When the Resolution Trust Corporation was created in 1989, nominal GDP was about 40 percent of what it is currently. That RTC took over about $400 billion in assets. So a current RTC could take over around $ 1 trillion and would be the same relative to the economy as the old RTC.
We did manage to get through the early 90s with a fairly mild recession.
Unlike the S&L crisis period, financial institutions holding these assets today are required to mark the decline in value through earnings and therefore capital. I have recently worked on several very large valuation exercises and observe that many RMBS are marked far lower than pessimistic economic scenarios would suggest(though all bets are off if RE declines another 20+%); much of the mark to market writedowns this year is due to illiquidity discounting. The system has seized up, and energy spent unwinding hidden leverage-- particualry in certain derivative sectors. I think the Treasury is betting that real estate values have nearly hit bottom and the mark to market has largely been realized at least on most financial institution's books. The hope appears to be that the Treasury will merely inject liquidity with its purchases of bad assets, thereby slow the pace of delevering, and help to stabilize asset price levels. Lenders & investors, purportedly already having written down the bulk of their losses, and knowing the Treasury is supporting the system (if not their assets overtly), will be confident enough to again to put capital to work.
ReplyDeleteIt's a huge bet because, unlike asset seizures of thrifts,the Treasury must decide who gets priority across many types of financial institutions (not just thrifts) and the actually buy and dispose of the assets. Knowing how long the arteries were clogged with the RTC , the adminstrative bungling may kill the whole purpose and leave the markets to work this through unaided. Batten down the hatches !
The changes in the real estate assets are always enlightened by the media outlets, but you have to keep in mind that even in the area of the decreased real estate market there will be some properties having increased market rate. If you are not aware of the real estate market change then are performing a non sense act of measuring the wider market rate. When you are discussing with the asset owner about the property sale then you should know about the value of David Lindahl scam.
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