Proposed Aggregator Bank Key Flaws Revealed
The “Good” bank, “Bad” bank concept known as an “aggregator bank” has been gaining traction recently amongst political authorities. While in theory it could be an effective solution to most banks toxic assets some argue it is still plagued by the same problems as TARP (Troubled Asset Relief Program).
Jeremy Siegel, Ph.D breaks down the basis of the “aggregator bank” concept:
The concept is an “aggregator bank,” a bank run by the government that will buy the “bad” loans and impaired mortgage-backed securities from ailing financial institutions, leaving the remaining bank with the “good” performing assets. The motivation for the plan is that, if banks were rid of their bad assets, they would begin lending again, kick-starting our sinking economy.
The main problem with this concept and what caused the TARP to change directions so fast was the issue of valuing the toxic assets. The other problem is cost which could be in the trillions for taxpayers. From Bloomberg:
Schumer, a New York Democrat who is on the Senate Banking Committee, said there are two problems with the bad bank, also known as an aggregator bank, solution. It would probably be “very expensive,” costing as much as $4 trillion. “Second, it’s very hard to value those assets,” and the prices could be set “so low that every other bank would go bankrupt.”
To be effective, any loss-insurance program must be large enough to encourage private investors to come back in and recapitalize banks, said Eric Hovde, president of Hovde Capital Advisors LLC, which manages $1 billion in financial-services stocks.
The government has to tell banks “we will do this wrap, but you have to go out and raise a bunch of money,” Hovde said. Still, having banks manage the assets is a better option than the aggregator bank because “you don’t get into this whole issue of how you price the assets,” Hovde said. “The government doesn’t have the infrastructure to manage them.”
And what makes investors think the banks will even comply or participate? The forced cash infusions are still being hoarded by the banks, and to be honest we don’t blame them for doing so.
All in all, Dr. Siegel summarizes his opposing viewpoint as a whole very well:
The aggregator bank plan is really just a larger version of the original TARP plan, and it inspires the following question: At what price does the government buy these assets? If the government buys the assets at today’s market price, ailing banks are no better off and may be insolvent. If instead the government buys the assets at a higher price, then the taxpayer is bailing out the bank’s bondholders — and there is still the question of what to do with management and stockholders.
One of the big uproars for those opposing any government relief is how the US taxpayer is essentially holding insolvent companies together (Citigroup for example) but bondholders and shareholders maintain value. How some of these bank stocks can still be trading for even dollars a share blows many minds.
We couldn’t agree more.
Sources:
The ‘Aggregator Bank’: A ‘Good’ or ‘Bad’ Idea?
Jeremy Siegel, Ph.D.
Yahoo Finance, February 3, 2009
Asset Guarantees Gain Momentum in U.S. Bank Talks
Robert Schmidt
Bloomberg.com, February 4, 2009
