The Obama toxic assets

David Ignatius:

Remember those "toxic assets" that were clogging the financial system a few months ago? Well, despite all the billions in government bailout programs, they're mostly still there. And in trying to clean up the system, the Obama administration has actually created a new category of toxic assets that banks desperately want to get off their books -- namely the U.S. Treasury's forced infusions of capital.

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To restart the securitization machine, Treasury and the Federal Reserve have proposed a series of programs with tongue-twister names. They include the Term Asset-Backed Securities Loan Facility (known as "TALF") and the Public-Private Investment Program (known as "P-PIP"). But these programs have had limited success, so far.

The Treasury argues that securitized lending is slowly coming back, thanks to TALF. That program made available up to $200 billion in public loans to support new issuance of asset-backed securities. A Treasury fact sheet boasts that $13.6 billion of these new securities have been issued this month, more than double the combined total for March and April, with $9.6 billion financed though TALF.

That's all fine, but the new issues are a small fraction of the securitized lending that was taking place two years ago -- for the simple reason that investors remain wary of buying and selling the bundles of debt. In the fourth quarter of 2006, the total issuance of asset-backed securities (excluding mortgage-backed securities) was $250 billion; in the fourth quarter of last year, that total was just $5 billion. The market has come back a little from that low point, but not much.

Private lenders are extremely wary of having the federal government as a partner. And this phobia about government money could actually cripple Geithner's plan for public-private partnerships to buy up toxic mortgage securities. After the public flaying of AIG executives' bonuses, financial CEOs became wary of taking P-PIP loans -- fearing that they would be attacked as profiteers or morons, depending on whether they made or lost money. Many analysts predict P-PIP will have few big-name players.

Fear of federal funds has become so acute that leading bankers are competing to see how quickly they can pay back last year's capital infusions from the Treasury. Jamie Dimon, the chief executive of J.P. Morgan Chase and perhaps the industry's most successful banker (a relative term), says he wants to pay the government capital back as soon as possible -- and as for P-PIP, forget it.

Summers and Geithner keep hitting the credit restart button. But what if the securitization process itself is the problem? What if the mistake of the 1990s was that we strapped a casino to our economy, and let the roulette wheel take control? Summers and Geithner may want a better-regulated casino, but is that really the right way to build a new foundation for the economy?

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One of the problems is that the TARP funds were just the gateway drug for government seizing control of the financial markets and imposing control freak policies that make finance more difficult.

Another huge problem is the collateralized mortgage securities are still difficult to price because there is no way to determine their value with any assurance. A corporate security can be valued by the marketplace based on the companies financial statement and other known metrics. But there is apparently no equivalent in the mortgaged backed market. The pools of mortgages are not audited.

Before the collapse, the financial community tried to deal with this absence of data with quants running probability studies in much the same way they might attempt to predict the results of a roulette wheel. After the massive failure of risk analysis that led to the debacle, the quants have lost their magic and nothing has so far taken its place. Until some dependable data can be filed on a quarterly basis, we are unlikely to see a robust market for these securities.

As for the desire to divest TARP funds, the Obama administration keeps making the case for that with their heavy handed control of business decisions and the Chrysler deal is just one example of how they force decisions that are against the interest of the banks.