Who Wants To Buy Toxic Assets? Plenty Of People, It Turns Out
Gary Varvel is the brilliant political cartoonist for the Indianapolis Star. His depiction of Treasury Secretary Timothy Geithner as an airline pilot trying to reassure terrified passengers about his improvisational flying skills is delicious. It gets to the point that there simply is no textbook response to the global financial crisis. This is especially true when it comes to disposing of those "toxic assets" President Obama, business leaders and reporters keep talking about.
"Toxic asset" has become economic shorthand for the bad loans at the center of this entire mess. The most damaging of the assets are mortgage-backed investments that have threatened the very survival of the world's biggest banks. Basically they are bundles of thousands of individual mortgages. At the height of the housing boom, selling these bundles of mortgages freed banks to loan even more money. Banks, Wall Street firms and hedge funds also bought these securities as investments. But the assets have lost their value as homeowners defaulted on the mortgages, foreclosures increased and home prices dropped.
The plummeting value of the mortgage-backed investments, and other securities built around loans, has forced banks to dramatically cut back on their lending to each other, businesses and consumers. The recession will only deepen unless the banks can eventually get rid of the "toxic assets" still on their books.
In his first address to a joint session of Congress President Obama made a point out, "The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins."
So who is willing to buy the toxic assets to allow broader bank lending again? Plenty of people, according to Sue Allon.
"I can name at least 12 hedge funds with $30 billion who are ready to start to buy them," she says.
Allon is the CEO of AllonHill. She's a veteran of the mortgage and banking business with an intelligence that becomes obvious within moments of introduction. The Denver-based company that bears her name specializes in examining toxic assets and determining their present value.
Allon's staff of more than two dozen analysts quietly toils away in open cubicles on a ground level office space just a few blocks from Coors Field. She describes it as detective work. They break down bundles of mortgage-backed investment loan by loan using a sophisticated computer program. This investigation process looks at everything from the terms of the loan to the borrower's payment history. They also examine whether the homeowner desires to stay in the home. The process takes anywhere from one to three hours per loan.
AllonHill has valued tens of thousands of loans this way since last autumn. The information is provided to clients, mostly hedge funds, who are interested in making an offer to purchase the toxic assets once banks put them up for sale. The discounted assets could pay off huge returns once the economy stabilizes.
"The industry is completely geared up and ready for this," she claims.
The problem is a lot of the banks are not. Many of these assets are now worth only 30 to 60 percent of what the banks paid for them. Allon believes the most distressed banks are reluctant to sell them because doing so would require writing down billions of dollars more in losses.
"In many cases they would be insolvent," Allon says. "In many others they wouldn't be insolvent [but] they would be in big trouble. And it would be very ugly headline, especially if they are taking money from the government. That would look very bad."
Allon figures the banks could quickly find buyers for more than $1 trillion worth of the stuff if - and it's a very big if - the banks bite the bullet and sell all their toxic assets at market value.
"I think you could move the vast majority of the loans that have a hope -- if you get to them quickly -- to get some modifications in place. I bet we could come together as an industry and move them within a matter of 90 days, 120 days."
Some believe that once trading of these securities gets underway, momentum could build quickly. There are some good assets wrapped up with bad ones which may actually recover of some of their value. A lot of money can be made. But it's unclear what it would take to convince banks to accept the steep losses that would come by selling their toxic holdings. Even if they did sell, some estimate another trillion dollars or more of the least desirable assets would remain on bank ledgers. It's hard to know how long it could take to clear those away. Of course, nobody is 100 percent certain of anything in this crisis because nothing exactly like this has happened before.
That gets us back to Varvel's "pilot" cartoon. Disposing of the toxic assets and other solutions to the financial crisis will depend on the ability of hundreds of people like Sue Allon to improvise and innovate. Making things up as you go along is not a comforting strategy for recovery. But remember that aviation clich?: any landing you can walk away from is a good landing.
© 2009 CBS Interactive Inc.. All Rights Reserved. "Toxic asset" has become economic shorthand for the bad loans at the center of this entire mess. The most damaging of the assets are mortgage-backed investments that have threatened the very survival of the world's biggest banks. Basically they are bundles of thousands of individual mortgages. At the height of the housing boom, selling these bundles of mortgages freed banks to loan even more money. Banks, Wall Street firms and hedge funds also bought these securities as investments. But the assets have lost their value as homeowners defaulted on the mortgages, foreclosures increased and home prices dropped.
The plummeting value of the mortgage-backed investments, and other securities built around loans, has forced banks to dramatically cut back on their lending to each other, businesses and consumers. The recession will only deepen unless the banks can eventually get rid of the "toxic assets" still on their books.
In his first address to a joint session of Congress President Obama made a point out, "The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins."
So who is willing to buy the toxic assets to allow broader bank lending again? Plenty of people, according to Sue Allon.
"I can name at least 12 hedge funds with $30 billion who are ready to start to buy them," she says.
Allon is the CEO of AllonHill. She's a veteran of the mortgage and banking business with an intelligence that becomes obvious within moments of introduction. The Denver-based company that bears her name specializes in examining toxic assets and determining their present value.
"We investigate all the details of the loan and based on that it's just math to come up with what the price is," Allon says.story about private investors buying up distressed mortgages.
