Cited: Reuters

A much-awaited program to cleanse toxic assets from banks balance sheets should be ready to roll out soon according to the new overseer of the US government’s $700 billion bank bailout plan. Progress has been made in developing public-private partnerships in an effort to pair investors and the government in buying poorly performing assets from banks was told to a Congressional Oversight Panel by Herb Allison.

“I’m confident that very soon we’ll be launching partnerships,” Allison said. In a wide-ranging exchange of questions and answers, Allison said there were signs the U.S. economy was on the mend but stressed there could be no let-up on recovery efforts.

“Our financial system and our economy remain vulnerable, with unemployment still rising, house prices falling and pressure on commercial real estate continuing to build,” he said. Allison also said that Treasury will “soon” publish guidance on how to value warrants that the government received when it injected capital into banks and that the banks are able to buy back as they regain stability and pay back the capital.

“We’ll soon be publishing on our website our approach to valuing the warrants and if it comes to that, disposing the warrants,” he said. The warrants to buy shares were intended to provide a means for taxpayers to share in the profits of banks that benefited from being able to draw on taxpayer-funded help.

Allison was confirmed by the Senate last week as Treasury assistant secretary to head the Treasury Department’s Office of Financial Stability, which manages the Troubled Asset Relief Program, known as TARP. Congress approved TARP last year under the former Bush administration.

He noted that about 30 companies that received cash injections from the government have repaid $70 billion and added that about $5 billion has been received in dividends on stock the government got in return for investing in firms.

Allison, a former chief executive of mortgage finance company Fannie Mae, replaces Neel Kashkari, who was appointed to head TARP by the former Bush administration. Kashkari carried over in the Obama administration until early May.

OPTIMISTIC ABOUT BANKS

Allison expressed confidence that so-called public-private partnerships to cleanse toxic assets from banks’ balance books will soon be launched. The partnerships are intended to pair private investors with the government to finance purchases of poorly performing mortgages and other holdings that might then be sold in the future at a profit while relieving banks of carrying them.

“We’ve made a great deal of progress,” Allison said. “It shouldn’t be long before we announce the first stage in that program.” Responding to questions, Allison said it was heartening to see increases in banks’ stock prices as well as rising confidence among financial sector participants since the government reported the results of “stress tests” on the adequacy of their capital levels.

“There are encouraging signs that the banking industry has been strengthening itself significantly,” he said. In May, the government announced the results of in-depth stress tests on the 19 largest U.S. banks. The tests were designed to gauge how the firms would weather more adverse economic conditions.

Since then, many banks have been aggressively raising capital by selling stock. Allison avoided a direct answer when asked whether the government might undertake the high-profile process of stress testing again, but with even tougher economic assumptions.

He said the administration’s regulatory reform plan calls for regular, ongoing stress tests of the nation’s biggest banks, but those tests will likely be part of the private supervisory process. Allison said he will review the controls over the use of the taxpayers’ money that funds TARP and try to make sure its operations are transparent so that people can see what is being done and why.

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My Take: I understand that banks and real estate are the major portions that run our economy, why don’t they talk about lowering prices. The high cost of products in this country is what makes it hard for people to spend money when they need to.

I remember in college when I took economics, one of the things my teacher taught us was about “turnover”. A business can more money in the “turnover” of a product, if they lower their price. For example, if a widget costs a business $10 to purchase and then sells it for $20, that is a $10 profit.

Of course, that $10 is not all profit. Part of that goes towards expenses of selling the widget. If it only costs a business $5 to sell a widget, then the profit margin is $5. That is the equivalent of a 25% profit. By lowering the price, the business will sell more widgets with a lower profit margin. However, if a business lowers the price of the widget and increases their order, which will usually lower their cost per item, they will be able to sell more in the “turnover”. See chart below:

As you can see the in the above chart, if a business maintains the same order and lowers their price, they will lose profit. However, if they increase their order, which will lower their cost per item usually, they will increase their profit by selling more. Simple economics! If more business owners would think like this, prices all over the country would go down and people would buy more!

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One of the strongest segments of the real estate market last year was the purchase of houses for investment purposes and accounted for 1 out of 5 home sales for 2008. This was still down several points from the housing boom in 2005.

Investors are keeping pretty close to their home area by following a long-standing rule that states invest in the local market that you know. Of property purchase for investments, 54% were located within 20 miles of an investor’s home and about 2 out of 3 were within 50 miles of the investors’ home.

This means that Minnesota homes for rent were purchased by investors in Minnesota. This means that if you rent in Minnesota you could be living next door to the owner of the property even though your payment goes to one of many property management companies in the area.

More investors were purchasing houses in distress situations like foreclosure or trustee sales. This is really no surprise, given the number of REO and auctions that have dominated many real estate markets today. Moreover, prices were down. The price of a rental unit in 2008 was $108,000 according to one Realtors study. Investors also seem to be buying units at a higher price. There is no mystery here, because interest rates are getting lower

Even with interest rates being so low, many investors seem to avoid banks or other lenders altogether. Many investors paid cash for their purchases instead of worrying about a mortgage. Of course, an investor is in it for the money where a primary residence buyer is trying to buy a home.

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