The Obama Bank Rescue Program (PPIP) Is Already Failing
You may start to relax. No one is coming to Timmy's party.
I haven't wasted brain space on the Obama Geithner bank rescue, bailout give-away, PPIP piece of shiv, because like virtually every program before it, it will not work. I've had my doubts about participation from both buyers and sellers, and last week's change in fair value accounting (FASB 157) only furthers a failed bank's incentive to hold onto their toxic assets.
Consider the mindfield facing potential sellers. Even sticking your toe in the water has risks for your balance sheet when you're still carrying ALT-A loans at 95 cents. What happens if you sell a few assets and blow a hole in your sheet with the marks. Much safer to hold the assets at fantasy prices now that the accounting landscape has changed.
Mark-to-whatever beats the hell out of sell at a loss. Whistling by the graveyard is preferable to almost anything that puts an undertaker's shovel in your hands.
From the WSJ:
A new accounting rule approved last week will relax mark-to-market rules for banks sitting on billions of dollars in toxic assets, making it more attractive to keep the assets on their books. Yet those changes may undermine a larger U.S. Treasury plan to rid the banks of those same assets, bankers and accounting experts say.
From Bloomberg:
While helping lenders report higher earnings, FASB’s changes may hurt Treasury Secretary Timothy Geithner's plan plan to remove distressed assets from bank balance sheets, Dietrich said. Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasury’s objective to resuscitate markets. It’s one of the unintended consequences of having the FASB bow to political pressure,” Dietrich said.
From EP at Dealbreaker (before the fair value accounting vote):
It strikes us that the PPIP plan requires a certain faith by the administration. Specifically, that balance sheets are not actually so underwater that even a 30% subsidy is a hollow gesture. What's more, how sure is the administration that actual price discovery is something that any of these institutions actually want? Clearly, given the seller-financing leverage shell-game baked into the plan, the hope is that bids will buoy up. The problem, however, was perfectly highlighted on today's FDIC call.
What, a banker effectively asked, if his participation were to "blow a hole in the capital?" Would capital requirements be waived or adjusted to keep the institution from running afoul? (Probably not). The meaning was somewhat veiled, but the broader implication was that actual price discovery would so impact the balance sheet and impact equity capital so negatively as to reveal this particular institution to be liver sausage.
What about bids or asks that resulted in no actual transaction? Would they, one voice trembled, constitute... (gulp, deep breath)... pricing data sufficient to trigger mark-to-market treatment? (Could be!)
As if on cue, another questioner wondered if the FDIC could force participation. (Probably not). You could almost feel the exhale of held breath.
Would participation exempt an institution from special examination? (Laughter). No exhale on this one.
Could it be that the biggest problem confronting the nation isn't that Goldman Sachs might make money buying assets in the PPIP because Tim "The Safecracker" Geithner is in league with the devil? What if almost no one participated at all? One side of us thinks that we are reading too much into all this. Another thinks that if you can read between the lines you can almost hear the cracks widening.
DB here. Now examine the bid side. Why participate in the PPIP program with the political risk that your profits will be disgorged by an angry Congress. Bridgewater Associates, one of the largest hedge funds with assets north of $70 billion, explained Friday in a client memo obtained by the NY Post why they have chosen not to participate and why they believe others will choose to abstain as well.
In the note, which is entitled, "Why We Decided Against Buying in the PPIP and Why We Doubt That It Will be Broadly Subscribed," Dalio cited economic and political concerns with Geithner's Public-Private Investment Program, dubbed PPIP, saying the numbers just don't add up -- at least when it comes to PIPP's legacy-securities program.
PPIP aims to remove toxic assets from the system by giving private investors, such as hedge funds and mutual funds, leverage to buy assets through two programs. The legacy-securities program enables those investors to buy older residential and commercial mortgage-backed securities that have been at the heart of many banks' troubles.
"When the program was first announced, we were originally interested" because the leverage the government was promising made the assets cheaper. "However, as things now stand, very little leverage is actually being offered via the 'Legacy Securities Program,' " Dalio wrote, pointing out that the leverage offered is just 1-to-1.
