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Thread: Help me please

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    Senior Member badbullgator's Avatar
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    Default Help me please

    I don't understand this for the life of me. Buying "toxic" assets....???? Share in any profit?? I don't understand any of this, how do you ever profit from "toxic" assets? Isn't that a big reason the banks are in trouble now anyway? Is this really saying we are going to throw more money (that we don't have) away buying bad debt that will never be recovered?

    http://www.msnbc.msn.com/id/29817617
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    Senior Member YardleyLabs's Avatar
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    Quote Originally Posted by badbullgator View Post
    I don't understand this for the life of me. Buying "toxic" assets....???? Share in any profit?? I don't understand any of this, how do you ever profit from "toxic" assets? Isn't that a big reason the banks are in trouble now anyway? Is this really saying we are going to throw more money (that we don't have) away buying bad debt that will never be recovered?

    http://www.msnbc.msn.com/id/29817617
    Toxic assets are typically non-performing loans. While those loans may have a true future value of, say, 50% of face value, they may be unmarketable today at prices of more than 10-20% of face value. The situation is complicated by the fact that assets have often been split into mutiple components with different risk profiles making it virtually impossible to strucutre a workout on the loan. By purchasing the assets for something greater than current market value but less than future value, the government may clean up bank balance sheets and improve their liquidity. By then holding the assets pending workout or by selling them as individual loans to a work out specialist, the government has a reasonable probability of profiting from the transaction over time.

    Obviously, the devil is in the details and those would determine the result. A variant would be for the government to offer reduced rate long term financing to private entities to buy out these assets. The problem there is that there would be likely to be a lot of cherry picking leaving the worst assets in the government portfolio.

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    Quote Originally Posted by badbullgator View Post
    I don't understand this for the life of me. Buying "toxic" assets....???? Share in any profit?? I don't understand any of this, how do you ever profit from "toxic" assets? Isn't that a big reason the banks are in trouble now anyway? Is this really saying we are going to throw more money (that we don't have) away buying bad debt that will never be recovered?

    http://www.msnbc.msn.com/id/29817617
    It's not a whole lot different than the S & L cleanup in the '80s. Everything has a value that someone is willing to pay. Vulture capitalism is an area where many investor's excel. There were & are mutual funds that specialize in that sort of market in bankrupt companies - just hasn't been much of it lately, everything has been grossly overvalued.

    In it's simplest form - buy a package of mortgages, 80% paying on time, 20% in various forms of slow to default. Look at the underlying value of that market, the ability of the 80% to continue, the ability to clean up the 20%, community strength, the personnel required to do the cleanup & make a bid. It really means you own the house if no one can pay, so can you sell it? It strikes me as an area where expecting a 15-20% per year return or more would be required to get investors to do the assets. Which would make some "toxic" assets being given away to steep a price. But that's why they have garage sales, people see value where others don't.

    There was a time when the makeup of the Forbes 400 included many who had became rich in other's throwaways.
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    Senior Member road kill's Avatar
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    I think this is a little more accurate and understandable....so to speak.....

    Let's say that Bob had a loan with Mellon Bank. The Loan is for $200,000 for a house and Bob pays 6% interest. The house is collateral, meaning Mellon gets the house if Bob defaults. But this house was valued at $275,000, so what is the worry?

    So now Mellon Bank has "mortgage paper", which is an asset. They can sell the mortgage to anyone they wish. Bob will then be required to pay the purchaser, who will get the benefit of the 6% interest. It's an investment which may (or may not) make more money in the future. A good idea if Mellon needs money immediately.

    But ol' Bob doesn't have the money to pay this mortgage. At the same time, the house value has greatly reduced to $150,000. Bob still owes $199,000.

    If Bob defaults on this, Mellon will only be able to recover a portion of their money back. The mortgage paper has now become illiquid (the house can't pay the mortgage). Mellon is now unable to sell it. Why would somebody pay for an asset that guarantees you will lose money?

    That mortgage has become a "toxic asset".

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    Senior Member Goose's Avatar
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    And the fun won't end because the unemployment rate continues to rise. More unemployed homeowners equals more home defaults in subprime, alt-a and prime mortgages. Government will not make money in any of these deals. They've already lost too much money from 'investments' they made with Tarp money in 2008 because they paid too much for a bunch of subprime crap. That money's gone and the taxpayers will never see it again.

    And does anybody want to call a bottom in housing? Anybody? You want to pay todays prices for an asset that won't be worth as much next year? Only government does that and that's the problem. They're too stupid to make a good deal for the taxpayer.

    We've all seen examples of the stupidity in places like California where 1600 square foot homes were selling for $500,000 four or five years ago. Now the same home might be priced at $230,000...but somebody still owns the original mortgage bond that's in default and that note will never be whole again. Never.

    Structured finance has ruined this country.

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