Toxic Waste--Toxic Assets

I love the term “toxic assets”. As I understand it, an asset is something of value—like a house or a savings bond. I always associated “toxic” with waste or garbage. (If your kid plays on toxic waste, his hair will fall out or he’ll turn green, so forth.) What happens when WE play with “toxic assets”?
This week’s “BusinessWeek Magazine” says the problem with our banking system is all of their “toxic assets”. Are they suggesting that our entire banking system—or a substantial portion of it—is not much more than a pile of garbage that’s been left unrefrigerated for too long?
That, when you contemplate it for a moment, is a truly horrible thought. It suggests that a very large part of what this nation thought was its wealth was really infectious trash. It’s toxic to the banks that bought the stuff, toxic to shareholders in those banks, its toxic to the people whose mortgages the trash paper claims to represent. In other words, it’s liable to make everybody sick. Including taxpayers with absolutely no stake in these institutions except that they live in this country.
What’s worse, nobody seems to have a handle on exactly how much money this stuff represents. In a stack of bundled mortgage papers, how much is real value; how much is worthless? Are we talking a trillion? Two trillion? More? Less? If you hold stock in those institutions, how much is any of that worth? How about instruments based on credit card debt? How big is that?
Bank of America, which felt healthy and hungry enough to gulp down Merrill Lynch last fall is said to be on the verge of legal insolvency. (For Federal regulators NOT to take over a bank, the value of the bank’s assets must exceed its liabilities.) BoA is said to have only a tiny margin left before liabilities outstrip assets. One little flip of the market—and boom.
You want to line up for that bailout? (Incidentally, “BusinessWeek” says the bailout has already failed.) Can we afford to prop up something as huge as BoA? We don’t even know what its assets are really worth. How many are toxic? How many are sound?
But if it fails, what else falls down with it? Nobody knows. That’s why nobody wants to lend to another bank (so it can lend to you). Nobody knows what, if anything, the borrowing bank’s assets are worth. Will it be around to repay? Around or not, will it be able to pay? Nobody knows.
Nobody, but nobody wants to go through its own books, its own stack of bundled mortgages and credit card debt to see which ones might really be toxic. A bad answer to that question could tip you into insolvency. By next Friday. Or sooner. So nobody knows.
Obama doesn’t know. Congress doesn’t know. The Fed doesn’t know. Probably most bank CEO’s don’t know (some may have horrible premonitions—but they can honestly say they don’t know. Not knowing can be used as a “Get Out Of Jail” card if necessary).
If you KNOW there’s a peevish and hungry lion around the next corner, you may be able to come up with a way of dealing with the situation. But if you have absolutely no idea what may be around that corner, the situation becomes insolvable.
Ask any businessman. Ask any general. Intelligence (knowing) is vital.
So how did our banks get into such a mess—where their asset column smells more like a pile of rotting sewage than money? How did they wind up in such a messy, ugly situation? How did a banker’s life get so “toxic”?
Wouldn’t it make some kind of sense to take a census of this stuff, garbage and all, before committing ourselves and several future generations to paying for all of it? Tell me the thing is cracked and needs some fixing, and I still might buy it. Tell me nothing—I won’t buy.
Right now, they are telling me nothing. I’m not buying. I don’t care how critical President Obama tells me speed is. Pressure for speed is an old encyclopedia salesman’s trick. “Buy TONIGHT or we can’t give you all these wonderful extras.” They used to do that in “Going Out of Business” sales in the old Times Square. I always walked away.
Let’s know what we’re buying first. There’s only so much garbage my container can hold. As much fun as I think the phrase “toxic assets” may be, I don’t like the real stuff at all.
Tomorrow, let’s look at some things we ought to do before there is any bailout at all.