Saturday, September 26, 2009

The Continued Risk of Troubled Assets

This is primarily a mental note to myself to eventually read the August 11, 2009 Congressional Oversight Panel report on The Continued Risk of Troubled Assets. Despite all of the hype, fearmongering, and general dis/mis-information floating around about the financial crisis, this report has a lot of hard, factual background.

Personally, as frightening as "troubled assets" sound, my view is that the goal is to get the economy going again and then a vast swath of these "troubled" assets will lose a lot of their risk. Sure, a double-dip into a deeper recession would spell a lot of trouble for the troubled assets, but as someone once famously said... It's the economy stupid! The Federal reserve has two big jobs right now: 1) provide financial "support" for the banks so that they can limp along despite the burden of "troubled assets", and 2) provide money to boost the general economy so that the troubled assets are actually productive assets for the banks.

The real solution is not to dump the "troubled assets", but to modify the terms of so many of the underlying mortages so that the risk is actually reduced and the assets are no longer "troubled".

In summary, my view is that the main focus should be on getting the economy on track since the risk to any mortgage-based asset is that so matter how solid a mortgage looks, its risk shoots through the roof when the homeowner loses their job for an extended period of time.

For the longer term, we need to come to grips with the fact that the banks were unable to recognize and adjust for the fact that the were holding assets that were over-valued due to to an asset bubble. Dealing with asset bubbles is an unsolved problem.

In any case, I wish I could find the time to study that report.

-- Jack Krupansky


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