Remember the term "toxic assets?" This term was all the buzz starting about a year ago and throughout the spring of 2009. The old Treasury secretary (Paulson) tried to figure out how to deal with "toxic assets" clogging up the balance sheets of investment banks, preventing loans, even naming a program after it - TARP (Troubled Asset Relief Program). The program name stayed, Paulson did not.
Then the new Treasury secretary (Geithner) came up with the Public-Private Investment Program (PPIP), a complex potential solution involving a miriad of government agencies and bank regulators, that has largely been ignored by those who hold the toxic assets and by those who are suppose to buy them.
An unfortunate outcome because what's good for investment banks is generally good for preferred stock investors.
So there they sit, tying up vast amounts of bank capital - hundreds of $billions. Capital that could otherwise be put to use furthering the profitability of the bank and benefiting its employees, borrowers and investors - including its preferred stock investors.
But it looks like that is starting to change.
Click here to see an interesting AP article regarding how investment banks are working their way out of the toxic asset mess.
By breaking up the toxic bundles and restructuring them with known-to-be-good real estate mortgage assets (creating what are now called "Re-Remics" since there must be a snappy noun for everything related to investing), the banks are finding buyers. Slowly but surely, according to this AP story, banks are working these toxic assets off of their balance sheets - no Treasury program required.
While there are several statements within the article that are, at best, oversimplifcations, the article is correct in saying that this bundling strategy is not a new idea. Bundling risky mortgage-backed assets with less-risky mortgage-backed assets in order to spread the risk has been going on for decades (according to Fed chairman Bernanke, this technique ends up providing about 40% of the cash used to fund home mortgages).
Using an old strategy to solve a new problem appears to be working mainly, as the article points out, because investors know what they are buying this time around and the price for the new retreads is set by the market accordingly.
And the risk versus reward tradeoff is working the way it always works - bundles that are completely composed of assets backed by the higher risk loans are selling for pennies on the dollar while bundles mixed with lower risk assets are selling for a higher price.
But selling, nonetheless.
And that is great news for preferred stock investors who are provided with investing opportunities at lower risk as the overall health of these investment banks improves.
A lot of really smart people throughout Treasury have been working for over a year now to figure out a way to deal with these toxic assets. While the Treasury's toxic asset program has struggled to find traction, the market itself appears to have found a way to deal with this festering problem.
Should these banks be required to use the government's PPIP to deal with this more quickly or is the slow-burn, market-based approach the way to go here? Please take a look at the AP article and post your thoughts (just Click To Post Comments below).
Many Happy Returns.
