Bad Asset Details Send Stocks Higher
March 23, 2009 by Tisa Silver
Filed under Finance
Today, the Obama administration revealed the details behind its highly anticipated plan to assist banks with bad assets.
In a MarketWatch article, Bud Haslett of Miller Tabak Capital Management said markets were “looking for anything that was more definitive from Treasury than what we had.”
Photo by Walter Rodriguez, courtesy of flickr
Perhaps Mr. Haslett was alluding to the lack of detail provided in the speech given by Treasury Secretary Tim Geithner back on February 10. The Dow lost 380 points that day and settled below 8,000 points.
Today was a totally different story. I guess he was right, it’s all in the details.
The details sent all three major indexes about 7 percent higher. The gains were driven by gains in the diversified financial services and banking stocks, which posted gains of 24.5 and 22.3 percent, respectively.
The Dow gained 497 points, the Nasdaq added 99 and the S&P 500 tacked on 54 points. Today’s rally was the Dow’s biggest since October.
The plan is a collaborative effort which will involve players from the private and public sectors. The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation (FDIC) will work with private investors to purchase between $500 billion and $1 trillion worth of bad assets.
The market for bad assets was non-existent until today, no wonder the market bounced. The details were interesting, but I am more interested in seeing the implementation!
It was nice to see the market’s reaction to the fact that long awaited plan has been delivered and is better than the first attempt. Jury is still out on whether it will work. The deal looks pretty sweet on the buy side with government loans and the government assuming all the risk. But if these securities are such a sweet deal for the hedge fund crowd, why would the banks sell? Don’t they stand a good chance of being able to write up the value of these assets as the market improves? Therein lies the problem.
Oh course the hedge fund crowd could do bear raids on these institutions to force them to sell, but I hope our regulatory agencies will be more vigilant and prevent this from happening.
This is a tricky situation. Waiting for asset values to rise keeps bank balance sheets bogged down, but they need cash now. Creating a market for these assets opens the door for the buyers to set and/or manipulate the value of the assets. As you said, buyers wouldn’t buy unless it was a worthwhile deal and who knows what the assets are really worth.