The link: LINK

The Story: In an effort to stem the bleeding from America’s financial institutions, the incoming Obama administration has proposed, as one potential solution, a government run “aggregator bank”.  This bank would take the troubled assets off of the lending institutions balance sheet using taxpayer funds.

The Analysis: There is little doubt that US banks are in serious trouble.  The residential housing crises has been in full swing for over a year now, but the commercial side has only just begun.  With over $500 billion of CMBS loans coming due in the next 3 years and asset values falling, the situation will get worse before it gets better.

However, the idea of an “aggregator bank” (AB) has left me with more questions than answers.  Let’s just assume for the sake of argument that the government sets up the AB and funds it with $300 billion of TARP money.

How, exactly, does the AB plan to transfer that money to the troubled banks and what are they receiving in return?  Will they purchase the loans or hard REO assets?  At what value will they purchase the assets – issuance, book or market?  If the answer is “market”, then let the market buy them directly and have the banks take the loss – not the taxpayers?  Is the government really set up to own, operate and reposition billions of dollars of real estate assets?  Is that the business they should be in and is it the best use of my taxpayer dollars?

There are literally hundreds of real estate funds that have been established in the past year to specifically invest in distressed assets.  How does the AB plan get those assets into the hands of the funds that really want to own them?  Finally, wouldn’t the government be better off directly issuing low cost loans to individuals and investment funds that wanted to buy distressed assets?  Using government funds to set up an auction website would be better than taking direct ownership of the assets.

At some point, some group is going to have to pay the price for the bad business decisions made over the past few years.  Without a bailout or AB plan, that group will be the lending institutions.  With the AB plan, that group will be the American taxpayers.  I personally would rather see my tax money be used to fund better schools and infrastructure.