vaughn

The Geithner Plan FAQ

The leverage on the private public partnership is less than 6 times ( total capital will be 18% with 82% financing coming from debt guaranteed by FDIC and bought by private investors, such as pension funds or bond funds)


On Mar 22 03:07 PM SilentP wrote:

> The creation of the now toxic assets required massive amounts of
> credit to be available. Without credit, there is simply not enough
> cash out there to purchase these assets outright. The Treasury is
> simply restoring 30-1 leverage ($30B * 33 = $1T) to soak up some
> of the supply.
>
> Add to that a deteriorating economy where no one knows where (or
> when) the floor on housing prices and consumer credit will be, it
> is not hard to see why investors don't want to jump in with cash
> to buy those assets.
>
> "However, I still don't understand why private capital hasn't already
> bought these undervalued assets to make these profits?"

The Geithner Plan FAQ

3% is quite a lot. Usually fund managers put up no capital at all. Look at all those sivs sponsored by banks. They put zero capital while charging management fee (50 basis point at least) plus profit sharing.

By forcing the private capital to put at least 3% capital as the first loss position is quite an achievement if you know the industry.


On Mar 22 08:07 PM Chancer wrote:

> Having hedge funds put up only 3% is an admission that the Feds are
> not sifficiently capable (smart enough) to do this with government
> employees. What the government is good at is "Monday morning quarterbacking"
> when the "horse has left the barn." They scream outrageously when
> they realize they did not get the details right. the hedge fund managers
> are smart enough to "skin" the government once again.

The Geithner Plan FAQ

It is coming this April 2, 2009.

The last trading price for the assets in an inactive market will not be allowed to use to value the assets. This will force Auditors to do the hard work to value the underlying assets.

Let me give you an example. Currently the super senior trench of CDO was marked to down to 30 c on the dollar, which assumes a foreclosure rate of 70% with zero rate recovery. Historically, the recovery rate is at least 50%. Using 50% recovery rate at 70% foreclosure rate gives you a final loss of 35%, which means the super senior trench of CDO shall be valued at 65 c on the dollar, not 30c on the dollar. But the trading in the inactive CDO market was 30c on the dollar. The rule using last trading price will be abolished this coming April 2.


On Mar 22 04:29 PM Wolfeman52 wrote:

> If the so-called toxic assets are in fact worth more than the value
> at which they are reflected on the banks' balance sheets, isn't the
> problem how the value for bank balance sheets is determined in the
> first place?
>
> In other words, does mark-to-market not work in an environment such
> as we are in? If it doesn't, why don't we establish a methodology
> that more accurately reflects the "real" value of the assets?
>
> And aren't we - the taxpayers - incurring yet another loss on these
> assets? We bailed out the banks for the reduction in their capital
> caused by the write down of these assets (that cost taxpayer money).
> Now they will be sold to these funds which will make a "profit" shared
> with the private investors. That "profit" is yet another loss to
> be born by taxpayers. Alternatively, if the funds overpay for the
> assets, the taxpayers lose also.
>
> How can an ordinary citizen get in on this deal with the upside potential
> (and limited downside)?

The Geithner Plan FAQ

The private partner must use its own capital.The treasury's capital come from the 700 billion Tarp fund. The FDIC never put up 820 billion as claimed in this article. What will happen is that FDIC will sell guarantee and charge a fee for the guarantee (likely 100 bps) so that private investors, like pension funds, will buy up the 820 billion medium term note debt offering. In short, the funding cost of this debt offering will be absorbed by the public private partnership.

The private partners are in for the potential of multiple return s with the downside risk capped at their initial investment. Since the private partner makes the decision of what assets to buy, it is unlikely they will overpay the price.

Now that the private partner can enjoy a decent leverage with secured financing, they will tend to pay the true intrinsic value of assets. Without financing and leverage, private equities or hedge funds can only lowball the bid in the hope distressed sellers will sell so that they get the return similar to that with leverage. Unfortunately for them, sellers with distressed assets are not distressed at all due to the Fed near zero fiscal policy with unlimited liquidity supply. Hence, you got no sellers in the market to sell legacy assets which yield over 20% at the moment.


