One of the goals of several of the federal interventions was to keep subprime loans high. If the prices for these loans dropped too much, then the banks holding these loans would be insolvent (loans are counted as assets under the assumption that they will be paid back)–the amount of money they owe to stockholders and bondholders, and other debt payments would be greater than their assets.
That’s why I call the pile of ridiculous loans Big Shitpile: these loans, due to plunging property values leading to defaults (or walkaways), are only worth only a fraction of their face value–and far less than anyone is willing to admit (we learned that during the S&L crisis, where, once federal regulators went through the books, things were worse than anyone thoughts–even the pessimists).
Hello insolvency (italics mine):
Wells Fargo sold $600 million in mostly non-performing subprime loans to Irvine, Calif.-based Arch Bay Capital, National Mortgage News reported, citing sources familiar with the sale.
The industry publication said the loans sold for 35 cents on the dollar, about double what most hedge funds were offering.
Most of the subprime loans San Francisco-based Wells Fargo (NYSE: WFC) sold were originated by once-high flying Accredited Home Loans and NovaStar Financial, both of which originated subprime loans in the Milwaukee area.
No one involved in the recent sale is talking on the record, which may be a key reason lenders will look to private transactions to unload bad assets rather than turn to a government-sponsored program, National Mortgage News said.
If 35 cents on the dollar is the best option, banks are going to get creamed once they have to start declaring this stuff. That, or they just never loan money–which is really good for the economy. Naked Capitalism writes (italics mine):
Finally, as the OC Register suggests, a 35 cents on the dollar bid means huge writedowns that banks do not want to take – especially banks still on government TARP life support like WFC. To me, this explains very well why the PPIP program was a failure: if banks can sell distressed assets quietly over time to private bidders, they might be able to delay taking writedowns. But, the price discovery involved in the PPIP program would be a blood bath for banks already capital-constrained. This is why the program has failed.