What exactly happens when the government says it will "absorb" BAC's losses? I would think they simply pay BAC book value for a troubled asset so that BAC loses/gains nothing on the transaction. Alternatively, can they reimburse BAC for any losses or asset devaluations that occur? I imagine this is cheaper because the government will never have to pay the full book value of the asset unless its market price goes to $0, but it also seems to be more inefficient.
Thanks in advance
the government will buy up/fund the securities beyond a certain value.
another way to think about is this, a company does an IPO and the underwriter/syndicate want to distribute to investors.
if the shares are undersubscribed, the bank will backstop or buy up the excess supply.
the government is buying securities that fall in value and due to mark to market accounting, the loss in value creates a hole in the company's balance sheet causing liquidity concerns. the govt steps in and plugs up the hole (thats what she said).We're about to enter a Great Depression. Don't you want a president who's already dressed for it?
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