We still don’t know how the Troubled Asset Relief Program is going to work. Right now it looks like the government is gearing up to buy illiquid assets from banks, although which assets and at what prices remains a deep mystery. Bill Ackman thinks he has a better plan.
Speaking on CNBC’s Squawk Box this morning, Pershing Square’s Ackman proposed an alternative plan. He would have the government provide financing to private firms that would bid on the assets in an auction.
“What I would do instead of the government being a buyer of complicated mortgage assets, is if the right thing to do create liquidity for these assets, the best way to do it is to actually have the government be a lender,” Ackman said.
Under Ackman’s plan the government would lend money at interest to buyers of illiquid mortgage related assets. This would avoid the problem of overpricing pricing assets because private buyers would still be bidding on the assets.
“There’s an auction. There’s competition among the private sector. The private sector loses their money first,” Ackman said.
Ackman’s plan appears to address one of the central problems facing the market: the lack of funds available to purchase the “troubled” assets. Right now these assets would have to be bought with cash because no one in the private sector is willing–or perhaps able–to finance the purchases. But with bank balance sheets bleeding and hedge funds facing huge redemptions, cash auctions for the assets could only bring in pitiful amounts that would force banks to take huge losses and write downs. In short, no one can buy, and no one wants to sell. Hence the illiquid market.
This assumes, however, that the Treasury and the banks holding the illiquid assets are right in their contention that the market is undervaluing the assets due to illiquidity. If the real problem is simply that the assets basically aren’t worth anything, providing financing for their purchase won’t help a thing.
Ackman thinks the private sector money would “no question” flow into the market.
“I think there’s a shortage of private debt capital to finance complicated mortgage assets,” he said. “I don’t think there’s any shortage of private equity capital.”