Geithner's Superfund Is the Real Deal

I’ve done my fair share of ripping on the Geithner bank plan but the reality is that banks like Bank of America (BAC), JP Morgan Chase (JPM) and Wells Fargo (WFC) just received a gift and so did the broad market (SPY). So much money has been thrown at our mortgage backed security problem that it will never be a problem again. We’re talking about a massive amount of money. Balance sheets will be fortified and lending will increase. From what I’m hearing, most investors have missed the glass half full aspect of this whole thing. Here is why this plan is the real deal:

1) This trillion dollar superfund is actually a more viable solution to our problems than merely suspending mark to market would have been. We all understand that we live in an era of increased transparency and getting rid of mark to market would have given us less transparency. No matter what your personal preference was with regards to m2m, it’s important to remember that Geithner’s solution will get the job done as well. He will be able to artificially prop up the market for those ‘fur coats in August’.

2) Geithner’s superfund will act as a permanent specialist for mortgage securities. The specialist acts as the market maker to facilitate normal trading conditions during abnormal circumstances. The stock market uses specialists and so should every other kind of market that may experience short term inefficiencies. Specialists actually can make a lot of money. The projections for the government to generate high returns on this deal look promising. I believe this is the reason why Geithner wanted the superfund so badly, he wants to burn those in the private sector who have caused this crisis.

3) This superfund is what Hank Paulson knew we needed all along. Go all the way back to October of 2007 when Paulson tried to bring the big banks together to form a fund but quickly found out there wasn’t enough private capital to do it. He needed a trillion but couldn’t get it from the private or public sector. He thought TARP 1 might be sufficient for a superfund/specialist fund but the emergency had gotten so out of control that he had to use the money for capital infusions and that was the end of that. TARP 1 ended up being a bandage for the symptoms; Geithner’s superfund is the logical next step of the healing process that the Treasury has known about for over a year. For the first time we are now treating the cause. For more background read my two articles here and here.

4) It will allow the market to sustain its next rally. I have known for some time that the next bull market would not begin until a permanent solution for the banks was in place. For a moment we thought that TARP 1 might have been the solution, but as soon as Paulson began emergency capital injections, we knew that it wasn’t the long term fix, this one is. Investors who fret over the lack of details are missing the big picture, the most important thing is that the Feds finally have the right amount of money to take care of this thing. It’s looking like the market will once again be a safe place to invest right after we digest the dismal 1st quarter data that's coming our way in April. The market will be able to rally because of what Geithner just did.

In conclusion, this plan has been in the making for a long time. Geithner didn’t just come up with it last week. The $14 trillion mortgage security market has always needed a superfund to back it up and it finally got one. This plan provides transparency going forward, it will protect the banks from future real estate corrections, and for the first time we can now start thinking about finding a true bottom in this market. The biggest winners going forward will be those stocks who have been pummeled down to nothing because of solvency issues or nationalization fears. My favorites in this sector are E-Trade (ETFC) and Bank of America. I’d love to see where those stocks are trading by year end.

Disclosure: None.

Comments

[User 143167]

Throw the Fed in as the supporting tranch will not solve the problem, the Fed doesn't have the capital. If the Fed is allowed to print money to compensate for any real losses it incurs in the superfund in the future, then this plan might be workable. However, at this point of time, Geithner can say that very clearly. He tries to let the congress believe that this plan won't cause any taxpayers money and at the same time, try to let the potential private investors believe that the Fed is the government trust backed by taxpayers money.

2009 Feb 12 05:24 AM

[athena]

The reason the market tanked in the first place was over his ideas. Or was it the heathcare disaster buried in the stimulus bill that was being voted on that day?
Wasnt after Geither said that the Fed would mop up the bonds that they themselves will issue when noone shows up at the auctions, effectively printing money? Gee, I cannot get all the bad ideas to add up to a new bull market,looks like everyone is voting with their feet.

2009 Feb 12 07:07 AM

[Ishortyou]

if you guys want your economic miracle, get rid of those 9 to 11 months of housing oversupply, 500K+ of new house starts and permits and buy those MBS (bonds) at cost price from the Banks balance sheets and there you will have it.

2009 Feb 12 07:24 AM

[Tom Armistead]

Paulson's original plan for TARP was to use the entire 750 billion to make a market in MBS: he told congress that the pricing would be based on "hold to maturity." By that he meant discounted cash flow. The bond industry has software and data bases that will provide this information, and that is how most financial companies look at the value of these holdings internally.

What muddies the water is nobody knows how long the default rate will remain elevated from historical levels or how low house prices will go. Treasury can make some optimitstic but enforceable assumptions and pay prices that will yield 15% (as an example) under that scenario. Vultures can either buy at prices above that or leave the profits to Treasury.

Another issue is the amount of fraud involved in some of the mortgage originations and securitizations that occurred. Again the industry has due diligience professionals and the worst of these cases can be excluded from the market and left where they belong - in the courts.

I too would like to see those who created this mess burned, but there is a law enforcement agency which has jurisdiction over market manipulation and auathority to punish the guilty - it is called the SEC and is under new management. In the meantime,partnering with private capital increases the amount of money available to make a market.

2009 Feb 12 07:32 AM

[Ishortyou]

I agree that private capital is going to help, why? because if they don't put their money down it would mean that the government will have to print more money that they don't have increasing the intensity of the inflation projected to be there after the market recovers. Things have their price after all.

2009 Feb 12 07:47 AM

[Top Gun]

Seems to me we are headed for a bit of resolution, someone needs to value and take these high risk assets. Even putting $500B into strong hands will reduce the overall risk in the sellers portfolio by quite a bit.

I think we are in a bond market for the next ten years, forget stocks. This is new in my adult lifetime. We created so much credit (we, ha!) that all available capital must be deployed against this mess. It's now clear to me that you can add to your list that bankers tried to get the public to absorb all of their mistakes - mistakes they had already made commissions on. Can anyone say $4B in bonuses Merrill Lynch for selling debt we are now asked to take - fungible money, remember?

2009 Feb 12 08:18 AM

[James Wilson]

Geithner did not use any carrot !

All stick !!!!!!!

2009 Feb 12 08:26 AM

[kelm]

What I read from this article is "hey this is great, if you get in as a market insider or specialist you can make a killing".

The goal of the plan has to be to fix the economy by killing off insolvent banks and restructuring and strengthening the solvent ones. This plan doesn't do it. It was crafted by a Wall Street insider who is directly culpable in the crisis occurring in the first place to ensure that no big bank is allowed to fail.

2009 Feb 12 10:34 AM

[TheSnail]

Excellent post. Thanks.

2009 Feb 12 05:18 PM

[Stone Fox Capital]

If ETFC could sell their mortgage assets at reasonable prices, they would indeed be big winners in this program. Unfortunately the gov't doesn't want to deal if ETFC since they are no longer in the business of originating loans. ETFC definitely fals in the small enough to fail area. No real hard would be by their failure.

I'm looking at positions in ETFC, but its still too early to see what happens to their loan portfolio. They seem to have plenty of capital and profits from the borkerage side, but this is a crazy market. Just looking for now.

2009 Feb 12 05:30 PM