Are we the only ones who get worried every time we hear a politician or one of CNBC’s chatterboxes tell us that the key to restoring our financial health is getting bad assets off the balance sheets of the books of banks?
We know that some people are saying this as a kind of intellectual shorthand for something they know is more complex. But we’re afraid it is misleading other people, including lawmakers, and obscuring the real costs of any bailout.
The problem is not that balance sheets are somehow “clogged” with bad assets. If that were really the problem, everyone would immediately agree to this deal: Clusterstock will take all the bad assets. Every single one. Give us your subprime mortgages, your second liens, your bundles of autoloans and student loans and credit card debt. If the problem is that you need these off your balance sheets, we’re here to help.
We’ll even sweeten the deal by offering to pay you one penny for the assets. Not a “penny on the dollar.” We’re bidding one penny in total for every asset at the market prices below the value you are carrying them on your books.
We didn’t think so.
As our little offer shows, the problem is not that there are no buyers for these assets or that the assets are clogging balance sheets. The banks don’t just want to get rid of the bad assets–they want to get rid of them by exchanging them for far more money than anyone is willing to pay. And there’s only one entity around that can force people to pay more than they are willing for something–that’s the government.
We’ve made this point before but it bears repeating. Any proposal to buy bad assets from banks means that the government will give the banks cash for trash. The “bad bank” will have to overpay otherwise the banks won’t take the deal.
Anyone who thinks differently can contact me at [email protected] and arrange to give me title to your bad assets. I’ve got a penny right here for you!