PPIP Killed the 2008 Bear

Nobody's supposed to know when we've hit the bottom until well after the fact. This bear, though, has just been killed with a super-weapon never seen heretofore: PPIP.

PPIP adds profits to the banks, as pointed out by several people (see here for an example).

We all know the TARP rules: banks had to repay that money, and while they had it, there could be no more $67.8 million CEO compensation packages. The big banks, naturally, did not like that program. In its place, the government duly created another, better, program called PPIP. The banks love this program. It allows them to trade toxic assets back and forth among each other. When they make a profit on those trades, they get to keep those profits. When they lose money on those trades, the ever-generous taxpayers pick up that tab. The mechanics are explained in the article above and here.

Add to that the wonder of the accounting change which no longer requires the banks to account for their deadbeat loans like before. Bottom line: big banks suddenly make much more money. Earnings rise. When a company's earnings goes up, it stock follows. When this happens to a few Dow stocks, the Dow rises. When the Dow rises, trading programs kick in and buy more. More buying pushes up the Dow even further. Hello, bull!

So now we have a weapon the world has never seen before: a pipeline directly from your wallets to the Dow: Uncle Sam pumps money from your wallet into a few big banks to cover their losses and increase their earnings. In turn, those earnings push up the Dow, as we just explained above. What bear has a chance against such a potent weapon?

The Obama administration took a lot of heat for the drop in the Dow after the inauguration. They just discovered this pipeline and how it makes the Dow go up. It's not their money, and it takes the heat off the administration. In fact, the world will probably begin heaping priase on said administration in the near future for the remarkable "recovery" they engineered. Does anybody think they're going to lift their foot from the pedal?

This is not a political commentary. It's just a description of the gun that killed the bear. R.I.P. buddy.

Comments

[AlphaDude:]

Well said. Except that this Bear is gonna get re-incarnated as a much bigger and badder beast.

Apr 13 07:59 AM

[asaf123:]

I hope everyone appreciates Mr. Cowie's sarcasm and dry wit.

The PPIP represents a "real option" for the Banks, to partake in the upside of toxic asset porfolio for a small premium, with the Govt. (we tax payers) backstopping bulk of the losses.

The beauty of the PPIP is that it finally aligns the motives of the Banks with that of the Obama administration.

To wit:
* Banks have incentive to oversubscribe to the PPIP, given the artificially low premium of the real option thanks to the FDIC sibsidy. A robust PPIP auction allows...
* ...The Treasury Secretary to emerge smiling at the huge success of the program. He will further state that "tax payers will make a profit on this program" bacause...
*...It depends on rising asset values (home prices) to repay the FDIC. And Thanks to Mr. Bernanke's Quantitative Easing, all asset prices will begin to re-inflate. Which allows...
*...Mr. Obama to be crowned as the "The Man" who saved the economy...

(until a few more years down the road, when the asset bubble pops again)

Apr 13 08:41 AM

[Bot:]

On the one hand, it really is not the taxpayers money, because the taxpayers are neither being asked to pony up for the sum or do they have the ability to pay for it.

On the other hand, in a "real money" world, it would be the taxpayer's money and that is exactly what we would be asked to do. In that case it would be especially disturbing to me to be forced to pay money I don't have to greedy, power hungry, criminals (in a Just world they would be criminals) who do not need the money.

Every president seems to be a pragmatist. He realizes where the real power lies and that he is just a song and dance man for the money. He then gets to enjoy the perks at no risk. Where have the great men gone, all we have are entertainers, dupes and thieves.

Apr 13 08:53 AM

[ArkansasAngie:]

Are we so completely powerless that rip-offs such as PPIP are created and executed without question.

One way is to demand transparency. If we can't follow the money then ... well ... they don't get anyway.

The greater good's claim for secrecy is horse manure.

Apr 13 08:53 AM

[Prudent Man...:]

PPIP is just rewarding the same Crony Capitalists who gave us the credit crisis, with the Administration rewarding those on the basis of political contributions.

Unfortunately, the more things change the more they stay the same. Consequently, we may be economically of life support which can keep us above the water short-term.

Watch the Treasury auctions for the next "Black Swan".

Apr 13 09:43 AM

[FlyingAfrican:]

Bot, we, as taxpayers are indeed paying for this.

Maybe not 'directly' (since it's funded through government debt), but three things WILL happen, due to Bernake's 'quantitative easing':
1. Inflation (inflation is a tax, it reduces your purchasing power)
2. Interest rates will rise
3. Direct taxes will rise

Inflation is an entirely monetary phenomenon. The government, for now, has discovered there's no (short term) consequences of printing as much currency as you want when it is the reserve currency. While the world has a long way to go to wean itself off the US $, the first step has been taken... other countries are talking about NOT using the US$. It might take a while, but the first step has been taken.

The Fed's 'trust us' policy has me tossing at turning at night. The Fed's asleep at the switch, they won't raise interest rates or reduce the money supply fast enough. They didn't see a recession until a year after it started... they won't see inflation until its double digits.

Remember.. Zimbabwe's quantitative easing resulted in 1^112% annual inflation, a $10 TRILLION note that can't buy a loaf of bread (imagine if their national debt was $14 TRILLION Zim, they could pay it off with 2 bank notes and get change back) and social unrest. And this occurred in the space of < 5 years.

Apr 13 11:04 AM

[Allan Frain:]

Excellent. I really wish I had written that.

The next step in the logic is whether such "pipelines" will have any long-term beneficial effect. Wealth Redistribution always seems to be at odds with Wealth Creation.

