The Stimulus Bill Goes Through The House
Friday, February 13, 2009SUSIE GHARIB: A big win for the Obama administration today. The $787 billion economic stimulus plan was approved by the House of Representatives. The House passed the revised bill without a single Republican vote. They say the rescue package won't work because it doesn't include enough tax cuts. The Senate is expected to OK the measure tonight, clearing the way for President Obama to sign it into law early next week. Well, as the government prepares to enact that stimulus bill and its plan to rescue banks, there's still one key issue: how to value toxic assets. Some say it's tough to put a price tag on them. But is that really true? Darren Gersh asked the experts for a lesson in toxic assets 101.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The toxic asset we'll examine today is a residential mortgage-backed security. It is part of a pool of 6,524 sub-prime loans, mostly from California, Florida and Texas. As homeowners make their monthly mortgage payments, the cash goes into the pool and is then paid out as interest on bonds that were sold to investors for $1.2 billion in 2006. Now contrary to what you may be hearing, many financial pros like investment banker Robert Albertson say concerns about valuing toxic assets like this are overblown.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: We're pretending these things are intergalactic and foreign to the earth and they're not. They're reasonably analyzable. We're over-reacting.
GERSH: Investors are doing the hard work of valuing toxic assets, beginning Standard & Poor's Mike Thompson says, with cash flow.
MIKE THOMPSON, CREDIT RISK GROUP, STANDARD & POOR'S: If you lend people money and they're going to pay you back, well then you're going to get full value, but the problem is, is that, if folks stop paying you, your cash flow goes down. You start having defaults. The value of your expected stream of cash is going to go down.
GERSH: This is an actual valuation scenario Thompson's team ran for an investor holding a bond in our toxic asset pool. Standard & Poor's figured about 20 percent of the mortgages in our pool will refinance and fall out of the pool every year. Another 20 percent will default and for each default, investors will lose an average of $90,000. Here's the good news. Assuming the economy doesn't get a lot worse, Thompson's valuation team figured there would be enough cash to pay 100 percent of the money owed on the bonds that were initially rated triple AAA or close. But here's the problem. The bonds in our pool are not all the same. The bonds at the bottom, the 'Bs' get a higher interest rate, but are riskier, because they absorb all the early losses in the pool. The bonds in the middle a little less interest, but a little safer. The bonds at the top are triple- A lower interest but the very safest. If a lot of people stop paying their mortgages, the bonds at the bottom get nothing. If even more people stop paying their mortgages, bond holders higher up lose everything. Eventually, all that's left are the bonds at the top. The investors who hired Thompson to value their assets held a middle-tier bond class called M4. Thompson's conclusion, they will lose $0.98.6 for every dollar they invested.
THOMPSON: It's not a pleasant sensation. It's not a gentle water flow cascading down. You just go right over the edge.
GERSH: And our pool of toxic assets is quickly growing more poisonous. People with good credit refinance and drop out of the pool. People with bad credit stop paying their mortgages. The cash flow dries up. As that happens, even the top-tier bond holders, those expecting to get all their money back are unable to sell their toxic assets to other investors.
THOMPSON: People are just downright scared of anything that they don't understand and these are hard to understand.
GERSH: So the problem with many of these toxic assets is not that people don't know how to value them. It's that they really don't like the answers they get when they do. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
