Consumers Are Doing The Right Thing

Consumers are correct to increase savings while spending less. No one will save them, so they must save themselves. Bravo.

The issue of toxic bank assets is THE big sinkhole swallowing up global capital markets. There seems to be something in the air, a feeling that before rushing into “fiscal stimulus”, something has to be done about this. And contrary to official propaganda, banks ARE lending.

Risks are vast in revaluing tainted assets
Example: The financial institution which owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S&P estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

The bond analyzed by S&P is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid.

While the government is considering several approaches to helping the banks, including more capital injections, buying or insuring toxic assets is likely to be a centerpiece. Determining the right price for these assets is crucial to success. Placing too low a value would force institutions to sell and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending.