I Want to Believe

The administration and some banks are already butting heads over the stress tests and forced sale of bad assets. from the NYT:

The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities.

Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses.

Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them.

Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.

“The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”

Pretending that these assets are worth more than they are is rediculous, and is equivalent to pretending that the housing bubble never burst. If that last quote from Frank Pallotta is true (and I think it is), then for all practical purposes, we do have only five banks left in the market. Anything else is pure Weekend at Bernie's.

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