PPIP Watch: Banks as Bidders and Sellers...Hmm, Remember Enron? 26 comments
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So according to the FT, it appears that the banks selling assets will also be able to bid on each other’s assets.
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.
I brought this up when the plan was first released, via a marginalrevolutions’ post in that link, but the idea seemed so absurd that I didn’t mention it in any subsequent posts. It is apparently staying, and we need to consider what this will do to the process.
I was out at “Debaser Night”, a 90s-music dance party in San Francisco, with some friends. A riot grrl rock cover band opened, followed by lots of great singles. I was getting a bit nostalgic. A friend of mine, who used to be on an energy trading desk back in the early 2000s, was listening to me talk about the government plan. He couldn’t believe what I was telling him about letting the banks that are selling auctions also bid on them. In the middle of my explanation, he had his own wave of nostalgia: “Man does that bring back memories….”
Before we go there, what will happen with these banks when they can bid on each other’s assets? Let’s do a thought exercise. Let’s say you are a bidder for Bank A. You know your banking asset is worth $50, and you also know the asset Bank B has is worth $50. You call your buddy up, the trader at B, and make a deal. Happens all the time. You go to bid, and you bid $80 for B’s asset. Then you wait. If B doesn’t come through, you are screwed out of a lot of money. And hey, isn’t this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your asset - $80 from B. You have each bid up each other's assets and traded them. And now the government is screwed. Let’s chart out that payment (click to enlarge):
Yup. Bad news. Bank A pays $6.50 for its new asset because of the leverage, and it loses all of that. It also loses the $50 from not having the asset anymore. However it gains $80, net profit - same as Bank B. The government has paid $73.50 for a $50 asset, twice. (See previous for how the levered non-recourse loan turns into a put option.) We tend to call this collusion if you and I did it. No price discovery, no movement of the assets from the banks balance sheet to private investors.
So why did my energy trading friend get all nostalgic? “Because what you are telling me brings back some great memories from what Enron was up to back in the day. All of us energy traders back then watched with our jaws on the floor. 2000 was a hell of a year.”
It is August, 2000. Let’s say you are a trader for Enron. You know your energy in California is worth $50, and you also know the energy that Reliant Energy (RRI) has is worth $50. You call your buddy up, the trader at Reliant, and make a deal. Happens all the time - you even have a nickname for it, The Daisy Chain Swap.
You go to bid, and you bid $80 for Reliant’s energy. Then you wait. If Reliant doesn’t come through, you are screwed out a lot of money. And hey, isn’t this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your energy - $80 from Reliant. You have each bid up each other's assets and traded them. And now the government is screwed, because it has to pay you $80. Let’s chart out that payment (click to enlarge):
You can go ahead and replace an Enron subsidiary for Reliant in that example, as I did in the chart. Enron did, and the banks are probably going to now. My friend was very excited telling me all the strategies Enron deployed - “Forney Perpetual Loop”, “Ricochet”, “Ping Pong”, “Black Widow”, “Red Congo”, “Get Shorty”, the whole works - and how all of them will be reliable guides for gaming the legacy asset market here. Buy assets high, write them down, then pay back with “fees.” Got it. Create SIV to bid up the profits. Brilliant.
What is really exciting, from the evil point of view, is the idea that we are going to get to see one giant, massive, Enron Death Star put into play:
That's no moon.
The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, let’s get them to someone else who wants them. However, Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid “for moving energy to relieve congestion, without actually moving any energy or relieving any congestion.”
And, it appears that the large banks are gearing up to do just that -- with the Geithner Death Star, they’ll just be collecting a large fee to run assets in a circle, without actually moving any of them off their collective books. For old time’s sake, I hope they route their loan bids through Oregon and then Utah before putting them back right where they started.
Mind you that was the electrical grid of California - this appears to be at the scale of the entire financial market. In case you are wondering, traders out there are licking their lips to try and find ways to game this even better than Enron. It appears the public will get to invest in these vehicles too. Direct Democracy in the 21st century means that all of us get to take part in collusion and ripping off taxpayers - we are the ones we’ve been waiting for!
I’m not the biggest Enron junkie - else I would have seen this connection sooner. If any people who know their playbook of strategies want to leave a comment with a move that could be made by the PPIP bidders, I’d be much obliged. And please, tell your representatives to keep the selling banks and their subsidiaries from bidding. I’m still hoping this part is a bad dream…
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This article has 26 comments:
This is why we used to call Enron-- Endrun.
This is the warm up to cap and trade.
1) Banks simply make use of TARP funds and make some shrewd investments taking advantahe of PPIP.
2) Banks A and B arrive at an understanding to buy each others junk at inflated prices. Paying an extra $ 10 only costs $ .70.
3) Similar to 1) banks sell their exisitng portfolio and replace it with an FDIC insured portfolio.
4) Banks provide seller financing, something the FDIC may approve.
5) Banks acquire assets through PPIP and then slice and dice the portfolio and sell off interets to smaller investors.
It'll be interesting to see the final rules.
