VIDEO: What Happened To All Of Those Toxic Assets?

Hey, remember the TARP program? If banks are now paying back TARP funds, then what happened to those toxic assets? Are they sitting in a canyon in Wyoming for the next 10,000 years? Not exactly.

Using a whiteboard, markers, and a delicious gravy metaphor, Paddy Hirsch of American Public Media’s Marketplace explains.

Where’s the toxic waste? [Marketplace]

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  1. Skin Art Squared says:

    At some point, someone, somewhere… is going to have to eat this stuff. If it ends up being the banks, and they choke to death on it and fail, then so be it. But we need to stop artificially propping up these entities and allow them to either claw their way through it, or die. Propping them up only prolongs the natural selection of the financial world.

    • MostlyHarmless says:

      @BZMedia: Hopefully the layer is thin enough that the banks can eventually absorb it as losses.

    • Megalomania says:

      @BZMedia: The idea is that, say, $100,000 of debt might sink you if you had to pay it immediately, but in a few years you might be able to to save up and pay it back. It should be pointed out that by propping up the banks, they really propped up the people the banks owed money to.

      • Skin Art Squared says:

        @Megalomania: “The idea is that, say, $100,000 of debt might sink you if you had to pay it immediately, but in a few years you might be able to to save up and pay it back.”

        Interesting concept. Wonder why that doesn’t extend down to the average person. I know people that are completely unable to pay their mortgage, but in a few years? who knows. Maybe. But nobody is giving them a few years to chill.

    • humphrmi says:

      @BZMedia: Maybe. I suggest an alternative scenario:

      1. Someone with some capital they are willing to risk and a long time horizon (with an equally long profit expectation) buys the toxic assets from the banks.

      2. With fewer “toxic assets” on their books, the banks begin lending again, not because Obama tells them to, but because they operate for a profit and lending money earns them a profit. Risk taking will not be as brazen as it was in the first half of this decade, but it will return, in a more manageable form – because with risk comes profit.

      3. The “toxic assets”, which have tangible assets underlying them (e.g. the real estate property underlying the loans) eventually become valuable again, and the buyers sell them for a profit.

      • frank64 says:

        @humphrmi: I think that was the idea, but the banks think they will be worth more in the long run than they can get for them. They are better off keeping them. Hopefully they have been written down to something that they will be able to realize, otherwise there will be more problems to come.

      • god_forbids says:

        @humphrmi: Sorry, but no. What you’re talking about is still “gravy” – an asset backed by something real, something tangible is comparatively excellent.

        What he’s talking about is something worthless (already defaulted mortgages) backing something else worthless that backs something else worthless which is still held in the BB$$ by banks. That stuff is worth $0.00. I don’t care if it cost $40BB to acquire, it’s worth is not a fraction of a single penny. There is no recovery of costs, just costs for getting rid of it.

        And your imaginary angel investor with unlimited resources and an impossibly long time horizon does not exist. That’s philanthropy, not investing.

        • humphrmi says:

          @god_forbids: The loans may be defaulted, but the real estate backing them is still worth something now and can still recover value later.

          And your imaginary angel investor with unlimited resources and an impossibly long time horizon does not exist. That’s philanthropy, not investing.

          Or, investors that know something you don’t:

          [money.cnn.com]

          Last I looked, BlackRock wasn’t a charity, but a very profitable investment firm:

          [finance.yahoo.com]

          • Skin Art Squared says:

            @humphrmi: “The loans may be defaulted, but the real estate backing them is still worth something now and can still recover value later.”

            Yes, but they aren’t worth anywhere near what the paper says it is anymore. It will recover, sure, but will it recover to the pre-apocalyptic level it was at? And assuming some magical investor appears on a unicorn to buy that stuff, they’ve still got to find someone to buy the actual property. And at what price? Fire sale price or the overvalued pre-apocalyptic price? The herd of eligible buyers has been deeply culled and the survivors are going to be ultra conservative when it comes to picking up these gutted McMansions. There will be ghost towns and a reshaping of suburbia for years to come. Maybe decades.

            • craptastico says:

              @BZMedia: if a piece of real estate is down 30% from where the market peaked, but the mortgage backing it is down 50%, which many are, than there’s plenty of room for profit. I made those numbers up, but these mortgages are trading at a fraction of the value of the underlying real estate. if the RE goes up in value (which it will eventually), it’s a big time win.

