Sunday, September 26, 2010

Guaranteed Box of Crap, Part NINE

I've used this quote (Tommy Boy) before, and I'll use it again - every time we stamp a Government guarantee on crappy assets:

"Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I've got spare time."

Today's occasion?  >The Wall Street Journal explanation of the Credit Union takeover.

First, let's hope around the article and pull out some direct quotes:


"Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.
Officials said the plan won't cost taxpayers any money."


"Losses on the mortgage-backed securities held by the five seized credit unions are expected by regulators to total about $15 billion. Wiping out the capital of the failed institutions will cover a chunk of those losses. But the remaining $7 billion to $9.2 billion eventually will be passed along to the nation's 7,445 federally insured credit unions in the form of future assessments."


 "Together they had about $50 billion in shaky mortgage-backed securities on their books, according to Larry Fazio, NCUA's deputy executive director. 

Based on current market values, those securities are worth roughly half of their face value, representing a potential loss of $25 billion"

So, to summarize:  We have  $50B in bad assets, which are currently worth roughly $25B, which will be stamped "GUARANTEED" by the government and sold for $30-$35B.   Since it seems that this time the Powers That Be actually realize up front that there will be losses (though they are careful to note: not to taxpayers, and not to buyers of the "guaranteed" paper), this may be the best use of "guaranteed box full of crap" thus far.  Who will eat the losses?   The remaining credit unions - you can think of this as a kind of FDIC for credit unions - their regulator will assess fees as a way to recoup the losses that will eventually be taken.  Magically, these losses are delayed/spread out via the "guarantee,"  allowing the pain to be taken over a longer period of time.

Maybe this one will actually work!



Anonymous said...

Not sure if I get it. If I buy the "gov't guaranteed" bond from NCUA that is backed by the "box", I don't really care if the box is full of gold or crap. What does it mean to be backed by some assets if the bond is also gov't guaranteed - doesn't that guarantee make it as risk-free as a Treasury bond? I do understand how the NCUA will recoup the loss of paying out on the guarantee by raising fees on the member CUs.

Kid Dynamite said...

they stamp the box of crap guaranteed, get people to buy it - like you said - it's GUARANTEED! and when the eventual losses happen, they've delayed that day of reckoning (hopefully) long enough to have raised the fees to pay for the shortfall.