Tuesday, June 09, 2009

Free market in troubled assets and banks owning troubled assets

Ezra notes this about market effects on pricing of the troubled assets and the banks holding them:
One odd argument I stumbled upon while reporting out the PPIP story yesterday that has relevance to this chart: Part of the story behind the crash in lending earlier this year was that large investors apparently sat on their money hoping that the banks would have to unload troubled assets at fire-sale prices. They didn't want to invest in normal opportunities because they sensed the possibility of extraordinary opportunities. "I know a bunch of hedge fund people who thought these things were screaming bargains," recalls Douglas Diamond, a banking expert at the Chicago School of Business, "but would become even bigger bargains soon."

Now it looks likely that the banks that own these assets are going to try -- and might even succeed -- at holding these things to maturity. Which means that it might be the banks holding the assets, rather than the assets themselves, that are the bargain.

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