Why do governments are trying to buy the financial stocks or free the banks off their bad assets by simply purchasing them just to end up on their knees begging the banks to pass the buck to the customers?Why don't they just provide a repo facility to the banks for all the new and recent mortgages? to me this simply provide 1) the incentive to the banks to start selling mortgages and bringing them to the facility for further funding and 2) help governments to start the funding flow all the way, through the banks and, to the customers without getting involved in "owning" the banks nor their worst assets.I would really appreciate any insights?Thanks

simple its not just a matter of liquidity but solvency - the banks do not have enough capital especially if losses continue to mount and we enter a deep recession.

This is probably where I get confused. Doesn't turning the Bank's illiquid papers into cash, by taking the papers as collateral (even for more than the market value of the papers), make the bank more solvent?

QuoteOriginally posted by: LucetiosThis is probably where I get confused. Doesn't turning the Bank's illiquid papers into cash, by taking the papers as collateral (even for more than the market value of the papers), make the bank more solvent?Not unless repo boosts the value of these assets (which is not impossible). But to the extent that banks still have underwater mortgages on their books that might lose value in foreclosure, the banks may go insolvent. Lending money to the bank does not help boost capital (= assets minus liabilities) because lending increases both the assets and liabilities of the bank. Central bank lending does help in the long-term with profitability -- the bank gets money at zero% and lends it at 6% and pockets the difference. But banks face a bigger short-term issue with solvency which is more a balance sheet problem than an income statement problem.

QuoteOriginally posted by: daveangelsimple its not just a matter of liquidity but solvency - the banks do not have enough capital especially if losses continue to mount and we enter a deep recession.one thing we've heard repeatedly is that banks have stopped lending money to each other because they don't know if the bank they lend to will be here tomorrow, and that in and of itself is has frozen the credit markets. Guaranteeing those interbanks loans (as many countries have done) is a way to free up that aspect of the credit markets

QuoteOriginally posted by: LucetiosWhy do governments are trying to buy the financial stocks or free the banks off their bad assets by simply purchasing them just to end up on their knees begging the banks to pass the buck to the customers?Why don't they just provide a repo facility to the banks for all the new and recent mortgages? to me this simply provide 1) the incentive to the banks to start selling mortgages and bringing them to the facility for further funding and 2) help governments to start the funding flow all the way, through the banks and, to the customers without getting involved in "owning" the banks nor their worst assetsIn a sense, I'm with Lucetios on this:when the bailout plan was first passed, the plan was to buy the debt obliqations from banks (it's since quietly been changed to buying the banks), and we were told the government would likely make money on these debt obligations in the long term.If that statement by the government had been true, it would have been easier, as Lucetios suggests, to let the banks hold the assets long term and lend money to the banks on these assets.to DaveAngel's comment:>>simple its not just a matter of liquidity but solvency >>- the banks do not have enough capital especially if losses continue to mount and we enter a deep recession.If those losses have not actually yet occurred and are still paper losses in the form of bad debt provisions on the accounts, the issue of solvency is a red herring that can easily be dealt with.

QuoteOriginally posted by: ppauperQuoteOriginally posted by: LucetiosWhy do governments are trying to buy the financial stocks or free the banks off their bad assets by simply purchasing them just to end up on their knees begging the banks to pass the buck to the customers?Why don't they just provide a repo facility to the banks for all the new and recent mortgages? to me this simply provide 1) the incentive to the banks to start selling mortgages and bringing them to the facility for further funding and 2) help governments to start the funding flow all the way, through the banks and, to the customers without getting involved in "owning" the banks nor their worst assetsIn a sense, I'm with Lucetios on this:when the bailout plan was first passed, the plan was to buy the debt obliqations from banks (it's since quietly been changed to buying the banks), and we were told the government would likely make money on these debt obligations in the long term.If that statement by the government had been true, it would have been easier, as Lucetios suggests, to let the banks hold the assets long term and lend money to the banks on these assets.to DaveAngel's comment:>>simple its not just a matter of liquidity but solvency >>- the banks do not have enough capital especially if losses continue to mount and we enter a deep recession.If those losses have not actually yet occurred and are still paper losses in the form of bad debt provisions on the accounts, the issue of solvency is a red herring that can easily be dealt with.the banks do not have sufficent capital to hold these assets thats why they have been recapitalised by the governments. if you look at the prices of the common equity you can see clearly that banks are trading at substantial discounts to book - this tells you they don't have enough capital.

QuoteOriginally posted by: daveangelthe banks do not have sufficent capital to hold these assets thats why they have been recapitalised by the governments. if you look at the prices of the common equity you can see clearly that banks are trading at substantial discounts to book - this tells you they don't have enough capital.You seem to have missed the point.Not having sufficient capital is a bookkeeping entry: they don't have sufficient capital because the assets have been written down, because if they tried to sell the assets they'd get very little.What Lucetios appears to be suggesting is Don't write the assets down and don't sell them. As I said before, the government claimed they would make money on these assets in the long term, so if th government is telling the truth, classify them as something other than "short term tradable assets" for accounting purposes and value them on the basis of expected revenue not expected firesale price, and in the interim lend the banks money on those assets

I dont know how you can avoid that as there has a large loss on the assets.

I think what da is trying to say is that the how is repoing the assets going to generate the capital? The cash collateral that is being put up is only going to be what you can liquidate the asset for on the market, unless you do a series of upgrade trades - and even then I believe you won't get that much upgrade from credit junk.

I totally agree with everyone in terms of capital adequacy of the banks. I used the term "repo facility" very loosely to simply provide a general idea. Imagine a firm with $1 asset with 20 cents cash and 80 cents AAA MBS notes and 80cents liability. However, now the firm needs to mark down its MBS note position to 60 cents. This action would make the firm to have 80 cents asset and 80 cents liability - in red.The proposal I thought of would be along the lines of1) Government would take the notes prior to write down, at 80 cents and provide 80 cents as short term funding in repo agreement with some "possible" differences from a typical repo given below. 2) Government does not rebalance the repo to mark-to-market. The 20 cents (or any future drop in price) would be automatically accrued to the outstanding balance. The government becomes an unsecured debt holder of any price reduction (which is 20 cents in this case) with a higher ranking than the equity holder.3) Government can also offer to pass (like a typical repo) or withhold coupons to maintain its exposure.4) Add your own version...Now the firm can fail on the repo (while not on the payables), take the 80 cents and purchase 80 cents worth of AAA MBS notes from a new mortgage issuer. The firm would have an incentive to do this since this is the only product government would repo. Until the firm gets new sources of funding buying new mortgages and repo it to government would enforceable be its only way.I am sure it is very naive. However, I would appreciate a counter argument within the scope of this example.Thanks

Not sure how this helps - in your example you have a bank that has peddled junk to government and has raised very cheap financing off the back of it leacing the credit risk with government. All firms would jump at a chance to repo out their crap for more collateral than it is worth, the government is still bank-rolling the bank just in a slightly convulated way - they may as well just give the bank the 20c and be done with.Just doesn't make sense to me unless I am missing something.

even if someone is willing to lend you many times the multuiple of the value of an asset it does not create wealth for you as you still have to pay the loan back + interest

Thanks

I rest my case ...Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. http://www.treas.gov/press/releases/hp1292.htm