PPIP: Pricing Still the Issue
The rally yesterday has now taken the S&P’s 23.5% higher from the bear market low of 666 (which happened to be just 1 point above the 61.8% retracement of the entire bull market that began in Aug ‘82). The 50% retracement in the S&P’s is 839 and is a definite point of reference here. Upon further review of the PPIP, the question of properly pricing the assets will remain the main sticking point as even Bernanke’s B52 in many circumstances will be able to fly between the bids and the offers. Jamie Dimon for example won’t be giving stuff away. This program is also another huge gov’t intrusion into the financial markets on top of everything else and as we further socialize finance, we further misallocate capital as we distort the risk and reward. It’s also only dealing with the symptoms of the current problem. But, I hope I’m wrong and I hope this works. The 5 yr CDS in the major banking institutions yesterday fell between 10 and 20 bps.
March 24th, 2009 at 9:34 am
Proper pricing relies on an arm’s length relation between buyer and seller, which is simply not the case.
People like Citi will set up funds (“unrelated entities” of course) that will bid 100 cents on the dollar for worthless assets that Citi already holds. Assets which are a total loss will become a loss of 15 cents on the dollar MAXIMUM, because the gov’t non-recourse loan will provide the rest of the loss.
This is a great taxpayer giveaway. I wonder when the masses will figure it out.
March 24th, 2009 at 9:38 am
…I agree the pricing of the stuff is where the rubber meets the road….BUT…..Does anyone really think this hasn’t been topic numero uno in the discussions the Treasury/Fed has been having with the banks over this plan before it was rolled out……I find it impossible to believe this hasn’t been modelled and discussed endlessly over the last sixty days
March 24th, 2009 at 9:42 am
Dollar up…gold down 922….omg
March 24th, 2009 at 9:49 am
It will probably work for everybody but the US taxpayer.
March 24th, 2009 at 10:01 am
It is amazing that Geitner would put forward this type of a plan. Maybe they are just using it as a decoy that will ensure that everybody back going Swedish (because this is so much worse). The public will not tolerate that we back rich investors against losses with public money, and then let them run off with huge profits. Look what happened with AIG. Why would the investors even want to get into this if they know that they will face a 90% tax if they hit the big one. Why would we as taxpayers want to get into another one of these socialize-the-losses-privatize-the-gains scams.
It may be a good idea to have some private sector expertise involved in disposing of these assets, but do it so that the public gets both risk and reward; and keep it so simple that everybody can understand that. I think we should hire some of all these unemployed wall street experts and retirered patriots to take care of this. Give each a high-level public employee salary of about $150K/year for 5 years and about $100M to purchase and manage toxic assets in their area of expertise. Give them a bonus structure that rewards them for selling assets at a profit (and prevent/punish them for selling it at a loss). Maybe there could even be a little competition for an extra bonus and medals to those that performed best each year. If mousey men still think it looks to much like the big scary S word, then make them private contractors instead of public employees.
March 24th, 2009 at 10:27 am
Give each a high-level public employee salary of about $150K/year for 5 years and about $100M to purchase and manage toxic assets in their area of expertise. Give them a bonus structure that rewards them for selling assets at a profit (and prevent/punish them for selling it at a loss). Maybe there could even be a little competition for an extra bonus and medals to those that performed best each year. If mousey men still think it looks to much like the big scary S word, then make them private contractors instead of public employees.
—————
Great… let’s create an economy around crappy assets. We’ll give bonuses to those who manage to sell crappy assets to other suckers. And we’ll leverage up the crappy assets to the max so the owners can generate lots of revenue without any risk of losses, then multiples will go up. With higher multiples we’lll get M&A! The economy will take off again.
That is such a good idea that maybe we should purposefully creat new crappy assets and hire 10% of the population (the new unemployed), pay them 150K plus bonuses (100% of their salary) for showing up every day from 9-5.
Why would anyone want more energy going into managing crappy assets? Has everyone lost their marbles????
Precious talent and energy should be going into sustainable prjects, things that will help our future not managing crap for the next 15-30 years.
March 24th, 2009 at 10:36 am
How about this for an incentive:
Do your job to a professional level of competence, for the agreed-upon salary, or you’re fired.
