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A binomial model of Geithner's toxic asset plan

  • Wilson, Linus
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    This paper formally models the Public-Private Investment Partnership (PPIP), a plan for U.S. government sponsored purchases of distressed assets. This paper solves both the problem of the asset manager buying toxic assets and the banks selling toxic assets. It solves for the fair market value of toxic assets implied by subsidized toxic asset sales, and it estimates the size of the government's subsidy. Moreover, this paper finds the circumstances under which banks and asset managers will meet at mutually acceptable prices. In general, healthier banks will be more willing sellers of toxic assets than zombies.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148619511000257
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    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 5 (September)
    Pages: 349-371

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:349-371
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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    1. Linus Wilson, 2010. "Slicing the toxic pizza, an analysis of FDIC's Legacy Loans Program for receivership assets," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 3(3), pages 300-309.
    2. Linus Wilson, 2010. "The put problem with buying toxic assets," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 31-35.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    4. Linus Wilson, 2011. "Troubling Research on Troubled Assets: Charles Zheng on the U.S. Toxic Asset Auction Plan," Econ Journal Watch, Econ Journal Watch, vol. 8(1), pages 33-38, January.
    5. 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.
    6. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    7. Andrey Pavlov & Susan Wachter, 2009. "Mortgage Put Options and Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 89-103, January.
    8. Linus Wilson & Yan Wu, 2010. "Common (stock) sense about risk-shifting and bank bailouts," Financial Markets and Portfolio Management, Springer, vol. 24(1), pages 3-29, March.
    9. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    10. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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