Idea of the Day: An Open, Transparent Market in Toxic Assets

April 14, 2009

• Print
• Email
• Text-size: A A A
• Share:

To make PPIP work at its best will require a fast-moving, highly efficient market that restores confidence in the valuation of toxic assets. This won’t happen if the private participants—the investors—are each acting independently without the benefit of an open, transparent market. Allowing market participants access to information regarding all of the transactions in the market will make for faster assessment of the subsequent transactions’ value and create confidence in market participants that the prices they are getting—as either buyers or sellers—are within a range of consensus. This will make participation more inviting and enhance confidence that the assets are being priced appropriately—a critical step for restoring financial and credit markets to normal operation.

These assets, of course, are all unique to some extent. To use a very simple example, a $400,000 mortgage on a Southern California home worth $240,000 is a different beast than a $300,000 mortgage on a Boston condo worth $350,000. Nonetheless, investors must have open information about the pricing and characteristics of the assets being sold to ensure the new market will be fast-moving and efficient. The transactions for both programs should be made public. Information could include:

• The purchase price of a given asset.
• The portion of the price coming from the investor.
• The amount of government equity.
• The amount coming from loans and the source of the loan and the nature of any government guarantees of the loan.

In addition, specific characteristics of the asset should be disclosed to the greatest extent available. Information disclosed could include, in the case of a whole loan, the location and nature of the property secured by the loan and second-lien information. In the case of a security, then the credit rating of the security, the nature of the underlying assets, default rates, the originator of the security, and other pertinent information that is an indicator of its likely risk and value should be disclosed. The name and identifying information for the buying and selling parties, and book value—the value of the asset on the selling party’s balance sheet—should also be available.

For more on this topic, please see:

• Recommendations for the Public-Private Investment Program: Implementing the Treasury Department’s Plan to Clean up the Toxic Asset Mess, by Michael Ettlinger, Andrew Jakabovics, and David Min