March 24th, 2009 at 10:38 am
It’s all a sham to delude the public into thinking this is a “cleanup”. It’s a taxpayer bailout in the dirtiest sense that is tilted toward the few TBTF oligarchs.
I am tiring of the growing frustration with setting an exchange price for these “toxic assets”.
IMHO, they are too complex to be priced. Auction-smauction. The oligarchs get to have their cake and eat it too. They get the stuff off their books, vacuum in wheelbarrows of taxpayer money, and retain ownership of the impossible to value assets until time resolves them.
And that’s just the way it is. Game over.
March 24th, 2009 at 10:44 am
I have yet to find a sober and informative analysis of the PPIP on the interwebs. Anyone have a link? Everything I read seems like an abbreviation of something else. Also, will AIG et al please stop blackmailing us with systemic risk? Lehman brothers CDS settlement was <$10billion, even if AIG’s was $100 billion I’d much rather pay for that than all these trillions we’re spending on keeping some of Wall Street employed.
March 24th, 2009 at 10:48 am
TARP II as Prisoner’s Dilemma:
I. Defection(B)/Defection(I) – Banks won’t sell at market prices, Investors won’t buy even w/ USG assistance.
Result: Epic net loss to economy. US Treasury shares space with a flea market on Sundays.
II. Defection(B)/Non-Defection(I) – Banks collude to distort “market” pricing/Investors + USG overpay at cartel rates for assets.
Result: Gain for banks, Minimal loss for investors, Big loss for USG.
III. Non-Defection(B)/Defection(I) – Banks submit to fire sale pricing; investors too skittish to bite without huge underpayment.
Result: Big loss for banks with major insolvencies, windfall gains for Investors + USG
IV. Non-defection(B)/Non-Defection(I) – Banks and Investors agree on good-faith “market price” and TARP II works as planned.
Result: Win-Win, credit flows and home prices rebound, people keep their jobs and pay their mortgages, U.S. Treasury building gets re-named the Timothy Geithner building.
Any reaction yet from the Oracle?
March 24th, 2009 at 10:52 am
I’d say you can learn everything you need to know about whom this plan ultimately is designed to benefit by just paying attention to what Bill Gross at Pimpco says and does. As James Carville once observed…you can never go against the big, bad bond market.
Gross loaded up on Treasuries and MBS’s just prior to the Fed’s announcement last week that it would be buying, well, Treasuries and MBS’s. Insider trading? Perish the thought. He’s just an astute student of the Federal Reserve.
Now he’s signed on to become an “investor” in this plan. (I use “investor” in the most expansive sense of the term, meaning much more than someone that puts money at risk hoping for a reward, to also include someone that puts up money hoping the reward is not all commensurate with the nearly non-existent risk).
So, I’d say, that if you’ve got any spare dough, you too should attempt to become an “investor”. Buy some of these “troubled” manic-depressive assets. But watch what Bill does. If he starts unloading his “investments” you should also. And so far as the Treasuries and MBS’s go, Pimpco has already come out saying that the Fed’s quantitative easing will likely spur inflation. Be mindful of when Bill decides to bail on those as well. He’s such an astute Fed observer (not participant mind you, just observer) of the Fed that he will know well in advance of the Fed’s decision to pull back on the QE.
In the meantime, if you have a house that you need to sell or refinance, you better do so w/in the next six months. The big banks (all of whom, like Bill, are just observers, not participants, in the Fed’s decision-making) have hired temps to last through the summer. These were curiously in place right before the announcement of a new round of MBS purchases by the Fed. Apparently Citi, WFC, BoA, are also very astute Fed observers. Sadly, it looks as if the residential real estate party is slated to last only so long as the temps’ contracts. If you don’t get in on it by October, it appears the cheap mortgage rates are slated to end about there.
Thank goodness the Fed is “independent”. If it weren’t, somebody might be concerned that it would manipulate its monopoly on money printing to collude with market participants to set prices, and that would be illegal, or at least it would be illegal if it weren’t a government (albeit “independent” ) actor.
March 24th, 2009 at 10:53 am
Kyle, check out Kid Dynamite’s blog for two excellent posts on Geithner’s Sham.
http://fridayinvegas.blogspot.com/
KD really gets into the nuts and bolts.
