Bank Bailout: Who Is Paying the Bill? Banks balking @ discount to prices banks now hold

[EV_Ares]

Will Uncle Sam take a pound or an ounce of flesh? The answer will be central to understanding the implications for banks, and taxpayers, of the massive bailout plan announced Friday by Treasury Secretary Henry Paulson.

The idea is for the government to establish a rescue vehicle that will buy hard-hit securities from financial institutions. Those purchases will presumably be done at a discount.

But to what? The prices at which banks have marked those assets? Current, more downbeat market values? Or perhaps their original, face value?

Picking a level determines whether banks or taxpayers shoulder the loss. Because, make no mistake, there will be some loss associated with the kind of securities the government plans to buy. That is, after all, why no one else is willing to buy them.

Yet banks may already be digging in their heels, with at least one industry group suggesting Friday that there shouldn't be any discount to the prices at which banks now hold securities.

How this plays out also will determine whether it makes sense to get back into bank stocks, because the government's plan will effectively recapitalize them free -- or if it is still too early to dive in, because banks will still have to raise new, dilutive equity, even if at a more-relaxed pace.

Here are some of the options to consider. Say Bank X is holding $1 billion in toxic mortgage-backed securities. The bank has marked them down to $800 million, recognizing a $200 million loss. No one in the market, though, would buy them for more than $500 million.

entire article @ link: http://online.wsj.com/article/SB122187297025359317.html

[kurt_cagle]

1. I wondered when this would finally show up

I had a feeling that the banks on Friday, when they initially heard this, were under the impression that the Feds would simply take the bad debt off their hands at a small discount, so that they make it like bandits while the taxpayers get fleeced. However, it sounds to me like the Fed is effectively saying that the US will now become a "market" and as such will determine value based not upon a blind purchase but a legitimate evaluation of the assets at hand. This has the potential to be a longer, slower and far more painful process to the banks than they'd originally expected, and all of a sudden senior execs are beginning to have second thoughts.

My prediction, this will go the way of the SIV that Paulson tried to create last year, that sounded really good when first announced but that ultimately no one bought into because it wasn't seen as profitable enough for the banks.

[EV_Ares]

2. Yeah, the banks intent is to make money on these real estate deals later

when the property goes back up. Foreclose on them now, then sell them later on with the value increases. The people will end up getting screwed again & the same people will end up getting richer with the help of our congress.