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Why Aren't The Toxic Assets Already Appreciating?

The FT has an interesting piece today pointing out that, even though bank stock prices rallied after the Geithner plan rollout, the prices of the toxic assets themselves have barely budged:

The ABX index, which tracks subprime mortgage-backed securities, has barely lifted from its record lows. The leveraged loan LCDX index has gained a little but is still sharply down on the year. Top-rated commercial mortgage-backed securities have rallied but are only back to mid-February levels, while lower-rated tranches have rallied much less.

Problem is, it's tough to say if this is a sign the plan won't work, or a sign the plan is even more necessary than we realized. On the one hand, financial markets tend to price in new information pretty quickly. If investors expected the Geithner plan to drive up the prices of mortgage-backed securities, then they should be snatching them up now in anticipation. On the other hand, as the FT piece concedes, investors may not be moving because they can't get favorable financing--the provision of which is the whole point of the Geithner plan.

I don't know enough to hazard a guess, but the piece makes a reasonable case for the former position. For one thing, it argues, the plan just might not be big enough in scope--it would only provide financing for up to about one-third of the mortgage-backed securities out there (if you judge by their current market value). For another:

[C]redit market investors are not convinced that the low prices on risky mortgage-related assets are necessarily too low.

Specifically, the government's assumption that by injecting liquidity into the markets, prices will rise may not prove correct, not least because prices on the underlying collateral - property - continue to fall.

That's the big question, it seems.

Update: Felix Salmon has some helpful pushback here.

--Noam Scheiber