Politics, profits key to U.S. toxic asset clean-up

By Al Yoon - Analysis

NEW YORK (Reuters) - A combination of politics and profits could determine the success of the U.S. government's most ambitious attempt yet to cleanse the banking system of up to $1 trillion in risky securities.

After several U.S. banks were saved from the credit crisis by the government, some lenders may feel heat from Washington to make the new toxic asset plan work by selling their securities, even if prices are not as high as they want.

Regulators could press banks reluctant to sell toxic assets -- and thus crystallize their losses -- by ordering them to book those securities at price levels established by a revival of the market, said Cornelius Hurley, a Boston University bank law professor and a former Federal Reserve lawyer.

If regulators say, "'You might not like it, but we are going to require you to write these assets down to the mark that has been established,' that will be enough compulsion to get more banks to participate," Hurley told Reuters Financial Television.

Securing the participation of banks will be key to the success of the Public Private Investment Fund that was announced on Monday as a centerpiece of the new U.S. attack on the credit crisis.

"There will be banks selling into the program. Of course, whether that's of their own free will or whether there is some arm-twisting I can't say," said another former Fed official who asked not to be named.

Strong-arming the banks may not be necessary.

Banks may find it easy to sell billions of dollars' worth of securitized subprime and commercial mortgage loans whose value they have already written down to distressed levels, analysts said.

The market price for "Alt-A" mortgage loans -- given to homeowners who didn't have to document income -- sits around 43 cents on the dollar, according to Glenn Boyd, a strategist at Barclays Capital.

Potential prices on those bonds could be 70 cents on the dollar, or higher, under terms of the public-private plan since buyers have low-cost financing, he said.

"If you have bonds that are marked to market you have substantial upside, and (banks) can use those write-ups to offset the write-downs from other bonds that are not marked to market," Boyd said on a conference call.

"So we think there will be a significant fraction of bonds where banks will be able to sell into this."

On the other hand, if a bank hasn't yet written down the value of its Alt-A portfolio, it could face losses of 25 cents on the dollar or more, he said.

Meanwhile, the market for distressed securities will be supported by the attractive financing being offered investors by the government, which is giving an opportunity to hedge funds, private equity companies and other big investors that sense the chance for big profits.

"There may be some really aggressive players that may pay up just for the leverage," said Ron D'Vari, chief executive officer at NewOak Capital in New York.