Treasury Will Struggle to Value Mortgage Holdings

Analysts say US will need to be leery of truly toxic portfolios
By Jim O'Neill,  Newser User
Posted Sep 25, 2008 9:36 AM CDT
In this July 2, 2008 file photo, a foreclosed home is seen for sale in Sacramento, Calif.    (AP Photo/Rich Pedroncelli, file)
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(Newser) – When Treasury starts spending the $700 billion in bailout money it’s asking for, the big question is going to be how much to pay for assets that are toxic in part because no one can figure out what they're worth. The bundled and rebundled mortgage securities causing Wall Street tumult are hodgepodges of loans of varying quality, mostly low, reports the New York Times. “No two pieces of paper are the same,” says one bond portfolio manager.

The big issue is whether to buy securities near their values on the banks' books, which would minimize the banks' losses, or at a discount, which would protect taxpayers. Former Treasury Secretary Lawrence Summers says splitting the difference may emerge as the strategy. Fed chief Ben Bernanke said this week the government should pay the "hold-to-maturity" price, what an investor expecting to hold the bond til it was paid off would bid. Reverse auctions—in which sellers make the bids—may be one of the means used to set prices, the Times notes.