The newest iteration of the plan to buy up the unwanted assets from financial institutions has received kudos from Wall Street Monday, as major averages have advanced by 6%. But there are still a number of nagging holes that have not been clarified in the plan – even though a bit of additional clarity seems to have been achieved through the release of a fact sheet from the Treasury Department.
“Insofar as the direction of the market and the economy is predicated on the help of the banking sector, this is a message that we’re moving in the right direction,” says Dan Ripp, president at investment bank Bradley Woods & Co. “The problem you’re still presented with is – and it’s the same as what happened in the fall – what price do you have to pay to get ahold of these?”
The new plan has a number of wrinkles to it, but the question of price remains central to whether it will work. Private-equity firms and other fund managers are likely to be interested in buying this debt at bargain-basement prices, but if the banks are not enticed to sell because they believe it undervalues these assets – and thus forcing them to take losses on loans that they’d rather hold onto in hopes of recovery – the process will still be jammed. Michael Feroli, economist at J.P. Morgan Chase & Co., says that the government’s stress tests may “force banks to sell into the Legacy Loans Program.”
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