Now if the banks sell and bid on these assets then what has happened is that they have converted the toxic assets into a bond (CDO) with a 95% government,er, taxpayer guarantee.
Congress was not set up to deal with this kind of chicanery which is why they are so inept at it.
The agencies that were set up to deal with them have betrayed us and are a part of the problem, and in fact, have colluded in it.
Only a small handfull of Congressmen are seeking to resist all this and bring the malefactors to justice.
If the American people fail to recognize them, and fail to offer them our full support, then we will all live to regret it - GUARANTEED!
we need a revolution but there's no repository of energy and action sufficient to change direction of the current flow of events. if we tried drying up the money, depriving Washington and Wall Street of the money to keep the plunder going, they just collude and create more money.
big dilemma (which actually means, no solution, I think)! wish i could suggest a plan, a program or a magnet to attract and amalgamate all this negative energy!? it's really what we need as a people being shorn of our wealth, or power and our national health.
Why not let AIG play as well?
Hey, lets allow the Social Security Trust fund get a piece of the action.
b) increased share holder vigil
c) a new set of regulations forcing higher capital cushion, stronger liquidity norms etc
do we really think either the government or the banks will let this happen in the near term? More over, the relaxation of mark-to-market accounting norms reduce the incentive associate with such devious tactics.
Also, the bigger question - other than letting the liquidity crisis play out slowly (which would have severe unemployment consequences), what are the alternate options to unfreeze liquidity?
This insanity must be stopped!
seekingalpha.com/insta...
several days ago, which also pointed out how PPIP inflates earnings at banks (hello, WFC). This, in turn, drives up the market.
Many are surprised that the market seems to keep rising. PPIP explains why. Obama, Geithner and company are picking our pockets, simply handing that money to the banks and waiting for credit for the rising stock market.
TARP money had to be repaid. PPIP money stays with the banks forever. Welcome to the New New Deal.
And when they keep changing the rules how do you play that?
Gold - to heavy to carry - no safe place to store - paper gold no good if market collapses.
Oil - If market collapses no money no demand for oil
Stocks - 666 on the S and P big drop if market gets spooked
Currencies - It sounds crazy but I like the Looney - I need an off-shore currency account any ideas that let you trade everything everywhere?
Currently - 60% long - 20 % short DUG as a hedge at $52 oil - 20% Cash
Geithner is a strong believer that home price is temporarily down so I will not be surprised of this hoax.
Prepare to save money to pay your outrageous taxes in the near future.
Toxic assets are just a fancy term for bad loans with real estate as security. This is not rocket science.
There can only be one reason why we're not following a plan that has been proven to work:: Wall Street execs will lose their jobs and mega bonuses when their banks are dissolved. And they've paid enough in campaign contributions that they are entitled to keep their jobs. There's this talk, shrouded in vagueness and mystery, that there will be total doom if the big banks fail. Not one shred of hard evidence has been produced to back this up.
On Apr 12 12:51 PM guitoon wrote:
> this is something that we really need to chase down..PPIP is supposed
> to get rid of toxic assets from big banks books...a toxic asset stays
> a toxic asset even over bidding it...
> Geithner is a strong believer that home price is temporarily down
> so I will not be surprised of this hoax.
> Prepare to save money to pay your outrageous taxes in the near future.
>
"Enron Style" never went away - No Rules To Stop Its Construct Were Ever Implemented In The Aftermath For Other "Securities" Arenas.
The PPIP for securities is just the "Next Change Of Venue" for this nefarious "Market".
The Tax Payer Is Being Fleeced To Fill The "Money Hole" Created By Fraudulent Valuation OF Assets.
What is coming will test the American People And The World.
I Hope The Constitution Survives.
"Those who make peaceful revolution impossible, make violent revolution inevitable." John F. Kennedy
I fear that Electronic Voting and The Patriot Act are going to make peaceful revolution much more difficult to achieve.
If ever there was a time for "Scrutiny Of Government Action"; It IS Now.
The Worst Is Yet To Come.
Pray For Peaceful Transition; In War Evil Has Its Playground And Almost Never Does Justice Emerge.
"The Campaign For Liberty" and other groups are a rallying point. Anyone Advocating A Return Toward Constitutional Rule Is An Ally.
The price to good people for apathy in public affairs is to be ruled by evil people. There is no greater arena in public affairs than that which deals with wealth and money.
So without the middle class, this bank recovery cannot work. I gave myself a stimulus. I am defaulting on some bank loans. I have too, I need the money.
There were already a lot of similarities to Enron before this new government sanctioned shell game - off balance sheet entities, exotic derivatives, mark-to-market (great on the upside, not so good on the downside).
Looking back, I'm surprised Enron was allowed to go bankrupt and its principals prosecuted. If it happened now, Skilling would be counting his big bonus and bailout money. Poor Enron, they were just before their time!
As for PPIP, it is much less important now. As you can see with this quarters financial fiasco, they can manipulate their balance sheet plenty with FASB rule changes that let them use "their discretion" on determining an artificial value of "impaired" assets (that means any asset that has a loss they can bury until it ruins the company. Then I guess you can bury that since it is also now impaired).