keep their money safe, finance their homes and fund their retirement. Why let it all collapse and be scaped- up by who knows who if we have the power to find a better way?

[Gregg]

Quote of the century:

"We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself."

-- The 2008 Republican Party Platform, adopted earlier this month

[Iconoclasher]

"A trillion here, a trillion there, pretty soon we're talking real money". To paraphrase one of our great past politicians. The "billion" he was referring to doesn't seem like that much money now.

IF there is going to be a bailout of Wall St firms, then let's make sure there's plenty of strings attached. That is, massive oversight and regulation of those firms. It's quite apparent that these guys cannot operate in a deregulated world. Have enough regulations in place so if this ever happens again, the responsible people can be prosecuted and held accountable.

As far as the bailout for homeowners, forget it! If they're too stupid to read the contract that THEY SIGNED and AGREED to, then let the ship sink!. It's going to hurt the economy, we're going to pay for it either in lower property values, higher taxes or deflated money. Since when are the tax payers responsible for their lower property values?

The thing one must understand is the home prices were artificially high to begin with because of the easy credit. Now they'll be more realistic. A homeowner bailout will just encourage more recklessness in the future.

By the way, this is going to cost us almost a trillion dollars. Are you aware of the fact that a STACK of one trillion dollar bills is almost 79,000 MILES high! That's three times around the Earth! (do the math, .005" x 1T)

[Barbara Ann Jackson]

re: Lehman Brothers, Foreclosure Fraud, Wells Fargo, Conspiracy; Deceptive Judicial Filings

LEHMAN BROTHERS' mortgage troubles provides a yet further occasion to call attention to FORECLOSURE FRAUDS being carried out by via deceptive collections through use of the court system in furtherance of real estate racketeering and IRS fraud. In conjunction with the big Lehman Brother picture, the following is a small (local) component affecting Lehman's decline. *See the court pleadings and more posted at:
http://www.lawgrace.org/2008/09/14/lehman-brothers%E2%80%99-mortgage-troubles-nationally-evidence-of-foreclosure-fraud-deception-and-conspiracy-with-wells-fargo-deceptive-judicial-filings/

Despite probes into factors of the mortgage crisis, there has been almost no investigation of the most lethal mortgage mess component: FORECLOSURE ATTORNEYS DEBT COLLECTION ABUSES and JUDICIAL COLLUSION. Congress needs to seek the whereabouts of perhaps billions of dollars and massive amounts of real estate that winds up in the collector attorneys' possession -as well as examine the scores of attorney bankruptcy court frauds.

Referring to a foreclosure case entitled: "Lehman Brothers Bank v. Clement Bailey," case #2007-5610 in Orleans Parish Civil District Court, and New Orleans federal case #08-3881, entitled: "Wells Fargo v. Clement Bailey, JP Morgan Chase, Bank of America, and Allstate Flood Insurance Program." The KEY element about these 2 cases is that debt collector attorney Herschel C. Adcock, Jr., filed a Lehman Brothers foreclosure in State Court claiming Lehman holds the note. But, Wells Fargo filed the latter lawsuit claiming Wells Fargo owns that same note. If Wells Fargo succeeds in concealing Lehman Brothers' (true or untrue) claim against Clement Bailey's property, Wells Fargo and Mr. Adcock will wound up gleaning $$$$ --most likely from JP Morgan Chase, Bank of America, and Allstate Flood Insurance. [As mentioned, millions, perhaps billions of dollars being unlawfully gleaned by unscrupulous debt collectors through fraudulent foreclosures has too long remained an unheeded atrocity for which distressed property owners have long been subjected to, but now also impacts Investors!]

Exhibits on the www.lawgrace.org website:

*Orleans Parish Civil Sheriff Docket record for the Lehman Bros. v. Clement Bailey foreclosure filed by debt collector attorney Herschel C. Adcock, Jr., showing docket entry "ADA" code for of $2,203.00 to Adcock.
*Letter dated from Adcock to J.P.Morgan Chase, informing Adcock’s representation of Wells Fargo, and seeking $$$ on Wells Fargo's behalf while at the same time maintaining a foreclosure case on Lehman's behalf.
*Page one of the lawsuit that Wells Fargo filed in state court against Bailey, J.P. Morgan Chase, Bank of America, and Allstate Insurance.

Even more proof of deliberate foreclosure fraud, and Securities fraud becomes clear when falsified IRS form 1099's become filed by lenders like Wells Fargo Bank, NA. For such reasons, property owners need to be WARNED about mortgage lenders' practice of filing falsified IRS tax form 1099-A's or 1099-C's. Here’s the LINK to that statement:
http://www.lawgrace.org/2008/08/08/my-august-8-2008-statement-to-the-louisiana-secretary-of-state-office-of-financial-institutions-concerning-wells-fargo-irs-and-mortgage-frauds-sham-foreclosures-and-judicial-collusion-and-national-app/

Barbara Ann Jackson
http://www.lawgrace.org

[martscan]

I've had a lot of respect, and sympathy, for Bernanke...up to hearing him explain buying the junk assets at "hold to maturity" prices and how the taxpayer stands to come out ahead. Compounding this insult to the intelligence of a dolt, I listened, in disbelief, to Bill Gross explain what a terrific deal it was for taxpayers..making an almost guaranteed $25B a year in interest. Then, as if he was Paul Revere incarnate, he told Erin whatshername on CNBC, that his firm, PIMCO, would be willing to act as a functionary in the process of carrying the plan out...FREE OF CHARGE! Gee, what a swell guy. I have now done a 180 and have become a populist advocate and a Jacobean. Off with their heads!!

[James Monachino]

Does it get any better than this?

I wonder if any of these reconstructionalists are listening to what they are saying;

* Don't buy at fire sale prices: Codewords for don't by at market prices, buy at a lose so bankers and investment funds can minimize the impact to their balance sheets.

* Won't cost American taxpayer any money they might make a profit: Right, then why are we doing this - Don't the banks deserve all these benefits and profits.

* If we don't pass this bill the credit markets will freeze up and we could see shrinkage in GDP: Smile, in case you don't know it folks, all our economic indicators show that we are still not in a recession. With the credit markets inches away from freezing up maybe we need to revisit how we calculate all our national indicators.

* Hurry, Hurry, Hurry: Pass this $700 billion dollar plus bill. Is this insane, coming from the people who brought us the mess they now want us to pay them to clean it up - - and quickly without thought or consideration regarding the resolution of the problems or the culprits.

Thank God the American people and a few brave senators and congress members are speaking up. Years in the making, the dismantling of consumer rights and protections will takes years to reconstruct an update. It is my hope that our moral compass is set correctly so that an appropriate set of new regulations and laws of fiscal accountability can be created.

James Monachino