March 24th, 2009 at 10:54 am
I love the smell of tinfoil hats in the morning!
March 24th, 2009 at 11:04 am
If the Treasury wants to play Prime broker to some hedge funds trying to find distressed assets, fine. I think the toxic assets that they want to buy are hidden with the weapons of mass destruction that Saddam had.
March 24th, 2009 at 11:05 am
@Curmudgeon: A neighbor/friend of mine at Wells Fargo told me about 4-6 weeks ago that they were ramping up hiring mortgage bankers en masse. I found it a bit strange then but it all makes sense now. If I were a little smarter/more bold/more of a pure trader, like jdamon33, I would have bought Wells as a trade at $7+ when it tanked, and sold at $17 recently, knowing full well that the feds were not going to nationalize them or let them fail. Lesson learned there.
March 24th, 2009 at 11:13 am
Mannwich: Don’t know if there is a lesson there, since it’s likely the Gubmint will eventually come under too much pressure to subsidize all the big banks forever. Then, the buyers at the bottom may get hit.
March 24th, 2009 at 11:27 am
All those doom parties will have to be postponed….who knows how long cheap housing finance will last….I think longer than fall but even if the plug is pulled it will be because it’s done its job …..the Geithner plan as even Curmudgeon admits is a no brainer….Inflation may or may not be a problem sometime next year but the Fed will deal with it.
March 24th, 2009 at 11:28 am
Agreed, Mike in Nola. The common sense side of me tells me to stay far away from the banks (partly out of principle) but when the feds are gaming everything, it’s all too natural to think: “if you can’t beat ‘em, join em’. Sad as that may be to admit.
March 24th, 2009 at 11:32 am
@vega: Thanks for the Kid Dynamite link. He’s on it.
The bond holders don’t get the haircut they deserve.
Until further notice, there will be no sharing of the pain.
March 24th, 2009 at 11:36 am
I’ve been trying to figure out the pricing conundrum myself. Everybody knows the assets are worth far less than what the banks want for them. So why would a guy like Bill Gross would ever pay more than they’re worth. Why would anyone? Well, it seems Gross and a lot of other people have many billions of dollars in bank debt that will go poof if they don’t buy this stuff at an inflated price.
You see, if the government just gives the banks the money, it hits the federal budget. But if they provide the guarantee, there’s no budgetary hit, until after the damage is done.
And Gross can invest a tiny portion of money into this fund, get the giant leverage, take the hit on the PPIP, but come out whole on the bank debt they’re holding.
So for Gross and other money managers who have huge bank bond holdings, it’s prudent to put up a billion or two, get the government’s money, bid high and get your bonds repaid. Then take the loss on the PPIP and let the government take the budgetary hit a few years later.
We’ll see.
March 24th, 2009 at 11:40 am
“…..the Geithner plan as even Curmudgeon admits is a no brainer….”
@otto:
Can you even fucking read? I said nothing at all about the merits of the Geithner plan. I just explained how to profit from it.
March 24th, 2009 at 11:49 am
The Curmudgeon Says:
March 24th, 2009 at 11:40 am
“…..the Geithner plan as even Curmudgeon admits is a no brainer….”
@otto:
Can you even fucking read? I said nothing at all about the merits of the Geithner plan. I just explained how to profit from it.
…….You just explained my definition of a no brainer…..
March 24th, 2009 at 11:51 am
The Curmudgeon Says:
March 24th, 2009 at 11:40 am
And btw just cut the profane insults….it’s just not necessary
March 24th, 2009 at 11:56 am
ottovbvs Says:
March 24th, 2009 at 11:27 am
…..the Geithner plan as even Curmudgeon admits is a no brainer…
Huh? Stop sniffing your finger and put it back where you it pulled it from…
March 24th, 2009 at 11:57 am
Mannwich: Know how you feel. The problem is that we don’t get to trade on inside info like Gross and the bankers. We are ruled by an old boy network. Reminiscent of stories about the pre-SEC days. Problem is that now the Feds seem to be on the side of the plutocrats.