          • GearheadGeek says:

            @humphrmi: The problem is that not only is the real asset overvalued that’s at the core of the toxic mess (a house, let’s say, or a piece of commercial real estate) but the derivative structure that’s built on top of much of these overvalued assets served to leverage up the already overvalued asset. So it’s true that there’s some real value buried deep in the forest of obfuscation and leverage, but it’s only worth a percentage of its original book value and at its original book value was worth only a fraction of the leverage piled on top of it.

            No one wants to take the hit that’s necessary to get back to a realistic valuation of the real assets underlying the system. That’s one of the drivers behind banks being unwilling to modify mortgages, because it would involve recognizing in the current or next quarter a loss from the imaginary value of the property to a realistic value on which they might be able to continue to collection mortgage payments. Until a foreclosed property finally actually sells (perhaps for a fraction of what the bank has in it) they can continue to recognize it on the books at its imaginary pre-bubble-burst value.

        • craptastico says:

          @god_forbids: worthless? those mortgages, even the defaulted ones, are backed by real estate. I’ve yet to hear about a real estate market that’s hit zero. let me know if you find one, i’ll buy

      • craptastico says:

        @humphrmi: you hit the nail on the head, but most people won’t put down their pitchforks long enough to listen

  2. yagisencho says:

    Hello, 1990s Japan.

    • god_forbids says:

      @yagisencho: Ding-ding-ding! Give the man a cookie!

    • god_forbids says:

      @yagisencho: *Ding-ding-ding* Give this man a cookie!

      The New York Times and other media outlets have been reporting on the similarities for some time, but the administration seems to want to charge headlong into the same mistakes. Two decades of economic stagnation, coming right up? Makes me sick to think about it.

      • t-r0y says:

        @god_forbids:

        Makes me sick to think about it.

        You’re not alone. But tell me, did Japan create a national health care system during their crisis? How about Crap-and-Tax? Take over an auto industry? We’re MORE than screwed!

  3. ludwigk says:

    Some people do want the fat. I’ve used turkey fat to make a roux for gravy, and it was delicious. Also, Paddy’s “gravy” is more accurately turkey stock, or jus.

    If you have a lot of time, a great way to separate the fat is to put it in the fridge overnight. Then you can pull out the fat as a solid block the next day, and the jus will have gellified. What’s that do for your analogy, Paddy?

  4. Zclyh3 says:

    Toxic assets? You mean legacy assets. hahah

  5. sirellyn says:

    Ugh. I hate these guys trying to explain things. The presentation and analogies are simple to understand, but incorrect.

    First you don’t “balance” toxic assets with anything. They are junk. Worthless. You write them off. Period. They are a loss.

    Second, that “good gravy” that was purchased was only done so because the government insured 90% of losses, and you earn all profits from it. In other words, it’s low risk for investors, however YOU pay! The government pays when there is loss. The more they buy, the more will of course have a loss. And the government gets it’s money from YOU. So that “good gravy” is costing you now, and will continue to do so for years. (Even though it’s off the banks balance sheets.)

    Lastly you’ve bailed out banks whose management ran them into the ground with these practices. So even if you’ve given them a transfusion of cash, how in the world do you expect their behavior to change if there were no repercussions for it???

    Remember even if the bank went under the management at the bank wouldn’t be broke, but they would suffer because they would have to find other jobs.

    Also real people who got burned (and badly) from the banks collapse losing money would obviously find better SAFER places to store their money.

    Instead you still have people trusting the same unsafe places still led by the same reckless managers!!

    In short, where did the toxic assets go? The banks still have a bunch, and they’ve offloaded some that have a hope in hell of making money, but most still won’t, and you’ll end up paying for it.

    • bmorg003 says:

      @sirellyn: A much more intelligent, well-worded, and (much more) accurate explanation of the “gravy” analogy. Kudos; very well done.

      Talk about being honest, some of these people explaining and saying everything is back to normal in finance (Goldman posting big numbers) are just plain lying. While the banks numbers are looking better, the tax payers will be feeling the pain from this for a long long time… ([zerohedge.blogspot.com])

  6. KainTheGreat is a Spy! says:

    SWEET! Paddy is back!

  7. t-r0y says:

    A related question that needs to be addressed is:

    What’s happening to all that TARP money that’s being paid back to the government? Principle plus interest!

    The TARP will probably end up as a perpetual slush fund for congress to use at their discretion. But seeing how congress abused recipients of the TARP funds, no company in it’s right mind would accept TARP funds in the future. But that won’t stop the funds from being used! There will be unscrupulous companies (probably with ties to friends in congress), that will be more that willing to take the funds and fail to repay them. I’m sure that we kiss that money good-bye.