Investors wonder if $700 bn is the right number for US crisis bailout

27 Sep, 2008, 1202 hrs IST, REUTERS

NEW YORK: As the US Congress works to reach a deal on the proposed $700 billion rescue for the US financial system, investors want to know if $700 billion is a magic or arbitrary number.

While investors and other experts at the Reuters Restructuring Summit this week felt the $700 billion bailout, crafted by US Treasury Secretary Henry Paulson and Federal reserve Chairman Ben Bernanke, was necessary to support the financial system, they wondered what the number would ultimately mean to investors seeking to buy distressed assets.

"Secretary Paulson has not really come with any explanation why $700 billion is the right number," Wilbur Ross, the billionaire investor who is Chairman and CEO of WL Ross and Co, said at the Reuters Restructuring Summit in New York this week. "Why not $500 billion or $1 trillion?"

Banks have written off more than $400 billion since the subprime crisis took hold last summer, but $700 billion seemed a very large number, practically pulled out of thin air, some said.

"We talk about a $700 billion bailout, but that number is, I think, almost meaningless," said Ed Altman, a professor at New York University's Stern School of Business said at the summit.
"$700 billion is what is going to be potentially purchased, but these are not valueless assets," Altman said.

If the government buys the assets from financial firms, then later sells them back to the market, it could spend much less than $700 billion, or use the sale proceeds to perpetually go back and invest more in the market, Altman explained.

Others say a big number, whatever it is, is needed to inject confidence back into the market.

"You need a big number for the bailout to have credibility in this market," St. Louis Federal Reserve President James Bullard said on Friday, noting that the market showed a sense of "panic" after the collapse of Lehman Brothers Holdings Inc and the government's rescue of insurer AIG.

But as the government becomes a player in the market for these assets, investors who specialize in purchasing distressed assets also wondered how it would interact with their investment plans.

"It sort of competes with the distressed investors that would otherwise be buyers," Michael Fineman, a portfolio manager at Third Avenue said at the summit.

"If the government is willing to step in and pay a higher price, it will initially squeeze out the distressed investor from buying these assets," Fineman said, noting the government could also find likely buyers to resell assets to in the distressed community.

Distressed investors in the United States, such as those speaking at the Reuters Restructuring Summit, have raised billions to buy up troubled mortgage loans, companies and other distressed assets.

But many have been sitting on the sidelines for now, worried that if they act too early they would "catch a falling knife," as Michael Psaros, co-founder and managing partner at firm KPS Capital Partners, termed it at the summit.

Members of Congress on Friday were reviewing draft legislative language agreed by negotiators for House and Senate Democrats and Senate Republicans on modifications to the Bush administration's $700 billion Wall Street bailout plan. Part of the draft called for the $700 billion to be granted in $250 billion installments.

How the government chooses to value the billions in assets it purchases is also a concern, the investors said.

In a survey of more than 3,000 investors on Thursday from the CFA Institute, 74 percent of those polled felt the government should pay fair value, or mark-to-market value, for the illiquid subprime, mortgage and derivatives securities it plans to purchase rather than any other value.

"The first thing they are really going to have to grapple with is how do you value assets coming in?" Ross said at the summit.

"I think a lot of us suspect that the institutions that own them probably tend to carry them on the generous side. So how do you parse the difference between what some third-party adviser might think is the right price and where they are carried? That's going to be a very critical part of the whole equation."


via:E.T