Will Someone Remove Geithner from the Poker Table, Please? 27 comments
an article to
-
Font Size:
-
Print
- TweetThis
As I wrote previously, the TALF in its current formulation is merely a lot of hot air as it provides an incentive to buy assets that nobody really cares about (AAA-backed, newly issued "securitized" equivalents). It would seem that the Treasury also glances at my website occasionally, as next week's newsflow is likely to be dominated by discussions over the revamped and expanded TALF 2.0 that Geithner will soon be unveiling.
And just what an expansion it is! Instead of providing back stopped, leveraged, non recourse incentives to hedge funds and asset managers to participate in a relatively safe piece of the securitization market, the Treasury Secretary is pulling out all stops: according to press reports, TALF 2.0 will include "older, illiquid and lower-rated securities." These could subsequently be re-packaged by the primary purchasers and then resold to a wider investor audience (those who remember the long, long time ago days of 2007 will recall that this kind of "repackaging" in the securitization market is what got us into this mess, and led to the bankruptcy of such previous tourist traps as Iceland).
Not surprisingly, Stephen Myrow, a former Treasury official under Bush who helped create the TALF was caught saying "opening the TALF to legacy assets is the most effective and efficient way to purge troubled assets from the financial system." And in order to guard against losses, the Fed would take "so-called haircuts, or discounts on the loans, for the collateral it accepts." And to top it all off the FDIC (yes, the same people supposed to protect deposits at all costs), will start an aggregator-entity (bad bank) to purchase non-securitized whole loans, which would get a government guarantee and be re-sold to investors.
As my regular readers can divine, what all this verbiage means, is that hedge funds will be allowed to establish investment positions, levered up to 10x with the government's aid, on which the funds will have only a stop loss of a certain percentage, and all incremental losses will be borne by you, dear (American) reader. And while this risk was "somewhat" acceptable for TALF 1.0, now that Geithner is opening it up to the whole morass of uber toxic and even more uber illiquid garbage floating on banks' balance sheets, the Treasury has just gone all in with taxpayer money in its bet that the market will recover. Geithner's Put has just been transformed to Geithner's All In. Is this vaguely reminiscent of what the rating agencies were doing: excel models which would crash if one tried to assume a reduction in housing values?
So in a nutshell:
1. The government is opening up the tax money spigot for market intermediary vehicles (hedge funds and other PPIFs or public-private investment funds) to buy up virtually all toxic assets with no accounting for default risk or loss assumptions, on the bet asset prices (i.e. the market) will go nowhere but up from this point onward. This is a huge gamble as macro economic conditions indicate we are nowhere near a bottom.
2. PPIFs use taxpayer provided leverage to agree with the Treasury that this is, indeed, the market bottom.
3. If this, gasp, is not the real bottom, hedge fund losses are limited as the TALF is non-recourse and non-remargining in nature and PPIF first-loss downside is at worst roughly in the 10% ballpark (of course they get to keep the spoils if the ploy succeeds), all the while no collateral has to be posted.
4. Banks and other companies offload all their toxic assets to these leveraged vehicles.
5. In the meantime the FASB is adjusting accounting rules to make sure that whatever assets remain can take advantage of Hummer-size FAS 115 loopholes and mark them at par.
6. Also in the meantime, the FDIC is buying up non-securitized toxic products (whole loans), and providing government backstopped capital to banks via the TLGP, all the while Sheila Bair is complaining that the Deposit Insurance Fund (DIF) is at or near zero.
7. Investors, whose deposits currently have no statutorily-required insurance as per the above point, are supposed to believe that banks are healthy, the accounting opacity is the new transparency, that the soon to be $15 trillion in total new bailout-related government debt and guarantees is sustainable as China bails and the Fed is left to purchase its own treasuries, that the FDIC will restore its DIF from fees banks pay for TLGP issues (even though banks will soon be able to issue debt cheaper in the Eurodollar market, until such time as LIBOR spikes again), and are expected to buy up equities and fixed income securities
8. As more and more buy into this all is good "new-age bull market" rally, the PPIFs will suddenly decide to sell off their resecuritized toxic garbage at a profit to themselves, people will ask just what these toxic legacy assets are really worth (again) and the whole system will crash once more, this time with the implicit guarantee of tens of trillions of US debt.
This is, of course, just one perspective. What is certain is that between Bernanke's TSY actions earlier this week, and Geithner's launch into TALF 2.0 (which is essentially stopping short of outright purchasing of bonds and equities), the administration has gone all in on selling its vision for the future to the U.S. taxpayer-cum-investor. If the pitch is unsuccessful, look out below.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
I think it's pretty clear that Obama is in WAAAAY over his head. His administration is being eaten alive. And if our only hope is Congress, then God help us.
Please forgive the paraphrasing but you get the idea.
On Mar 22 10:15 AM LaughingTrader wrote:
> "...but have elected one more puppet to the federal reserve crowd"
>
> I think it's pretty clear that Obama is in WAAAAY over his head.
> His administration is being eaten alive. And if our only hope is
> Congress, then God help us.
See you on the other side of the Revolution!!!!
On Mar 22 11:55 AM punditobserver wrote:
> This article and following comments come off as the rantings of losers
> and fools who dont know what they are talking about.