March 24th, 2009 at 11:58 am
@Mike in Nola: Hence my high levels of crankiness these days……..it’s hard to feel good about what’s going on. It really is. Sure doesn’t seem like “change I can believe in”.
March 24th, 2009 at 12:06 pm
Just in case anybody missed it, here is a link to the latest in a series from the EIU:
http://a330.g.akamai.net/7/330/25828/20090318195802/graphics.eiu.com/specialReport/manning_the_barricades.pdf
I haven’t had a chance to read it all the way through yet, but their 1st report in August 2007 ‘Heading for the rocks’ was very informative.
March 24th, 2009 at 12:27 pm
“Reminiscent of stories about the pre-SEC days. Problem is that now the Feds seem to be on the side of the plutocrats.”
But we still have the Office of Thrift Supervision! They will save us, right?
March 24th, 2009 at 12:31 pm
jason Says:
March 24th, 2009 at 11:56 am
ottovbvs Says:
March 24th, 2009 at 11:27 am
…..the Geithner plan as even Curmudgeon admits is a no brainer…
Huh? Stop sniffing your finger and put it back where you it pulled it from…
……It’s a no brainer because as Curmudgeon points out, it will be possible for private investors to make money out of it, ergo it will attract private capital, ergo it will remove a lot of poorly priced assets off bank balance sheets and make them more willing to lend…..in short it’s likely to work and hence it is a “No brainer”…… at least for those who can communicate at above 10th grade level
March 24th, 2009 at 1:08 pm
James Surowiecki, he of the wisdom of crowds, on why Geithner’s approach probably makes most sense at the economic, financial and political levels
http://www.newyorker.com/online/blogs/jamessurowiecki/2009/03/who-can-at-leas.html
March 24th, 2009 at 1:21 pm
“And btw just cut the profane insults….it’s just not necessary”
Then learn how to read.
March 24th, 2009 at 1:29 pm
…An interesting take by Doug Kass…worth reading
http://www.thestreet.com/story/10476521/1/kass-why-the-bears-are-wrong.html
March 24th, 2009 at 1:32 pm
Vega@10:53
Great link.
So the result of the current plan is that the FDIC basically is used to bail out the bond-holders, with a $100 billion supplement from another taxpayer pot of money. I know that the middle class will end up paying for this one way or the other, but somehow I would fell a lot better paying via a reduction in the bond part of my 401K.
March 24th, 2009 at 1:35 pm
The Curmudgeon Says:
March 24th, 2009 at 1:21 pm
“And btw just cut the profane insults….it’s just not necessary”
Then learn how to read
……That’s not the problem….the problem is you don’t always realize the implications of what you’re saying…..and when it’s pointed out you can’t respond in an adult way…..
March 24th, 2009 at 3:24 pm
I don’t know how Geithner can sell this massive subsidy to a few investors in the current environment. Who wouldn’t want a thirteen to one bet? For that matter individual investors should be allowed to participate, but that would make it clear how large the subsidy is.
In addition, I completely agree on the pricing issue. As a piece of anecdotal evidence. I enquired about refinancing my home a few days ago. When I was asked how much I thought the home was worth I gave an answer that was 25% less than what home was appraised at in 2006–which was probably 20% above the true 2006 level. So in other words my “guess” is probably overstated by 25%. To my surprise the banking associate at the other end of the phone was amazed at how closely my guess matched his estimate…dear god. So I am sure that bank still has my loan, it is marked at par and that they are assuming there is considerable positive equity in the house, when I think the equity is flat at best. Moreover, I am sure the bank has no idea that I am unemployed. So my bid for my loan…65.
March 24th, 2009 at 3:26 pm
@otto: I like Kass. Reading his articles in ‘05′-’06 is what led me to believe something was going to go horribly amiss in the housing market and then wider economy. His articles actually led me to dig deeper and ultimately find Barry’s site (which then led me to CR, Naked Capitalism, Paul Kedrosky, Mish et al). However, if I recall correctly, Kass was early with his bearish calls, which leads me to believe he’ll be early here as well.
March 24th, 2009 at 5:38 pm
ottovbvs and Mannwich: What Kass says are necessary, but not sufficient conditions.