On Mar 22 01:49 PM user guest wrote:

> Q: Where does the trillion dollars come from?
>
> A: $150 billion comes from the TARP in the form of equity, $820 billion
> from the FDIC
>
>
>
> meanwhile on Friday the headline on Bloomberg was this:
>
> Bair Says FDIC Reserves May Hit Zero Without New Fees
>
> March 20 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman
> Sheila Bair talks about the depletion of the fund reserves and the
> need to increase fees and premiums.
>
> Bair, speaking before the Independent Community Bankers of America
> conference in Phoenix, Arizona, also discusses the importance of
> community banks and the need to create financial "disincentives"
> to curb the size of banks. (Source: Bloomberg)
>
> www.bloomberg.com/apps...;sid=aoXQRRSXeGMQ

As Mortgage Rates Plunge, 30 Year Fixed Rate of 3.5% Seems Likely

I do not think 3.5% mortgage rate for 30 years is likely, make that 4.5%. The reason is simple: 30 year treasury bond is already yielding 3.5% which was considered low.

What happened was that the banks made the 4.5% (if you are lucky enough to get one) loan and simultaneously sold the loan to Fannie Mae which issued a 30 year bond to hedge the interest rate risk. And in all probabilites it is the Fed who purchased the 30 year bond from the Fannie Mae. So, in the end, it is the taxpayers who subsidy your mortgage rate. Therefore, it is your BAILOUT. Go get it.


On Mar 19 10:33 AM DougM wrote:

> What happens to banks that make 3.5% loans for 30 when, inevitably,
> sometime during the next 30 years (heck, the next 5 years) rates
> on deposits go north of that?

What to Do About Toxic Bank Assets

Auditors are afraid of being put out of business after the collapse of Arthur Anderson. For this and this reason only, auditors are extremely conservative and protective of their own interest by insisting on using the lowest possible price in valuing assets while using the highest possible price (at least at par) in valuing liabilities, notwithstanding what said in Fair Value accounting, aka FASB #157.

The amendment or so called guidance under consideration by board of FASB is simply forcing auditors to resume their responsibility under FASB #157 by doing hard work in valuing the assets rather than using the last trade price whether the market is distressed or inactive.

The guidance will have the same effect as valuing assets based on its intrinsic value, where such value can be derived from an active market or from cash flow analysis from an inactive market. In the end, the fair value accounting is simply creating more works and fees for auditors and providing no more or useful information for general public.

FASB Unlikely to Suspend Mark to Market

The issue is auditors. They don't like flexibility even if the FASB said loudly and clearly that market price is only one of the factors to be considered when evaluating the assets price in an inactive market.

The concept of mark to market is wrong. The mark to market is based on the assumption of liquidation, i.e., not a going concern. That means mark to market accounting assumes that an enterprise shall be valued on the liquidation basis, at a value that can be fetched now and right now, contrary to the nature of on-going business nature.

Under mark to market accounting, we have the ability to make all corporations insolvent. consider the following: If inventories are marked to market, then the last sale price in the internet will be used to mark down inventories, say, wallmart or target.As you are fully aware, the price on the internet sometimes can go extremely low.

How about a nuclear power plant? If a bankrupt utility was forced to auction off the nuclear power plant at 1/3 the value, that means all utilities having nuclear power plant must also mark down their nuclear power plant at 1/3 value which will immediately put all utilities in violation of loan covenant which will immediately put them into bankruptcy procedure.

Business must be valued on a continuing operating basis. Mark to market says business must be valued on the liquidation basis.

Mark to market is only useful in the monitoring of margin requirement, but is a weapon of mass destruction in measuring business operation.


On Mar 14 04:38 PM Harry Tuttle wrote:

> It is simply not true that Citibank's plight would be relieved by
> abolishing mark-to-market.
>
> In fact, the banks already enjoy a lot of flexibility to value assets
> at "model" which means it is worth what someone AT THE BANK says.
> In addition, loans are also reserved at the discretion of the bank.
>
>
> If you think this is too harsh consider the following. The total
> size of Citi's balance sheet is listed everywhere at 2 trillion.
> The astute analysts don't even bother to check the footnotes to "discover"
> that they have an additional trillion (with a "T") in off-balance
> sheet items.
>
> People who are desperate for the Dow to go up can convince Geithner
> and Bernanke to buy S&P futures, but not even this will change
> reality. The losses are real and not a product of accounting.

