Friday, May 15, 2009

How big will be Germany's "toxic asset dump" or "bad bank"?

On the 13th of May, the German Cabinet apparently agreed on a plan to establish "bad banks", in order to remove so called " toxic assets" (that is, liabilities that may get very much worse!) from the balance sheets of German banks.

While Berlin hopes the plan will not "further burden German taxpayers", the size of the current burden is not clear. Most people are quoting a figure of €200 billion ($274 billion), but some are quoting $800 billion. Not an insignificant difference!

Part of the problem with such "assets" or "questionable bets" is that no one really knows which company or institutions holds how much of them. Some have not revealed the true size of their holdings in the hope that if the economy returns to growth, some or even most of their presently-sick bets will turn positive.

The officially-sanctioned guess is that the world has something like €3 trillion in toxic assets. Unofficial estimates range beyond $1,400 Trillion.

According to the new German plan, banks will set up their own subsidiaries in which to park these liabilities. The new subsidiaries would then refinance the "bad" assets by the issue of state-backed bonds to the mother bank. That would remove the risk of further write-downs from the balance sheets of banks, and put an end to the quarterly announcements by banks of huge write-downs as the "assets" move from potentially negative value to real negative value. Such movements naturally have consequences for banks' reserve capital holdings, and have led many to the brink of collapse.

The funding for the plan would come from the €500 billion bailout fund, known as Soffin, which was passed last autumn, and apparently still has some €260 billion left in it.

The problem is that if any bank's "bad subsidiary" makes losses greater than the bonds issued, it would of course be again in trouble – and threaten again the value of shareholders' capital in the bank.

Though the above-mentioned German scheme applies only to privately-owned banks, Germany is also full of state-owned banks, many of which are in trouble - but there is a similar scheme being planned for them.

Is all this good or bad? It is good for "confidence" or "faith" in the system. It is bad because of the excessive cost that is being paid to "rescue" ALL "toxic assets".

In my view, only those "toxic assets" should be rescued that were entered into as a necessary part of insuring one's real business. There is no need to rescue people who made it their business to gamble.

Howver, this scheme (like those of many other governments) guarantees the losses of the gamblers, while giving governments no share of the winnings of the gamblers.

Very nice for the gamblers. Very bad for tax-payers who will have to foot the bill. Sphere: Related Content

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