He also blasted the program for its initial design, saying it is ripe for conflicts, pointing to the plan to hire five asset managers to run everything on behalf of themselves, the government and the other investors.
"The managers are clearly in a conflict-of-interest position because they have both the government and the investors to please and because they will get their fees regardless of how these investments turn out," Dalio wrote.
Also on the bid side, Paul Jackson at housingwire chronicles the mortgage servicing concerns of potenial whole loan buyers.
“If I retain responsibility for servicing, I need to control servicing, meaning the loans I purchase come into my shop,” said the investor, whose fund maintains its own in-house servicing platform. “If servicing stays with the mega-banks likely to be selling this stuff, I’ll have to price accordingly for a lack of control.” Whole loan investors say that the return on their investment into distressed residential real estate loans is wholly dependent on the servicing function–and the fact sheet’s suggestion that servicing would stay with whatever bank sells the loans via auction has investors concerned.
DB here. It's looking more and more like another non-starter. Buyers and sellers are both staying away. Don't misunderstand, the program will still launch and there will be players and gaming, but participation will not be broad and losses to taxpayers will likely be in the hundreds of billions and not trillions as first imagined. The inevitable will not be assuaged, however, and eventually we can still expect failed bank receivership and a discussion of losses for bondholders.
And since we all seem to understand that we are headed there anyway, why not be proactive and get the receivership process started.
Apr 6, 2009 at 6:49 PM
Reader Comments (10)
Nice scoop. And great analysis. I'm still working on that letter to the editor -- hopefully will finish it tonight -- but I really like how you talk about receivership as if it were a fait acompli. Very Chris Whalen that way. Me likes it.
1. Does anyone really believe, as my congressman does, that ALL of the TARP money will actually be paid back (to the govt. of course)? ( "They're just loans, see. No worries. No worries at all...")
2. Now that people like us have started making noise, I've noticed here and there the argument that bailing out the banks, although a bargain with Satan, is far cheaper than protecting deposits under FDIC or some other, modified form of receivership. Is there any truth to this? (Obviously this doesn't square with the contention in question # 1 that the TARP money will be paid back, but these are govt. and establishment shills we're talking about here.)
Many thanks!
If the TARP funds are really just "loans," then why isn't the FED making them? You know, seeing as how Ben Bernanke loves to trade free money for crap assets and all.
Bonus Question #2:
How do you pay back a "loan" that now exists in the form of penny stock shares which are possibly worth less than when the govt. bought them last fall?
1. Does anyone really believe, as my congressman does, that ALL of the TARP money will actually be paid back (to the govt. of course)? ( "They're just loans, see. No worries. No worries at all...")
No. Elizabeth Warren has reported on the losses for the first $350 billion already. And I read something somehwere today, I probably put the link in the comments somewhere, that those loss estimates have been revised higher.
Round numbers, we have already lost $140 billion of the first $350 billion.
You can find the exact loss on TARP so far through google.
There will be no need to protect deposits under nationalization of either citigroup or bank of america or any other. It will be just like WAMU or Wachovia or NCC or any other only the short-term aquirer will be the FEDS.
There is little systemic risk to deposits.
The risk exists in the government assuming the bad assets.
So that argument you have heard is specious.
The biggest risk I suppose as Geithner and other Wall Street apologists see it, is damage to bank bondholders.
They are desperate to avoid another Lehman.
You answered your own question. The Fed only makes loans against collateral, which it has done in droves to all the banks and continues to do.
As you know, the Fed is a private bank consortium. They do not give away capital. That's apparently the Treasury's job. The Fed will trade it however, for shit as you say.
How do you pay back a "loan" that now exists in the form of penny stock shares which are possibly worth less than when the govt. bought them last fall?
You do not pay the loan back. Tell your Congressman to talk to someone on Ron Paul's staff to learn the truth.
April 8 (Bloomberg) -- A congressional panel overseeing the U.S. financial rescue suggested that getting rid of top executives and liquidating problem banks may be a better way to solve the economic crisis.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJJ_MkIv9VvA&refer=home
“All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets,” the panel, headed by Harvard Law School Professor Elizabeth Warren, said in its report.
“it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”