Mark-to-Market: The Bogeyman of the 1930s Is Back

Under mark to market, banks have the downside (mark down), but no upside mark (can't mark it over par)


On Mar 13 11:04 PM MTM wrote:

> How come no one mentions the damage that mark to market does on the
> way up? No one talks about it. MtM allows financial institutions
> to mark up items as profits, such as loans, to their so called "current
> market value" even if they never sell it.
>
> Well, that allows for this giant loophole no one ever talks about.
>
>
> The easier you make lending, the more people will borrow, therefore,
> the value of the property the loan was made on rises because its
> easier for more people to take out loans to pay a higher price for
> it. The more this happens and the more those loan values keep rising,
> the more the banks keep reporting them as "profits" in their books,
> the more "artifial money" they have in their books to lend.(Remember,
> the banks dont truly make a profit if the value of a property rises,
> it's the owner of the property that makes the profits if he sells
> it for a higher price. All the bank can do is sell the mortgage to
> another institution if there's a "market" for it. Yet, according
> to MtM, they can mark up the value of that loan, even if they dont
> sell it). The more they are allowed to do this, the better their
> books look, therefore, they lend more. That makes it extremely easy
> and tempting to make irresponsible loans. Why not? The more you lend,
> the more those loans you have will go up in value. Except, there's
> a ceiling to everything. That's what happened in the 1920's (the
> same loophole existed then) and thats exactly what happened in the
> 2000's.
>
> Yet, no one ever talks about that. All they talk about is the damage
> it does on the way down. Which is real, mind you, except now it's
> the reverse. Now, the banks have to mark down loans, even if they
> are making a profit on it. Remember, banks are still making a profit
> on the interest they receive every month. They only lose money when
> a loan is defaulted by the client.
>
> Think about that the next time you argue about "mark to market".
> Its a double edge sword. It cuts what appears to be a path to glory
> on the way up, when its really doing is gaining momentum to cut your
> head on the way down.
>
>
>

Mark-to-Market Marches Towards Extinction

The problem is in the auditors. They don't want to take the responsibility and they don't want to do the hard work since the fee they got is already fixed so they insist to use the market price ( it's easy. Just get the last trading price as market price).

The proposed rule change is to force auditors not to use market price when the market price is not fair price generated from an active market.


On Mar 13 11:20 AM TPoise wrote:

> M2M is already "waived" when there is no liquid market. Read up on
> the FASB 157 clarification from September 2008 where they specifically
> state and cite the MBS market since it does not work when there is
> no "orderly transaction".
>
> M2M is just a political rallying cry for many banks so they can go
> back to Mark-to-whatever-I-fee... and have huge write-ups.
>
> And let's pop the myth now that M2M is for all assets. It's not,
> it's only for trading assets that are not intended to be held to
> maturity. Thus, if your neighbors are selling their houses all for
> $10k, and you are selling a very similar house for $200k, you're
> probably a little overpriced, and thus the market reflects that.
> If you aren't selling your house, you don't have to worry about any
> margin calls or anything like that since you are holding to "maturity".
>
>
> However, insurance companies are probably the only ones targeted
> unfairly in this case. Insurers are required to post all of their
> assets at fair value at any given time (since there may be a sudden
> outbreak of hurricanes or bird flu and they need to sell those assets
> immediately).

Congress Pushes M2M Reform: Suspension Unlikely, Revisions Guaranteed

Not all assets are mark to market, only level 1 assets with the active market price is mandated to use market price to mark. Level 2 and 3 are not marked to market based only on market price because market price for these assets are not fair price resulted from an active market.

The problem is: Auditors don't want to assume responsibility and they don't want to do the hard work by evaluating the value of assets going through various credit analysis, etc. So, auditors push to value level 2 and level 3 solely based on the market price which is totally out of whack due to illiquid market and thinly traded, manipulated market. so long as the market price is used to value level 2 and 3, auditors feel safe because the market price for these level assets during economic crisis is extremely distressed and thus the value of assets are extremely low.

The fix on the mark to market rule is simple: Just mandate the market price is not applicable to value the assets of which no representative market existed and no fair transaction price can be found. Thus will force auditors to do the hard work by evaluating the value of assets based on the credit analysis, cash flows, etc.

