The Obama Administration’s rumored plan to buy "troubled assets" to rescue banks presents the government with a "thorny valuation problem," the New York Times reports.
The article gives an example of a bond held by an unidentified "financial institution" which is "backed by 9,000 second mortgages from borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent."
The financial institution values the bond at 97 cents on the dollar. Standard & Poor’s values the bond at 87 cents at the current default rate, but estimates the bond’s value could go down to 53 cents if the default rate doubles. But someone actually bought one of the bonds recently. The purchase price was 38 cents.
According to the article, financial industry critics "say that the banks’ accounting for those assets cannot be trusted because they have an incentive to use optimistic assumptions."
Read More