If you’re confused at all about the current financial crisis—what caused it, what can be done to fix it—then read this
Floyd Norris, the chief financial correspondent for The New York Times, has one of the simplest yet precise takes on the ongoing financial meltdown in an article in today’s Times titled “U.S. Bank Bailout to Rely in Part on Private Money.”
Courtesy of Flickr user Luigi Rosa
There have millions upon millions of words devoted to the current crisis. But Norris’s clean, deft writing here shows why he’s one of the top business reporters at the old gray lady.
Here are a few grafs written for the common reader yet detailing complex financial processes.
When the Bush administration introduced its original $700 billion bank bailout plan last fall, the government was supposed to be the primary buyer of the damaged assets — the securities tied to subprime mortgages and other dubious loans whose value plunged as the financial crisis intensified. The idea was to pay more than private buyers were willing to spend, but less than the assets might eventually be worth after a recovery.
After it turned out that the banks were in even worse shape than thought, the Bush administration decided it was more important to invest directly in the banks.
It was also unclear how the assets would be valued, raising political questions about whether the purchase prices would be fair both to the banks and to the taxpayers. But as those assets have remained on the banks’ balance sheets, they have continued to decline in value, producing more multibillion dollar losses.
The securities are complex and hard to evaluate, and there is little public information about precisely which assets are owned by each bank. And some prospective purchasers say banks are not making many available for sale, or have refused to accept the prices being offered.
The Obama administration, in proposing its plan, will be seeking to spend the remaining half of the original $700 billion in bailout money.
By trying to bring in private sector buyers to set prices for the distressed assets, and to take some but not all of the risk that the asset value will continue to decline, Obama officials evidently hope to restore confidence in the banking system. They will also try to avoid the politically perilous course of having the government directly buy the assets at prices that could turn out to be far higher, or lower, than their eventual value.
The assets were the product of a market that grew rapidly in the past two decades, in which loans made by banks, and sometimes by others, were packaged into investment securities with varying levels of risk.
Because of the hedging of risks, some were presented as safe, even if the underlying loans were risky. When these securitized assets were being created, federal regulators declined to regulate this rapidly expanding shadow financial system. Alan Greenspan, then the chairman of the Federal Reserve, argued that the complex securities were improving the safety of the banking system by transferring its risks to outside investors.
It turned out that he was wrong, as became clear when the crisis spread last year.