Apr 13 11:25 AM

[Minlita:]

PPIP can make gold from toxic assets like a veteran investor (Bill Bartmann) says

"The U.S. Treasury's toxic assets clean-up plan is the greatest market opportunity since the savings & loan crisis, says veteran investor Bill Bartmann.
He should know: Bartmann made a fortune snapping up distressed loans from the wreckage of failed savings banks some 18 years ago.
"The current crisis is creating a whole new playing field and, with that, a whole new opportunity," Bartmann said in an interview. "It's going to be a bigger opportunity this time than last crisis."
Bartmann's Commercial Financial Services was among the first to purchase distressed assets from the Federal Deposit Insurance Corp and the Resolution Trust Co following the failure of some 2,500 thrifts in the late 1980s and early 1990s.
Now, Treasury's plan to help private fund managers purchase securities and loans from struggling banks has inspired the Tulsa, Oklahoma, businessman to dust off his Rolodex, assemble his partners and raise a $1 billion (670 million pounds) fund from wealthy investors and hedge funds.
Bartmann, who is 60, said his fund would purchase consumer loans from struggling banks through the public-private investment partnership. With a matching co-investment from Treasury and as much as six-to-one leverage through FDIC-backed bonds, Bartmann could purchase up to $14 billion in loans.
Several major fund managers, such as Ray Dalio of Bridgewater Associates, have poked holes in the government plan and said they will not participate. Yet Bartmann argues Treasury may finally have found the tool that will revive banks and put the economy back on its feet.
"It's a great opportunity for us to finally get back on the road to recovery, but we can't get there until we admit we have some really bad loans stinking up the books of our financial institutions," he said. "This is going to be their chance to purge."
In the last crisis, Bartmann said his closely held firm bought 4.5 million loans with a book value of $15 billion from 800 failed banks. Bartmann packaged these loans into $3 billion of asset-backed securities that were then sold into the market, raising cash to finance new purchases.
This time around, Bartmann hopes to have his fund in place and ready to invest within two months. The fund, he said, would target credit card loans and other consumer assets.
The government, he explained, also needs to act quickly.
Commercial real estate losses, expected to rise as the recession drags on, have only begun to impact results, he said. Indeed, without the toxic-assets plan, Bartmann estimates some 500 banks could go bust.
Treasury, he said, will help banks unload problem assets and boost capital so they resume lending and help fuel the economy, he said. The cleansing process will also restore investor confidence in banks.
"What the FDIC is telling 8,300 banks is, 'Gentleman, we have a bad loan amnesty program,'" he said. "They're saying, 'Give us your bad loans, pull them out from their hiding places, all those loans you've been in denial about or trying to defend, and we will let you disgorge them.'"
Bartmann, who in the 1980s struck it rich investing in Oklahoma oil wells, said inspiration for the new fund came last fall. That's when then-Treasury Secretary Henry Paulson announced the $700 billion Troubled Asset Relief Program.
The TARP ultimately became a capital- injection plan, but the government has followed up with a series of taxpayer-funded bailouts. Yet current Treasury Secretary Timothy Geithner's toxic-assets plan, announced last month, served to reassure Bartmann that his investment plan was the right idea at the ideal time.
"We saw the TARP as a wonderful opportunity," he said. "Little did we know there was $2 trillion more right behind it. This is wonderful squared."
from Reuters


Posted by Denis Ouellet, CFA at 11:56 AM

Labels: banks, financial crisis, PPIP, TALF


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Apr 13 06:32 PM

[Steven Vincent:]

Check out my piece: VIX Breakdown Forecasts Bear Panic

seekingalpha.com/insta...

There is panic buying after hours in Citigroup, now up to $4.20. Also BAC.

Here is an addendum to my piece:
Question from this posting on MarketOracle.com:

VIX showing buying panic?

Just wanted to ask about your interpretation of the VIX. When I saw the VIX break down below 40, I took it as a sign that we'll see less panic in general, on the long side and the short side. Options implied volatility works both ways. Why did you see it as a set up for panic buying?

Reply:

It's interesting that there are many divergent interpretations of this indicator that has become widely monitored.

First, clearly historical volatility has not diminished in this bull phase...we all know that this is "the fastest rally since 1933."

The VIX tends to move inversely to the market. Technically the index had reached a point that demanded resolution implying a sharp break in either direction. A break down from the 200 DMA and the triangle formation would imply a continuation of the bull trend in stocks...and a sharp one. A move away from the 200 DMA is a fundamental change of trend. It means something very important is happening. Bears had been expecting an upside resolution to the VIX, coinciding with a top in the "bear market rally". They have tried to short the market again at this level on the blanket assumption that the bear must return. The breakdown in the VIX in an indication (and a strong one) that they are probably wrong. It is possible that on Tuesday or Wednesday there may be a sharp pullback in the markets and the signal that the VIX has given may prove to be a bull trap (or bear trap from the perspective of the VIX chart). However that would need to happen in the next few days or the shorts will start to cover and sideline money will pile on driving the market to the 200 DMA on the SPX.

Apr 13 08:18 PM

[dcb:]

market is being driven up by quants to drive out shorts, this brings in real money and retail and killing made before nice sell off.

Apr 13 10:51 PM

[Promod Radh...:]

The PPIP does involve some risk for tax payer money, but its probably one of the only few options to revive the MBS/ABS/CMO markets and have liquidity flowing again. The question is not whether big banks will gain from this...but whether there are enough controls to safe guard public moeny. Considering the situation, Tim Geithner and team have done a decent job. If there's nothing on the table from the government, tha market's going to stay off such assets for a long period. Fresh Fed lending alone doesn't help - banks just park it back as deposits with the Fed itself! So, i would say the PPIP is one of teh few good options to get the credit markets functionaing near normalcy again!

Apr 13 11:55 PM