Troubling Research on Troubled Assets: Charles Zheng on the U.S. Toxic Asset Auction Plan

Abstract

(Zheng, 2009) does not realize that the government provides nonrecourse loans to investors to buy toxic assets. Nonrecourse loans allow the borrower to walk away from the loan with no penalties besides ceding the asset that the loan purchased. Thus (Zheng, 2009)’s conclusions that less well endowed borrowers will win toxic asset auctions are erroneous. Further (Zheng, 2009)’s use of auctions to model these plans is largely inappropriate since only one of the three government toxic asset plans has government backed investors bid for the same toxic asset in an auction format.

Keywords: auctions, bailout, banking, CMBS, CDOs, EESA, Emergency Economic Stabilization Act, lending, Legacy Loans Program, Legacy Securities Program, mortgages, Public-Private Investment Partnership, PPIP, TALF, Term Asset Lending Facility, Troubled Asset Relief Program, TARP, RMBS, toxic assets

JEL Classification: G12, G13, G18, G21, G28, G38