>
> Someone has to say it.
Rather than just deal directly with the problem which is I think called the "Swedish" solution and take the banks over on a temporary basis and clean out the mess on the balance sheets it appears we have to find a way for the Goldman's of the world to make a buck on this....a huge buck.
I suppose the rational is that Congress will not vote for the Trillion dollars that would be needed to do this directly. At least that way we would know we were getting the job done.
This is a disappointment.
God Bless America!
> Obama or Bush I don't care... But ranters, what other options can
> you suggest assuming no bail out money and no Systemic Bankruptcies
> !!!!!!!!!!
There are no options without systemic bankruptcies, nor is there a Santa Claus I am sad to tell you. The options are either 1) systemic bankruptcies or 2) systemic bankruptcies after dumping trillions of dollars of new debt into the black hole of Wall Street IB's trying to make them whole.
Find guys that are willing to use Dutch solution to end all CDS gambling once and for all.
The rot in the economy is too extensive. Economic activity and consumption were boosted for years on home equity locs and credit cards---those are Dixie cup affaris--use once and throw away.
Another author (Brian DeLong) tried to present this as the fed being part of a giant hedge fund-like investment with the chance for a big payout. Well it is an investment with no clear exit strategy, with a plan predicated on some big ifs, and which is being concocted by ---who? The ex head of the NY Fed Reserve Bank, who demonstrated his wisdom by sounding shrill alarms as the banking sector spent years soaking itself in gasoline and striking matches? I wouldn't invest in this. But then, I'm not being given a choice.
What assurances do we have that the same is not or will not occur with this bad asset put Geithner is writing for all bad assets/loans?
God knows I've got my own anger control demons to deal with on a daily basis, so, in justice, I have little room to criticize. Indeed, I have been known to type the occaisional harsh comment myself. (Like, say, this one.) I'm just noting that it rather seriously undermines the reader's ability to put a lot of stock in your judgment in an argument that is, in the end, about judgment.
And make no mistake, that's what this argument is about: judgment and only judgment. A lot of people--Krugman and economists in general most particularly--talk like the consequences of implementing policy A vs. policy B can be fortold like Hari Seldon mathematically deriving the future in the Foundation novels. In fact, no one knows. All one can do is assess risk--a judgment call because the risks cannot be meaningfully quantified--and take action based on one's evaluation of those risks, another judgment call.
You may be right. The Administration's policy may lead to disaster and the one you favor, whatever that is, might lead to some glorious utopia. But it is also at least possible that you, and all those denizens of Akadame whom you cite are the ones who are disasterously wrong--because ivory tower experts may, in fact, have been wrong about something at some time past--and the plan proposed by the administration might somehow, by some miricle, stumble bassackwards into success.
It's the failure of many engaging in the discussion of economic policy here to acknowledge, at least implicitly through tone, the possibility that they might be wrong that disturbs me. That, and the increasingly common attacks on the good faith, motices, and intelligence, the apparant believe that one's own viewpoint is so self-evidently true and good and right that anyone opposing it must be evil.
If I wanted iron certitude that increased in inverse proportion to its relevance to the speaker's area of expertise, I'd have gotten a teaching job somewhere so I could attend faculty meetings.
I'll speak for myself: I don't care who makes a profit, as long as they're not using money forcibly extracted from me and from my childrens' future earnings to do it. What gives them the right to steal more of my money to back a plan to "recover" a system that already steals 40% of what I produce, and in the process try to guarantee an upside to more big money players? And who are you to tell us we have no right to be angry about it?
'...the increasingly common attacks on the good faith, motices, and intelligence'
Damned right I attack their good faith, motives and intelligence. They are stealing money from me to pay off their owners, the people who funded their political careers. They are doing so in spite of the common citizens' overwhelming opposition, which means they doubt either OUR good faith, motives or intelligence. They are doing it out in the open, daring us to try to do something about it.
'And make no mistake, that's what this argument is about: judgment and only judgment.'
Nothing could be further from the truth. It is impossible to separate economics from politics, because politics determines who gets the fruit of the economics. It shouldn't be that way, but that's the way it is. At one time in the not-so-distant past, Americans kept what they produced. Many of us want to see us return to that system. More and more people are beginning to wonder aloud whether we even want to save the current system, a system that is aggressively enslaving us to permanent debt we never agreed to.
P.S. I just read this by Denninger:
market-ticker.denninge...
'Over the weekend I made clear that I had figured out how to "game" this system, thereby putting a hard cap on losses for the banks and transferring the rest of the risk of failure to the taxpayer.
Preventing this sort of fraudulent rigging of the market requires that those who are selling these assets be prohibited from participating in any way on the bidding side.
If they're able to do so, they will rig the game and the taxpayers will lose.
As I made clear Saturday, if that happens it is my considered opinion that it will be no accident and the architects of this "scheme" (at that point it won't be a plan any more) will need to be grilled - and not in front of Congress either.
Such a scheme, if it transpires in that fashion, will be nothing other than raw theft from the taxpayer without benefit of any sort to society. It will be an act of intentional, knowing fraud and in fact, in my opinion, high treason committed upon The United States.'