Abstract

http://ssrn.com/abstract=1343625
 
 

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The Put Problem with Buying Toxic Assets


Linus Wilson


University of Louisiana at Lafayette - College of Business Administration

April 24, 2009

Applied Financial Economics, Vol. 20, No. 1, 2010

Abstract:     
This paper uses the option pricing arguments of Merton (1974) to demonstrate that even solvent banks will be reluctant to sell volatile, toxic assets at market prices. Banks' shareholders have insolvency puts that give them limited liability in the event of default. The insolvency puts are more valuable when the banks' assets are more volatile. Shareholders in banks will require any buyer to pay for the lost volatility as well as the market price of the toxic assets. Thus, taxpayers must be ready to richly overpay if they want banks to voluntarily part with their toxic assets.

Number of Pages in PDF File: 14

Keywords: FDICIA, mortgage securities, PPIP, Public Private Investment Partnership, receivership, resolution authority, TARP, too big to fail, toxic assets

JEL Classification: G01, G13, G21, G28, G32

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Date posted: February 15, 2009 ; Last revised: January 6, 2010

Suggested Citation

Wilson, Linus, The Put Problem with Buying Toxic Assets (April 24, 2009). Applied Financial Economics, Vol. 20, No. 1, 2010. Available at SSRN: http://ssrn.com/abstract=1343625 or http://dx.doi.org/10.2139/ssrn.1343625

Contact Information

Linus Wilson (Contact Author)
University of Louisiana at Lafayette - College of Business Administration ( email )
Department of Economics & Finance
214 Hebrard Blvd., Room 326
Lafayette, LA 70504-0200
United States
(337) 482-6209 (Phone)
(337) 482-6675 (Fax)
HOME PAGE: http://www.linuswilson.com
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