So Citi has likely received $205 billion on collateral of only $100 billion or so (assuming the rest of their assets are similarly mismarked).
If all of Citi’s assets are mismarked by 50%, that’s just about enough to pay off the depositors. Wouldn’t it be cheaper for the government to shoot Citi now, pay off the depositors, and be done with them as opposed to guaranteeing their $1.8 trillion in liabilities?
I don’t get why you say that liquidating these big banks now would be more expensive for taxpayers than zombifying them. The up-front cost may be more but I think the long-term cost would be less. [/quote]
Regarding the specific collateral issue, the FHLB only loans 50% against the value at origination of “qualified collateral,” so it’s still covered if the asset falls by 50% in value (although, admittedly, not much margin of safety). This is pretty typical for bank-related ST lending arrangements.
Regarding the liquidation of performing loans at 50% of face value… (1) you’re making my point for me to let the Big Pigs ride this out (who’s getting rich off buying performing loans at 50% of face? You? The taxpayers? Nope! It’s the banksters!!); (2) this gets to the heart of the MTM issue in my original post.
An example. Let’s say two different banks originated two identical loans: 10-year maturity mini-perm at 6% three years ago. Small CRE building, $2 million loan at origination, 20 year amortization, original LTV of 80%. Fast-forward to today and some principal’s been paid down, so now we’re down to a 75% LTV on the ORIGINAL loan, but cap rates have increased so that now it’s a 100% LTV loan. Not pretty, but not the end of the world. But it couldn’t be refinanced TODAY as a performing loan because of the LTV.
Bank A fails and the FDIC sells Bank A’s loan to a group at 50% of face value. What’s going to happen? The group that bought it is probably going to go to the borrower and say, “Hey, take us out of this thing at 65 and we’re happy.” The borrower’s going to go to another bank who’s willing to lend at the “new” 80% LTV and the buyers are paid off. So where did the 20 go? That’s right! “We” ate it. And the borrower and the buyers make out like bandits. Ain’t America great?
(Recall that the bank only wants to earn its 6% over the life of the loan. The buyer from the FDIC wants to earn 20%+ on that same loan. Thus the valuation disparity.)
Bank B is still in business. They have this loan that is performing but it’s at 100% LTV. But, the balloon isn’t due for another 7 years. So, this property continues to pay and 7 years later, even with higher cap rates, it’s down to maybe a 65% LTV because of the principal paid down. It’s a performing, conforming CRE loan once again. No problems refinancing it. Where did the 20% “we” lost in the previous example go? The borrower paid it off. Just like s/he should!
So, my point is – again – that a hell of a lot of these loans that are “underwater” will ultimately pay off (not all of them, mind you – but the vast majority of them) if we give it some time. But if we try to cram all this stuff to the curb at once, the folks who are going to lose are “We the People.”
Regarding Citi and shutting it down, I think the larger problem is not saving the depositors – although that’s a big issue (although there is a chunk of capital between the equity and the depositors). The bigger problem is that Treasury doesn’t have enough manpower or expertise to handle a company like Citi in receivership (look at the bang up job they’re doing with AIG – which is in quasi-receivership). The task would be so gargantuan and complicated that it would be very difficult to pull off (multiply Lehman by a factor), especially given all the other shit on their plate. And I think given the Monday morning quarterback complaints after letting Lehman go down, they’re gun shy. (I was for letting Lehman go down, for the record.) Anyhow, I think that’s the “logic” being applied to handling the Citi’s of the world.
