Troubling Research on Troubled Assets: Charles Zheng on the U.S. Toxic Asset Auction Plan
AbstractCharles Zheng (2009) purports to model the U.S. toxic asset auction plan. In the model, “moderately poor bidders outbid rich bidders in such auctions,” because poor bidders have less to lose by defaulting on taxpayer loans. Thus, says Zheng: “After defeating their rich rivals and acquiring the toxic assets, such bidders will default on government-provided loans whenever the toxic assets turn out to be unsalvageable.” The chief trouble with the paper is that the assumptions do not fit reality. In reality, the government-provided loans used to buy toxic assets are nonrecourse, allowing the borrower to walk away from the loan with no penalties besides ceding the asset that the loan purchased. Thus, there is nothing to make rich bidders less ready to win the auction. Zheng’s conclusions that less well endowed borrowers will win toxic asset auctions are erroneous. Further Zheng’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.
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Bibliographic InfoArticle provided by Econ Journal Watch in its journal Econ Journal Watch.
Volume (Year): 8 (2011)
Issue (Month): 1 (January)
auctions; bailout; banking; CMBS; CDOs; EESA; Emergency Economic Stabilization Act; lending; Legacy Loans Program; Legacy Securities Program; mortgages; nonrecourse loans; Public-Private Investment Partnership; PPIP; TALF; Term Asset Lending Facility; Troubled Asset;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
- Zheng, Charles Zhoucheng, 2001.
"High Bids and Broke Winners,"
Staff General Research Papers
12665, Iowa State University, Department of Economics.
- Zheng Charles Zhoucheng, 2009.
"The Default-Prone U.S. Toxic Asset Auction Plan,"
The B.E. Journal of Economic Analysis & Policy,
De Gruyter, vol. 9(1), pages 1-11, May.
- Wilson, Linus, 2011. "A binomial model of Geithner's toxic asset plan," Journal of Economics and Business, Elsevier, vol. 63(5), pages 349-371, September.
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