Allon's staff of more than two dozen analysts quietly toils away in open cubicles on a ground level office space just a few blocks from Coors Field. She describes it as detective work. They break down bundles of mortgage-backed investment loan by loan using a sophisticated computer program. This investigation process looks at everything from the terms of the loan to the borrower's payment history. They also examine whether the homeowner desires to stay in the home. The process takes anywhere from one to three hours per loan.
AllonHill has valued tens of thousands of loans this way since last autumn. The information is provided to clients, mostly hedge funds, who are interested in making an offer to purchase the toxic assets once banks put them up for sale. The discounted assets could pay off huge returns once the economy stabilizes.
"The industry is completely geared up and ready for this," she claims.
The problem is a lot of the banks are not. Many of these assets are now worth only 30 to 60 percent of what the banks paid for them. Allon believes the most distressed banks are reluctant to sell them because doing so would require writing down billions of dollars more in losses.
"In many cases they would be insolvent," Allon says. "In many others they wouldn't be insolvent [but] they would be in big trouble. And it would be very ugly headline, especially if they are taking money from the government. That would look very bad."
Allon figures the banks could quickly find buyers for more than $1 trillion worth of the stuff if - and it's a very big if - the banks bite the bullet and sell all their toxic assets at market value.
"I think you could move the vast majority of the loans that have a hope -- if you get to them quickly -- to get some modifications in place. I bet we could come together as an industry and move them within a matter of 90 days, 120 days."
Some believe that once trading of these securities gets underway, momentum could build quickly. There are some good assets wrapped up with bad ones which may actually recover of some of their value. A lot of money can be made. But it's unclear what it would take to convince banks to accept the steep losses that would come by selling their toxic holdings. Even if they did sell, some estimate another trillion dollars or more of the least desirable assets would remain on bank ledgers. It's hard to know how long it could take to clear those away. Of course, nobody is 100 percent certain of anything in this crisis because nothing exactly like this has happened before.
That gets us back to Varvel's "pilot" cartoon. Disposing of the toxic assets and other solutions to the financial crisis will depend on the ability of hundreds of people like Sue Allon to improvise and innovate. Making things up as you go along is not a comforting strategy for recovery. But remember that aviation clich?: any landing you can walk away from is a good landing.
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This way the holding bank realizes no immediate large hit and has the upside of possibly collecting higher returns from their loans over time.
This is known as a good bank bad bank approach and it is probably what will be done.
I am a former chief analyst of a large bank.
Like if the assets were great and so set to take off again, why wouldn't the banks just hold onto them?
This whole scenario sounds like a Bernie Madoff scheme - just doesn't add up (?)
I thought the whole financial sector was having a liquidity problem because people were cashing out of the market - wasn't that supposedly a big part of the reason for those drastic drops in the market in November? People were asking for their money back, and then all the financial firms were ditching assets to cover the withdrawals and then the whole thing spiralled downwards?
The risk tolerance of the hedge funds has always been off the charts - is there a downside to them betting their bottom dollars on risky toxic assets in the gamble that the move will help turn the housing market around and that they'll win because they're confidence is off the charts too? Because if they're too big to fail, then the government might not have a choice but to give them a bailout, is that possible (?)
Wouldn't it just be a lot less risky to nationalize as far as cleaning up the assets go? Maybe the stock market would prefer the private buy out because all the market players are cut from the same cloth. I'm still not sure whether the market's truly on the side of a healthy economy or whether they're just driven to profit by hook or by crook - I would tend to think it was the latter, and the economy's really dysfunctional now, so that's not good, is it?
Want to bet in 2010 they are singing the same song they sang last year.
You don't want to give the Democrats that much power do you.
Of course it worked so well for them this year.
Just as soon as the banks are prepared to get back a few dimes per dollar of their original cost, they're ready to sell.
Yah, nice cartoon of Geithner. Notice that he's leaning to his left.
The twisted logic that he used to more or less justify creating a whole new layer of inflation and yet another way to dispossess the small homeowner in favor of a rich investor and increase the wealth of one person while giving pain to many was amazing.
If the bank is going to have to take a loss, the most logical straightforward and probably cheapest way for the bank to handle the toxic asset crisis is NOT to find an investor to issue the loan to so that he may turn around and resell it at a price out of reach of the original homeowner. If the bank is going to have to reissue a loan at a loss, the most logical straightforward and probably cheapest way to handle this is to repackage the loan and talk to the homeowner to see if they can afford to buy it at the same reduced price that they would sell it to the investor, cutting out the would-be middle man.
You wonder why this country is in such a mess? How could it be anything else when the media is presenting such twisted thinking which, as far as I'm concerned, is tainted or slanted. And why do I think your coverage of the topic is slanted or tainted? Very little coverage has been given to the fact that these "toxic loans" are because people were caught in a bad real estate market when they suffered job loss, divorce, serious illness with associated medical bills, or death of spouse/partner. Also very little coverage is given to the banks who did issue questionable loans. Instead coverage has been devoted almost exclusively to people, who apparently according to your reports deserve to be kicked out of their home. Meanwhile Madoff refuses to leave his penthouse and that apparently is acceptable.