The Core Question: What’s This Junk Really Worth?

Now that the details of Obama’s bad-assets are coming out, the back and forth begins.

So far, Mr. Market likes it. The president’s political base and lefty economists—not so much. Essentially the government will guarantee that hedge funds/banks/private equity can gamble with the public’s money with little skin in the game in the hope that it will break up the logjam that’s freezing lending and causing panic in the system.

But the core of the dispute is the question of whether the toxic assets are being fundamentally overvalued or undervalued by the market.

First a word on the “market”: As far as I can tell, there is no market for these assets. By no market, I mean there are no sales. The banks want 75 cents on the dollar, say, while investors want to pay just 20 cents on the dollar.

But I haven’t seen many stories, if any, digging into what these assets might be worth. That’s impossible you say. True, but it is possible to find out how much cashflow the securities (or at least one CDO, or a few CDO’s) are kicking off and how that cashflow is trending.

As far as I can tell, the last sale was Merrill Lynch ditching its assets last summer for twenty-two cents on the dollar. Has anything been sold since? What is the bid-ask spread? Meaning, what are banks asking for assets and what are investors bidding for them? How much do banks need to recover from these assets to make them solvent?

Don’t get me wrong. The press can’t answer these questions definitively. I think it could get at some of it anecdotally at the least. If it can’t do this stuff, it should write a story about that.

This is critical information that would go a long way toward determining whether the administration’s plan can work.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.