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LEGACY SECURITIES PROGRAM:

Much of the information about the Legacy Securities Program (a UST/Fed program) is unclear, undefined and can’t be mapped out from the summary or term sheet FAQ.

As I wrote last week:

“UNFORTUNATELY, we have heard that as of yesterday afternoon Treasury decided to get back to playing games and putting forth half baked plans. It is amazing that three months into the new Administration we have these decisions, about structuring distressed asset disposition programs, being made not by the FDIC, not by qualified and confirmed Treasury appointees, not by those senior and capable career Treasury staffers with a great depth of institutional knowledge but rather by a plethora of in-sourced “friends” from Wall Street and orchestrated by three unconfirmed consultants to Treasury and an former junior technology banker… Instead, Treasury would set up a separate program for distressed securities. Treasury said their program would allow less leverage and would allow the bidder more time to pull together the capital. While they might argue the purpose was to reduce taxpayer exposure, this is not the real motivation. Given the inexplicability of the change of plans, it seems reasonable to ask if a large and preferential asset buyer may have gotten to them. At a time when there is nobody at Treasury to respond to independent inquiries one might wonder if there have been discussions between Treasury and Fed’s banks or Pimco or Blackstone about which Secretary Geithner forgot to inform the White House. Perhaps a large asset manager convinced Treasury that once a specific distressed security (MBS tranche as example) was publicly announced for sale, that asset manager could use its market power to try and track down the other tranches in an effort to put the entire deal back together and “create value”. By having Treasury allow less leverage it would reduce the pool of available buyers and, therefore, reserve the play to a very small group of oligopolistic players who happen to be very close and have unprecedented access to Treasury.

The lack of detail and limitation that assets may only be managed by institutions that are $10 billion in AUM or larger suggests that this was created at the suggestion of, and as a gift to, our Treasury Secretary’s ‘friends’ at those large firms that are rapidly becoming the buy-side’s “too big to fail” institutions. There is no rational reason to limit management of the assets to those few firms with more than $10 billion in AUM. While I think highly of the “Loan Program”, I believe the “Securities Program” stinks like a payola program. Once the market and public figures out the reality of this program, whether tomorrow or in a few years, it will become a rightful focus of public outrage far larger than the outrage over the AIG bonuses.

While exclusions from TARP compensation limits should exist to protect the public bidders of assets in the Legacy Loan Program they should not exist for the five ‘largest and most sophisticated’ firms that will manage the Legacy Securities Program. This Geithner giveaway to managers that appear to have unlimited access to the Treasury Secretary, and to the White House, appears to be the real scam of the century. Isn’t the unfettered access and unlimited market power these firms wield reason enough to ask if they are being provided “protection” in their bids to grow to become systemically risky and globally dominant?

The “hunting license”, as the Legacy Securities Program has been termed, allows giant “F.O.T.” firms (“Friend’s of Tim”) to buy the assets anywhere they can find them (not just from banks – perhaps even from each other or their own separate funds). The details are scant. Is it dollar for dollar matching private/public funds? It appears but isn’t clear that it may include UST debt financing as well as equity . It seems to allow the winning firms time to present a plan to UST, take time to raise money, time to identify securities, try and buy back pieces of ARM and CMBS to reconstitute CDOs and “add value”. The program requires RMBS to originally have to have been AAA rated and ABS and CMBS to currently be AAA. Are they able to use this as a mechanism yo bid up the value of their own separate portfolios?

LEGACY LOAN PROGRAM:

On the other side there is not much to say about the Legacy Loan Program (a UST/FDIC program). It is a straightforward program that appears clean This program, the LLP, will allow the FDIC/UST to use it not only for resolution of loans but also securities and was therefore made somewhat redundant by the inexplicable creation of the Legacy Securities Program. It will likely have three classes of bank participants:

1 – Institutions that have conservatively marked their exposures can sell through the LLP at a likely premium relative to the distressed price in the market. This is due to the attraction of government funded guarantees and cheap funding.

2- Institutions that might take hits to equity from the sale of exposures but would remain viable and solvent… they may be given incentives to sell, in the form of some TARP capital in return for a contingent agreement to raise private equity capital.

3- Institutions that are fundamentally deeply troubled and may sell into the program as a result of regulatory pressure. For them it will be a way of shrinking or winding down without a clear receivership.

Joshua Rosner
Managing Director
Graham Fisher & Co., Inc.
O – (646) 652-6207
C – (917) 379-0641