Buying toxic assets: A tricky question

President Barack Obama’s financial team is facing a critical, but tough question of how to value toxic assets it plans to buy from U.S. banks.

Hundreds of billions of taxpayer dollars are at stake, The New York Times reported Monday.

Purchasing debt securities at too low a price would not push banks to resume lending — the ultimate goal of the program. Paying too much for the assets would put taxpayer funds at a higher risk or mean the government (and the taxpayer) would incur losses or wait longer to recoup the funds.

But, what is the actual value of the securities?

One financial firm valued a mortgage-backed bond at 97 cents on the dollar. Ratings agency Standard & Poor’s valued it 10 cents lower. An increased default rate would push the value lower. And, the bond recently traded at 38 cents on the dollar.

Should the government pay 38 cents, 97 cents, or something in between?

To date, the banks have stuck their heads in the sand and demanded they be paid the price of good apples for bad apples, said Lynn Turner, a former chief accountant for the Securities and Exchange Commission.