Geithner's PPIP: Are We Really This Stupid? - Barron's 27 comments
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James Keller, former head of "structured products" at UBS (UBS), writes a scathing review of Treasury Secretary Tim Geithner's plan to buy up toxic assets from banks in Barron's magazine this week. Well worth a read, considering Mr. Keller's background. He's played the game and knows its nuances.
Much of today's turmoil, he writes, stems from an overabundance of cheap financing that induced investors to overpay for financial assets. We know how that worked out. So what's the solution? To create a new overabundance of cheap financing, and reinflate the bubble.
Geithner and the interventionist crowd repeatedly claim that we are in the midst of genuine market failure with respect to toxic securities. Nothing is trading because nobody knows what anything is worth. According to many commentators, the securities are not tradeable because their value is unknowable.
One of the principal aims of Geithner's plan is to provide a market where none exists, so that these securities can be valued and traded. But it is not true that nothing is trading because nobody knows what things are worth. Nothing is trading because too many people know what things are really worth.
PPIP, the Public-Private Investment Program, purports to solve the problem by creating collateralized debt obligations (CDOs - you remember those?) out of bank debt - ironically the very structure that supposedly caused all the trouble. Bringing to mind Will Rogers, who asked, "If stupidity got us into this mess, why can't it get us out?"
Basically, the government and private investors will put up 8% each to snap up "toxic" assets. The other 84% will come from you - the taxpayer - "hereinafter known as Uncle Sugar." Asset managers nearly tripped over each other to sign up for the program, which amounts to them buying a cheap call option on the underlying asset, offering them enormous upside and limited downside. That's because under the "recovery" scenario, PPIP participants could reap gains of 625% - nearly 50% a year. Their risk, meanwhile, is limited to the 8% they put up. Uncle Sugar's return is unlikely to be much more than 10% - best case scenario.
It's reasonable to assume that Geithner will find ample participants, thereby artificially inflating asset prices. But that's a far cry from "price discovery" - and a rotten deal for taxpayers.
::::::::::::::::::::::
For other viewpoints, here's a brief selection of recent commentary on Geithner's PPIP:
- Promod Radhakrishnan: Making Sense of the PPIP
- Curious Investor: PPIP: The Creation of a U.S. Sovereign Wealth Fund
- Tom Lindmark: More Evidence the Banks Might Abuse PPIP
- Greg Feirman: Stiglitz: PPIP Assets = Call Options
- David Shvartsman: On PPIP and Geithner's Latest Power Grab
- Felix Salmon: The Least-Worst Option?
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This article has 27 comments:
Let's change the name of "toxic assets" to misunderstood assets. The Institution is being run by the Inmates!
This guy needs to go quickly and the gov't needs to quit giving in to "financial terrorism" that continues to use extortion to steal money form the txpayers.
Or this is the most intelligent thing he cane come up with, because we somehow have picked the stupidest Treasury Secretary in all of history.
Neither of the above explanations bodes well for the American people.
I was just made aware that the FDIC maintains a database of the prices for distressed assets auctioned off by banks it has taken over. In a recent sale, most of the loans were performing and brought 50% of par.
The big banks are carrying this stuff at as high 90% and do not want to take the haircut, incur losses and reduce bank capital.
on their non-transparent, slippery ICE exchange.
Goldman gets to snowball investors yet again.
While you are correct that treasury could find ample participants to gamble with taxpayer dollars, the plan is being arranged so as to exclude all but a few bidders.
See this WSJ Article, "Treasury's Very Private Asset Fund"
online.wsj.com/article...
Good luck to all.
1. Since FASB suspended the MtoM accounting, the banks may not like to sell any asset. They believe they may not get 100% of the face value of their assets. Unless, the Fed forces the "weak/failing" banks after the stress test, no transaction may happen.
2. If all the banks pass the stress test, then no bank needs to unload its toxic waste for a fraction of its face value.
3. I believe that about 50% of the banks will fail the stress test. These banks will be forced to sell their toxic assets for 50 cents a dollar.
4. These toxic assets will be bought by the PPIP, and the private partner will manage till it can be sold for the face value. This could take 2-5 years. When a profit is made, then it is divided between the Govt and the private partner.
5. The key is whether the toxic waste is sold for 20 cents or 50 cents or 80 cents a dollar. This can be determined only by a very experienced private partner (like PIMCO, a hedge fund or any other company which had had 5 billion dollar of distressed asset management under its control). Banks will like to sell at the maximum price possible, and the PIPP will like to buy at the lowest price possible for a potential profit at a later time.
Yes, the PIPP could work well and a profit can be made or nothing may happen or Govt would be forced to take all the loss.
Geithner wants to try something and unclog the frozen credit system.
We need some good luck. We all want to normalize the credit flow and the economy.
Cheers.
6.
www.washingtonpost.com...
On Apr 05 09:55 PM Yamaka wrote:
> Yes, if the PPIP works well, the Govt and the private partner can
> make money. But, there are many ifs:
>
> 1. Since FASB suspended the MtoM accounting, the banks may not like
> to sell any asset. They believe they may not get 100% of the face
> value of their assets. Unless, the Fed forces the "weak/failing"
> banks after the stress test, no transaction may happen.
>
> 2. If all the banks pass the stress test, then no bank needs to
> unload its toxic waste for a fraction of its face value.
>
> 3. I believe that about 50% of the banks will fail the stress test.
> These banks will be forced to sell their toxic assets for 50 cents
> a dollar.
>
> 4. These toxic assets will be bought by the PPIP, and the private
> partner will manage till it can be sold for the face value. This
> could take 2-5 years. When a profit is made, then it is divided
> between the Govt and the private partner.
