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:
“When you overpay small people you frighten them. They know that their merits or activities entitle them to no such sums as they are receiving. As a result their boss soars out of economic into magic significance. He becomes a source of blessings rather than wages. Criticism is sacrilege, doubt is heresy.”
—Ben Hecht (1893–1964)
“Like speaks to like only; labor to labor, philosophy to philosophy, criticism to criticism, poetry to poetry. Literature speaks how much still to the past, how little to the future, how much to the East, how little to the West.”
—Henry David Thoreau (1817–1862)
“... criticism ... makes very little dent upon me, unless I think there is some real justification and something should be done.”
—Eleanor Roosevelt (1884–1962)