Don't Kid Yourself, Of Course The Treasury Is Setting Asset Prices

A key feature of the Treasury’s new bailout scheme is that toxic assets will now be priced based on a “market” of various investors bidding for them. This market price is supposed to be fair, in that means banks can’t claim there’s no market price anymore, and taxpayers won’t get screwed by the government overpaying.

But get real, the government is still setting the price of the assets. Just indirectly. They do this by setting the ratio of leverage. Think about it, the amount of leverage they extend to these investors is arbitrary — currently at 12x.

Given that the loans are non-recourse — so there’s no more risk to an investor by taking on more leverage — they could easily achieve higher auction prices by upping the leverage. Try 24x. Or they could reduce the market prices of the asset prices by reducing it. Try 6x.

Point is, there’s only a market prince inasmuch as the government sets the rules and parameters.

So why doesn’t the government seem too worried that even with the new system, the bids won’t meet the ask? Probably because they already know, based on conversations, what leverage is needed to get the bids that the banks are happy to sell at. Some market.

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