DB: Treasury Purchases Will Restore Liquidity

Deutsche Bank -- once a key player in subprime financing -- believes that as soon the Treasury Department begins purchasing troubled mortgage assets, liquidity will return to the market. In a new research report, chief economist Joseph LaVorgna predicts that even if the Treasury buys a "small amount" of assets, "liquidity will return." He says he believes that, in time, it could lead to a dramatic improvement in pricing. He cautions, however, that Treasury's Troubled Asset Recovery Program could run into problems if financial institutions are valuing their illiquid assets "meaningfully above the government's eventual purchase price." Deutsche Bank says if that's the case, sellers (banks, thrifts, and investment banks, among others) might not participate, defeating the purpose of the program, or they would face significant markdowns as they revalue their assets at the new price, which could raise solvency concerns.