I am sick and tired of hearing about toxic assets, bailouts, TARP, and stimulus plans. Sick of it I tell you. This financial crisis is exhausting.
To be candid I would not know a toxic asset if it bit me on my not-so-perky ass. So I decided to do a little research (by little, I mean very little, like almost none).
I have concluded that toxic assets are like ugly shoes. It only took me about ten minutes to figure this out. I am not sure why our esteemed elected officials are having such a hard time. I think they should give me a call. I would be happy to explain it to them.
The convo would go something like this…
No one wants ugly shoes.
Get rid of them.
Ugly shoes will never be cute.
Give them away if you must.
Make room in the closet for cute shoes.
See? How easy was that? Banking crisis solved. They can thank me later.
Maybe that was a little too brief for politicians. Fine. Allow me to explain (Or leave now if you know what is good for you).
Banks are like shoe stores. Banks buy and sell bonds, stocks, and loans. They have expanded their business to include MBS (mortgage-backed securities), CDO (collateralized debt obligations), CDS (credit default swaps).
Shoe stores buy and sell boots, sandals, and high heels. Many shoe stores also sell handbags, hats and scarves.
Business has been good for the last several years. Banks were buying all the paper they could get their hands on. Instead of doing proper due diligence, banks relied on credit rating agencies to tell them what they were buying. This would have been fine if the credit rating agencies had known what the hell they were doing, but they did not. OOPS.
Business for shoe stores has been booming. Keeping shoes and accessories on the shelves is challenging. Our shoe store owner turned to E-Bay to make a large purchase of assorted items and relied on the seller’s description without benefit of photos to make her purchase. This would have been fine if the sellers knew what the hell they were doing. Sadly, they did not. OOPS.
When the banks got around to looking at these assets, they discovered that about thirty three percent of it was worthless. These car loans, credit card loans, and mortgages would never perform. Total crap. Thirty three percent had potential. If the banks held these assets for a period of time and the economy continued to prosper these assets had a good chance of performing. Thirty three percent of these assets were stellar. Gold balls. No problem.
When our store owner received her order from E-Bay, she was horrified to discover that thirty three percent of the shipment was hideous, Think Payless end of season clearance. Thirty three percent was from an up and coming designer. They had potential. Thirty three percent were fabulous, Think Prada.
Common sense would dictate that the banks would act swiftly to write the bad debt down, or off their books entirely, sell the remaining assets, and be more prudent in the future. They did not. Instead, they held the paper. The economy slowed down. They were holding the worthless paper. The second thirty three percent of the assets were deteriorating. The remaining third was at risk due to pressure on these borrowers from job losses, gas prices and the general fuckery that was the economic climate. OH NO!
Our store owner could not face her epic screw up; instead of marking down the Payless rejects and getting them out the door, she stashed them in the back room. Out of sight. Out of mind. The up and coming designer she was counting on to recoup her losses from the Payless crap was busted for using kitten fur to line his trendy boots. She would have to mark his stuff down to get rid of it. Demand for Prada purses fell due to the same economic fuckery that was plaguing the banks. OH NO!
As the economy continued to spiral downward banks were faced with insolvency. They turned to the Federal Government for help. Gazillions of dollars were handed out to stabilize the banking system. The toxic assets remain on the balance sheets. No one knows the value of these securities. The private sector is unwilling to invest in them. The government cannot possibly buy them all. So now what? Nationalize the banks or let the free markets dictate who lives and who dies?
Our shoe store owner has hard choices to make. Sell her inventory at pennies on the dollar and risk bankruptcy, or make a deal with the devil. Her soul in exchange for a loan. A bailout in exchange for eternal hellfire and damnation. So now what?
No one wants ugly shoes.
See? How hard was that?