The Obama Bank Rescue Program (PPIP) Is Already Failing
Apr 6, 2009 at 6:49 PM
DailyBail in Bank Bailouts, bailout opinion, bank bailout, bank rescue, banking bailout news, bridgewater associates, geithner plan, obama plan, ppip

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. 

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