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Viewpoint: Asset Auctions Better than Guarantees


American Banker | Wednesday, January 28, 2009

By Robert M. Pardes

The views recently expressed by Karen Shaw Petrou in "Viewpoint: Guarantees More Useful than Capital Infusions" [Jan.
23] accurately characterizes the use of guarantees as "more expedient." However, expediency alone does not bring lasting
resolution. In fact, a fair argument can be made that expedient decision-making has magnified market volatility and the
attendant costs to taxpayers.

Ms. Petrou also opines that guarantees will be "a lot easier on the federal deficit." How can that conclusion be reached
without being a fortune teller?

The new administration has been clear in its promise of transparency and accountability. Open-ended guarantees are a
contradiction to this promise and will undoubtedly facilitate deferring the pain at a greater comprehensive cost.

Guaranteeing assets that have proven difficult to value by their creators would be the first critical error of the Obama
administration. It can only lead the American taxpayer down a path of greater uncertainty and challenges in providing the
clarity, transparency, and exit strategy necessary to instill the hope and promise so central to the new administration's
message.

Of greater concern, the guarantees can be perceived as a subterfuge to leverage the government's balance sheet well
beyond the $700 billion originally authorized, to levels that are hardly capable of estimation now or anytime soon. (Wasn't it
leverage that compounded this mess in the first place?) This further frustrates the accountability necessary for formulating
a comprehensive strategy, in contrast to the ad hoc Band-Aids applied to date.

A brief review of the recent history and logic behind this strategy clearly reveals the flaws in the existing and proposed
undertakings.

The original Tarp strategy of cleansing bank balance sheets to restore confidence in our financial system was valid, and so
was the Treasury's decision to abandon the purchase of illiquid assets as a primary means to that end. It is now proposed
that the original plan be substituted with guarantees covering blind pools of assets of a scale incomprehensible to the
average taxpayer (and probably the not-so-average member of Congress).

That having been said, Tarp funds should have and can still be used (or renegotiated) to cleanse balance sheets by
requiring the auction of toxic assets to the private sector as a condition of the capital investments.

The theory behind the original acquisition strategy and the guarantees is that they would bring an end to the quarterly
announcements of losses driven in part by related writeoffs. No doubt, there have been interim seminal events that have
influenced value declines. However, the pattern of losses was inevitable, given that book values reflected extreme
optimism or, worse yet, a collaboration to bleed the losses over an extended period, so that sources of capital (which
ultimately wound up being the American taxpayer) could be identified.

In an environment where regulators, investors, and taxpayers are demanding the transparency and honesty that can lead
to credible solutions, the Obama administration cannot participate in any scheme that serves to defer and mask the
continuing costs to rehabilitate the economy. Government-sponsored uncertainty and opacity is simply not an acceptable
option. Credibility will only be earned through the communication of a clear vision of the steps to recovery, along with an
exit strategy to avoid moving from one economic crisis to another.

Critics will point to the absence of a liquid market as an excuse for not selling these assets on an auction basis. Of course
the market is illiquid. The avoidance of honesty in recognizing the realistic value of any commodity will drive illiquidity. No
investor will take on assets that are void of the perception of upside.

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Viewpoint: Asset Auctions Better than Guarantees - American ... Page 2 of 2

Banks are realizing this on a daily basis with the disposition of foreclosed properties. Ultimately, buyers only emerge when
the asset is priced right.

Even in this environment, there are considerable resources searching for suitable investments, including distressed debt
and real estate.

It is true that arm's length sales may trigger further writeoffs, but the continuing risks and management challenges are
better borne by the private sector.

Let's not bury future losses in the government's balance sheet. Taxpayers deserve to know the true costs of the road to
recovery. The Obama administration must demonstrate that early steps reflect the communication of honesty,
transparency, and a commitment to avoid passing the damage on to the next generation.

Mr. Pardes is a managing director of RRMS Advisors LLC, a New York provider of strategic and tactical advisory services
to financial institutions.

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