The problem is not in the FSAB #157 which does not mandate to use market price to value all level of assets. The problem lies in the auditors signing off the financial statements: They don't want to take the risk and they want to use the lowest price to protect their own butt, citing the consequence of Authur Anderson after the debacle of Enron.

Only when the FASB forces the auditor to assume the responsibility by mandating market price is not appliable in certain situations and shall not be considered, then the true spirit of FASB #157 fair value accounting (Yes, it is called fair value accounting, not mark to market accounting) can be implemented.

Look at Citigroup. It is said Citigroup reported a $10 billion net income and paid $3.5 billion tax to IRS for fiscal year 2008 while it reported over 40 billion loss due to mark to market practice imposed by its auditors.

Small Vacuum of Time for a Substantial Short-Term Rally

Only traders could survive this market. All investors are assigned to the dust bean, done and over.

Wait, both shorts and longs have equal chance to be totally wiped out. Not even traders can survive!

Mark-to-Market: A Rule That Begs to Be Broken

Herz, a bean counter, is deadly wrong.

Assume, for example, W utility company owning a nuclear power plant valued at xxx in the book. Now, another utility owning a similar nuclear power plant went bankrupt and the nuclear power plant was auctioned off in the bankruptcy procedure at 1/3 of the price. Now the 1/3 price becomes market price for the W utility company and must be marked down pursuant to mark to market which will then cause the W company having a negative equity which will then cause the violation of loan covenant which will then initiate another bankruptcy procedure.

Accounting is a man-made science based on the basic principles. The very basic principle of accounting is going concern assumption. Under that assumption, the value of assets held must be valued on the basis of continuing operation. While mark to market accounting is based on the principle of liquidation, not going concern, that is., the value one can fetch now and right now on the liquidation basis, fire sale or not.




On Mar 12 05:01 PM j_remington wrote:

> Untrue.
>
> "The fact that fair value measures have been difficult to determine
> for some illiquid instruments is not a cause of current problems
> but rather a symptom of the many problems that have contributed to
> the global crisis—including lax and fraudulent lending, excess leverage,
> the creation of complex and risky investments through securitization
> and derivatives, the global distribution of such investments across
> rapidly growing unregulated and opaque markets lacking a proper infrastructure
> for clearing mechanisms and price discovery, faulty ratings, and
> the absence of appropriate risk management and valuation processes
> at many financial institutions,” Herz said.

Mark-to-Market: A Rule That Begs to Be Broken

The underlying assumption for mark to market is liquidation, i.e., the value that can be fetched now and right now, fire sale or not. But that is not the real world for the business that is supposed to operate for foreseeable future. Hence, mark to market violates the very fundamental assumption of accounting principle--going concern.

Mark to market is only applicable when the business is not a going concern, i.e., in the process of liquidation.

FASB forces going concern business to adopt the non-going concern accounting principle to value the assets in the name of transparency is a joke enjoyed by short sellers. No business can survive under mark to market accounting rule, especially those holding gargantuan assets, such as too large to fail banks, using the liquidation price to value the assets even in a normal business environment (there will always have a fire sale price somewhere in the market place for illiquid assets), not to mention in a distressed market induced by economic crisis.

Too Late to Complain About Mark-to-Market

Mark to market rule is based on the assumption of liquidation: That is: the value an enterprise can fetch now and right now.

but an enterprise is supposed to be valued on going concern: That is: the value an enterprise can fetch over the projected life span of its existence.

Mark to market rule is the response to the aftermath of Enron scandal and is designed to cover the political inconvenience. It backfired in the time of economic crisis: Abnormal market situation brings an abnormal market price which will produce misleading information at best, and secure fasb/sec assisted fraud at worst.

World War III: U.S. vs. China?

Look at the great wall china built long time ago.

why the great wall was built at a great cost? Simple. China wanted to be left alone. For over a thousand years, China never invaded other countries. During that time period, china was invaded numerously times. The most recently ones: the military Japan and the drug lord of British.

Now,ask yourself what the US will do if china sends a spy ship within 75 miles off the coast of the USA to monitor the movement of nuclear submarine? A civilian ship may pass unharmly within 200 miles exclusive economic zone, but a military ship with the intention of spying is not a civilian without the intention of harming. If the US sits tight and does nothing to expel a spy ship, say from russia or china, then the US may claim it has the right to do the same. Last time I checked the US navy will expel any military ship within 200 miles without prior permission from the US navy.