Robert Mcdowell

Geithner's Financial Reform Is Doomed to Fail

When the impaired RMBS and structured credit derivatives ($1.4tn current watchlist at top 6 US banks) are write-down discounted by the CDS rates plus haircuts, the yields on these assets rise and are looking good (many of them at 17%). Then when the credit enhancements and standby liquidity is factored in plus the amortization going on that rapidly will improve their quality, plus now too the FDIC, FM&FM, insurance guarantees and loan-contracts restructuring, plus Fed's liquidity window and Geithner Plan deals for $500bn to be auctioned off - then even with further credit defaults in the pipeline the upside opportunity outweighs the downside risk considerably, enough to make this relatively secure vulture territory.
But, I think these risk/reward oportunities should be fed not to 'market-makers' but to the underlying distressed mortgage borrowers by severely cutting their mortgage debt by whatver the RMBS are auction-discounted for. That way the circulation in your graphics above include Main Street.
Hedge funds should get real and go for conventional vulture fund plays and/or look again at the risk/reward of financing big banks' 'funding gaps' by buying MT Notes and Covered Bonds at good interbank rates when the Fed Rate is so low and inflation is heading down. The banks are making enough internal capital despite continuing loss provisions to be sound payers and to guarantee respectable signle-digit returns.
The macro-funds and others are expecting to make 17-25% returns from the Geithner Plan? And that again will make the banks jealous they're not on the buy side, only the sell-side. They'd loan-finance som good margin private deals for asset swap repos in support of medium term financing for their 'funding gaps'.
But while banks and hedge funds may think long term about relationship building for when recovery returns, the banks should be thinking more about how to repair their relationship with Main Street and make sure their distressed customers get some of the payola of these TARP/TALF/Geithner Plan 'save the bank' dealings.

Big Banks: Pulling Off the Ultimate Bait and Switch

Sure the banks are 'insolvent' if having their capital wiped out means that. But there are various ways of measuring insolvency. Problem is what to do when in aggregate all banks are having their capital wiped out twice over, once by the credit crunch and again by the recession? The government is replacing 1 X bank capital ($1 trillion) so that the banks can maintain lending in the recession to supplement the fiscal stance (worth maybe 4% GDP boost when 6% is needed to get recovery happening). Banks need to recover another 1 X capital this year. Over 2 years they raised 0.5 X capital and are generating half as much again from underlying net interest profit on traditional banking. They also face problems in refinancing their 'funding gaps' betweem customer loans and deposits and some international withdrawel from US banks' MT Note and covered bond programs (medium term financing). The Geithner Plan is starting with $500bn of assets to be auctioned off at maybe 40% write-down discounts. But, that still leaves banks needing to access the short term money market window at the Fed for a couple of $trillions.
Legal firms are collecting class action groups of shareholders to sue banks over misrepresenting their balance sheets. Why don't they or the investment banks or the Fed or FDIC or Fannie Mae and Freddy Mac collect large groups of distressed mortgagees and let them into the market for buying the banks' impaired RMBS instead of the hedge funds (who are seeking minimum 17% returns on the Geithner Plan). Remortgage money should buy the sub-prime and Alt-A RMBS at substantial discounts and use that to cut the mortgage debts of borrowers and thereby also cut their negative equity overhangs. That way, Main Street wins something in place of the Wall Street hedgers who made plenty shorting the banks and shouldn't be further rewarded by Fed loan subsidies plus exit clauses to profit from banks' fire-sale deals.
Private funders should take their lead from the Fed and maybe through government guarantees for the big Money Market Funds provide 'funding gap' financing and gain more normal profits instead of looking for big kills for vulture fund strategies?

Banks Say to Regulators: You Can Have My Hide - Just Let Me Live!

Like Keynes said "in the long run" life is like an "unedited dictionary blurb"
that gets edited by the courts if you're unlucky in love,
or by an obituary column if you're lucky at cards!