>
> 5. The key is whether the toxic waste is sold for 20 cents or 50
> cents or 80 cents a dollar. This can be determined only by a very
> experienced private partner (like PIMCO, a hedge fund or any other
> company which had had 5 billion dollar of distressed asset management
> under its control). Banks will like to sell at the maximum price
> possible, and the PIPP will like to buy at the lowest price possible
> for a potential profit at a later time.
>
> Yes, the PIPP could work well and a profit can be made or nothing
> may happen or Govt would be forced to take all the loss.
>
> Geithner wants to try something and unclog the frozen credit system.
>
>
> We need some good luck. We all want to normalize the credit flow
> and the economy.
>
> Cheers.
>
> 6.
Now these bastards at Barron's are getting all high and mighty about Treasury Secretary and noted Tax Cheat, Timmy "The Tax Cheat" Geithner's plan to make all of his old Wall street cronies well off of the tax payers. Give me a break, when did anyone over at that weekly bird cage liner dispensary grow a spine?
As Market Ace said in so many words above "financial terrorism" is Government's only game now.
It follows that in a few short years there will be little point to working for an honest living; as each in a series successive moral hazards is succumbed to by the Government any remaining rewards for decency and righteous living will eroded and eventually converted into penalties.
2) Hillsfar, Right On the Head!
3) mac.barron - "bird-cage liner dispensary" . . . that . . . is . . . PRICEless!! One for the ages, congratulations!
How do we stop this before it goes any further?
On Apr 06 12:18 AM William Cowie wrote:
> The administration is ripping off the taxpayer. That has become abundantly
> clear.
> How do we stop this before it goes any further?
Small point, but it's not.
I think I'm beginning to see what the problem was, didn't UBS break some sort of record for the number of $billion written off?
1. We can't do much until the mid-term elections in 2010. But we can do a lot when they do get here. I'm for dispatching every encumbant that comes up for reelection. Send a message America! Demand term limits and return a sense of "service to nation before self" back to Washington.
2. Taxpayer revolt; stop paying taxes. This is very difficult for most people because they have their taxes withheld. However, if enough people amended their Forms W-4 to increase their dependent exemptions, it would slow the tax revenues to a trickle. I am not advocating this, but it would not surprise me to see it happen at some point if the government does not wake up. BTW, there are legal problems with this one so I recommend trying #1.
On Apr 06 12:18 AM William Cowie wrote:
> The administration is ripping off the taxpayer. That has become abundantly
> clear.
> How do we stop this before it goes any further?
My point is Geithner needs the support of the Congress and the people to implement his PIPP, which will hopefully unclog the credit market pipeline, which is very important for the economy to come back to normalcy.
1. When unemployment is shooting up, Govt must act fast to bring normalcy to the economy.
2. At this point in time, the Congress should not try to overhaul the Compensation Methodology of banks and others in the private sector.
Legislation regarding BONUS payments for financial institutions which got TARP money may be legitimate, but Compensation as a whole need not be addressed now. That can wait until after the economy comes back to normalcy.
3. We need to wait and see the results of the Stress Test for banks. How many are truly failing and how many are really strong. That would dictate whether PIPP needs to go forward or not. If PIPP needs to go forward:
a. The toxic assets may not be bought for more than 50 cents to the dollar. There will not be an issue of overpayment.
b. If the market fully recovers in a few years, these toxic assets may be sold to the private sector for the full face value or at least 70 cents the dollar or at least 50 cents to the dollar (this will be "at cost").
c. PIPP will lose money only when the toxic waste cannot be sold at all and or sold less than 50 cents to the dollar - the chances of that happening is very very small.
I strongly believe PIPP could work very well, if the Congress does not intervene with counter-acting legislations.
The bottom line is the Credit Pipeline Must be unclogged for the economy to function to its fullest potential (creating at least 2.5 million new jobs per year), period.
Cheers.
On Apr 05 10:10 PM dcb wrote:
> All of these programs are a massive government fraud. The banks are
> insolvent, and they will do what ever they can to bail them out.
> It doesn't matter if it is legal or illegal. There will be some kind
> of legal justifacation, but it is a smokescreen. I really don't see
> how anyone who is rational can say otherwise at this point with all
> the evidence. Even the good old democratic washington post realizes
> this: see link below. Folks if the liberal media is saying he is
> crooked with only a few months in office, he must really be bad.
> I am not a republican by the way.
>
>
> www.washingtonpost.com...
>
On Apr 05 10:10 PM dcb wrote:
> All of these programs are a massive government fraud. The banks are
> insolvent, and they will do what ever they can to bail them out.
> It doesn't matter if it is legal or illegal. There will be some kind
> of legal justifacation, but it is a smokescreen. I really don't see
> how anyone who is rational can say otherwise at this point with all
> the evidence. Even the good old democratic washington post realizes
> this: see link below. Folks if the liberal media is saying he is
> crooked with only a few months in office, he must really be bad.
> I am not a republican by the way.
>
>
> www.washingtonpost.com...
>
I could easily get a ton of positive recs. The banks should fail, hang the bankers, Geithner and Obama are robbing the taxpayer to help out the wall street plutocrats...it's easy, and plays to very elemental emotions.
Now, please make some suggestions on how to resolve all of this. I don't think any solutions are simple and anything is going to entail a certain amount of pain. Frankly, I question people's fortitude these days. '73-'74 and 1980-82 were pretty bad, and certainly this is not nearly as painful as the Great Depression. If you think so, I don't think you have read your history. Or you are histrionic.
On Apr 05 08:17 PM wobatus wrote:
> The way I see it, it's either bear some of the risk or we (the taxpayers)
> bear all the risk in the long run anyway.