Yeah, the banks have to be recapitalized. Will that get them lending again? Not necessarily. See Krugman’s recent column about despair and his comments on the videos Barry posted today. Just because the banks get into a position where they can lend doesn’t mean a boom. They need customers who want to borrow and are creditworthy; those won’t appear til recovery.
Of course financial stocks have improved; they can hardly get worse. And, they are being subsidized out the wazoo. How will they act when the government teat is withdrawn?
Commodities are rising because China is stocking up and because they were so far down, a bounce can be expected. It doesn’t necessarily mean that there is growth. In fact, I plan on buying some SMN after the optimism from the plan starts to fade.
Barry pretty well rebutted the housing bottom baloney in the MSM in his previous post.
Emerging markets? The will improve if they think we are going to buy their stuff again. Federal attempts to reinflate the bubble will raise hopes. China’s economic stats are notably unreliable and have actually been worrisome if you read Michael Pettis blogs, which are mysteriously being blocked by China.
March 24th, 2009 at 6:25 pm
glad you guys enjoyed my posts on the subject.
yeah – i wonder how much the American public would love this plan if they understood it. It’s as confusing as hell, even for people who know what they’re doing.
and to Barry’s point in this post – the plan does little to solve the problem of the market wanting to pay 30c and the banks asking 80c… this leverage won’t fix that…
March 24th, 2009 at 8:01 pm
I don’t know enough of Doug Kass’s history to make a determination- but you’re saying Kass was early with his bearish call, and I know for a fact that he called THE bottom on Citigroup at $23 !! Yes, $23 last year he was running around saying the banks were finished going down & were great buys ( I remember because I got sucked in by it!) – so it sure looks like the man is always REALLY early – and being $22 too early on C sure hurts!
March 24th, 2009 at 11:18 pm
joe the trader Says:
“For that matter individual investors should be allowed to participate, but that would make it clear how large the subsidy is.”
“but that would make it clear how large the subsidy is.”
yes, quite, it is that transparent.
March 25th, 2009 at 8:05 am
Stiglitz: “Quite frankly, this amounts to robbery of the American people
Toxic assets plan a robbery: Stiglitz
25/03/2009
The US government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, according to Nobel Prize-winning economist Joseph Stiglitz.
“The Geithner plan is very badly flawed,” Stiglitz said on the sidelines of a Credit Suisse Asian investment conference in Hong Kong yesterday.
US Treasury Secretary Timothy Geithner’s plan to wipe up to US$1 trillion (HK$7.8 trillion) in bad debt off banks’ balance sheets, unveiled on Monday, offered “perverse incentives,” Stiglitz said. Washington is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside to private investors, he said.
“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”
Even if the plan clears banks of massive toxic debt, worries about the economic outlook mean banks could still be unwilling to make fresh loans, while the prospect of a higher tax burden to pay for various government stimulus plans could further undermine US consumers, he said.
Some Republican lawmakers have also expressed concern over the incentives offered by the government, which could end up providing private investors with more than 90 percent of the funds to buy the troubled assets. But President Barack Obama has said the plan was critical to economic recovery.
Barclays Capital, meanwhile, says the success of the Geithner plan depends on a recovery in house prices.
For the plan to work, house prices need to stop declining, said Chotaro Morita
March 25th, 2009 at 8:17 am
still love reading this blog .. lol .. slaps and jabs and all
From a workin man who invests in free market capitalism via time and energy buying stuff to produce my product with … I hope y’all figure how to bring it all back in line … I hope my President Obama and past State Senator gets a handle on the game you all play . so I can survive without playing the game you love to play . cause I find your game revolting . necessary . but still the same
that was background to mention another necessary to worry about .. property taxes to balance these printagiveaways juicing the economy as we knew it .. I am sure as anyone . who takes care of who with its muscle
_____
ps – BR I need a thread to add juice to the World Currency idea
March 25th, 2009 at 9:33 am
pss – another thread .. Growth via Less Waste via Time Element
concentrate investing in items that have a longer life expectancy
such as a power plant (25 years) versus a tv show (1 second)
America has adopted show business song and dance as a mainstay
“a waste is a terrible thing to mind” .. JoJo . still love that slap upside the head