If I am an expert at anything, it is that I know a lot of things that "don't work." From a Kool-Aid stand in 1958, selling Kool-Aid with no sugar to save money, to selling real estate tax shelters in 1986, the year of the infamous Tax Reform Act of 1986, to a period spanning from Q3 2007 thru Q1 2009, attempting to sell distressed loans via sealed bid, I have earned a Phd in what does not work.
Some things don't work because of our mistakes or omissions (the original sugar free Kool Aid of 1958). Some things that once worked well become obsolete because of new rules or changed legislation (the Tax Act of 1986). And some things that once worked seamlessly and efficiently, one day stop working at all because of market changes beyond our control (sealed bid, date certain loan sales).
Today our banking system is broken, maybe not irretrievably, but the system we knew for the past decade is not working. The new system that will emerge will be different, it may be better, it may be worse, but certainly it will be different, but for now it does not work. No matter what the Treasury reports, no mater what accounting standards,or lack thereof, are enforced or implemented, the fact remains that most of the top 100 banks in the country are presently insolvent because of massive losses related to real estate loans. The FDIC continues to close "selected" banks while the "too big to fail" list appears to grow. New plans are trotted out weekly by the government that are touted to save both borrowers and lenders, only to be abandoned within weeks that they too will not work.
As I write this post the plan to buy toxic assets from banks is once again on the front burner. This time it is designed to be limited to, and for the future benefit of, the billionaire's club. The same Wall Street firms and hedge funds that brought us to the brink. You can be certain that the latest plan will be no more transparent than past plans. Still no plan or model has been developed that can or will indicate fair market. Still there is no plan to assure sellers that they are not giving their assets away and still no plan to insure that buyers are not paying too much.
For the past (20) months the loan sale industry has been mired in gridlock. We have witnessed historic spreads between what sellers need for their assets and what buyers are willing to pay. Industry experts agree that, with the exception of the FDIC sales, there has not been a significant public sale of loans in almost two years.
There is no clear reporting by advisory firms as to the level of bidding and no reliable source exists as to the loan sales results. Even the FDIC does not allow their contractors to disclose sales results. The FDIC does publish bid results within 90 days of a sale, but only in pools and only by pool ID's. If you were not a bidder on that exact pool and had the ability to identify the loan types and loan quality of the pool the information is useless. Further, pooled loans can be of wide variety of collateral types, loan balances, loan quality and geographic locations that make an individual asset value impossible to determine. The effect of this lack of transparency in loan pricing and sales results makes an entire industry a guessing game. Imagine if real estate appraisers could not use comparable sales as a determination of value. Appraisals would be worthless. What is the big secret? Why are lenders and the government so reluctant to publish sales results? Because we could see an accurate picture of a lender's health or the true value of their remaining assets?
In addition to value issues, loan quality continues to deteriorate at a historically rapid pace while older distressed loans that did not sell in previous attempts pile up. We continue to talk about this "tsunami" of unsold loans or as Treasury now calls them "Legacy Loans." I am glad they renamed it, tsunami does not adequately describe the immense backlog, it's much larger. Legacy however, meaning multi-generational, much better describes the situation.
The single unresolved problem that continues to plague most lenders today is insufficient loan loss reserves. TARP money has not solved the problem nor will selling the loans under any machination of proposed value as the result of government financing or public/private partnerships. The only sure way investors (the general public, not synthetic PPIF's) will ever participate en mass buying up these Legacy assets in is to sell the assets for cash, "as is" and let the market find its true bottom. This will not happen until there is transparency in pricing and sales results. Until the market is neutrally buoyant, without the aid of Federal life preservers, it will always be in danger of sinking further. Can we handle the truth?
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