Criticism
Economist and Nobel Prize winner Paul Krugman has been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors. Mr. Krugman argues that this will lead to wild overbidding for assets. Yet, research into the structure of the program shows that the overbidding incentives in non-recourse loans are subtle. If there are overbidding incentives, they depend on the amount of leverage, the interest rates and guarantee fees charged by the Federal Reserve or the FDIC, respectively, and the volatility of the toxic assets. Banking analyst Meridith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is a call option on a firm's assets, this lost volatility will hurt the stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices. The program has been hampered by the announcement by Standard & Poor's that many eligible assets would be downgraded by the rating agency, making them ineligible for the program. Federal Reserve of New York president William Dudley stated on June 4 that "there's a huge administrative hurdle" to implementing the program.
Read more about this topic: Public-Private Investment Program For Legacy Assets
Famous quotes containing the word criticism:
“Parents sometimes feel that if they don’t criticize their child, their child will never learn. Criticism doesn’t make people want to change; it makes them defensive.”
—Laurence Steinberg (20th century)
“It is the will of God that we must have critics, and missionaries, and Congressmen, and humorists, and we must bear the burden. Meantime, I seem to have been drifting into criticism myself. But that is nothing. At the worst, criticism is nothing more than a crime, and I am not unused to that.”
—Mark Twain [Samuel Langhorne Clemens] (1835–1910)
“Of all the cants which are canted in this canting world—though the cant of hypocrites may be the worst—the cant of criticism is the most tormenting!”
—Laurence Sterne (1713–1768)