Well, I wasn't going to do it, but I can't help showing this report from Option Armageddon, a Certified Public Accountant blogger who is quite astute. The writing's on the wall with Public Private Investment Program.
FDIC Won’t Rule Out Banks as Buyers of Toxic Assets May 27, 2009 – 6:18 pm
During a press conference today, FDIC Chairwoman Sheila Bair was asked about this morning’s WSJ report that banks are lobbying to buy assets under Geithner’s toxic asset plan, the PPIP.
She says banks will not be able to bid on their own assets, but clearly leaves open the possibility that they’d be allowed to buy the assets of other banks.
This is highly problematic. If banks can act as buyers in any capacity, what’s to prevent collusion? With just a sliver of equity and a pile of non-recourse federal loans, Citigroup could fund a special purpose vehicle to overpay for BofA’s bad assets. In exchange BofA would overpay for Citi’s assets. The beauty of using non-recourse debt is that you can walk away from it. The lender, in this case the taxpayer, is stuck eating the loss on the bombed-out asset.
All banks stand to lose is their small equity investment.
The ranking Republican member of the House Financial Services Committee, Spencer Bachus, previously expressed outrage that such collusion might be possible. He promised to introduce legislation to prevent it from happening. I’m not aware that he has and have a call in to the Financial Services Committee for comment.
Below, I’ve transcribed Bair’s full response to the question she was asked about PPIP….
"No [banks] will not be able to bid on their own assets. I think there has been some confusion about that….There will be no structure where we would allow banks to bid on their own assets. I think there have been separate issues about whether banks can be buyers on other bank assets and I think that’s an issue that we continue to look at. There’s also a question of whether banks who come to the PPIP to sell assets, while they would not be involved in the bidding process—private investors would set the prices—whether part of the consideration they would take back once the price has been set by the private sector, would be in an equity piece in the PPIP. Those are things we’re actively discussing….I think there are a couple of factors that are still at play here as we try to develop this structure and look toward the launch of PPIP. One is we’re finding on both the buyer and the seller side there continues to be discomfort about Congress’s view of this program, whether the rules could potentially change. The Boxer/Ensign amendment I think is a good amendment…it addresses conflict of interest issues and we want that too. Nonetheless I think this has created some uncertainty about certain aspects of the Boxer/Ensign amendment and the Treasury will need to issue regulations I think to clarify those issues before we will have comfort by market participants."
Bair’s sentence beginning “nonetheless” was not clear. What I transcribed is what she said. It sounds as if she’s uncomfortable about the amendment (more below)…..she quickly changes the subject…
"Also the good news is banks have been able to raise a lot of new capital before taking more aggressive steps to cleanse their balance sheets. The incentives to sell [assets to the PPIP] may be less for good reasons because they’ve been able to raise new capital.
So there are still some issues we are working through…"
She knows taxpayers are getting a raw deal, which is why it would be “good news” that banks’ have less incentive to sell assets to these vehicles. She also knows that banks are still swimming in so much toxic junk, it has to be flushed away somehow. But she’s apprehensive that the public might have a transparent view of the cleansing process.
Enter the Boxer/Ensign amendment, which is attached to S. 896. It reads:
"To provide for oversight of a Public-Private Investment Program, and to authorize monies for the Special Inspector General for the Troubled Asset Relief Program to audit and investigate recipients of non-recourse Federal loans under the Public Private Investment Program and the Term Asset Loan Facility."
In other words, Senators Boxer and Ensign want to give Neil Barofsky oversight over PPIP in addition to TARP. Is Bair uncomfortable with this because she knows Barofsky would publicize some of the very abuses the administration is counting on to help banks push their losses onto taxpayers?
This blog entry shows the problem with the Wall Street/Washington connection. It's a lot, like an "L.A. Connection" from a Steely Dan song.
Or, it's a lot like the words from this Steely Dan song, "Kid Charlamagne":
"Clean this mess up or we'll all end up in jail, the test tubes and the scales, just get it all out of here. Is there gas in the car? Yes, there's gas in the car. I think the people down the hall know who we are."
First, in this analogy, the "mess" are the "toxic assets," the "test tubes and the scales" are the TARP programs and the other "tools" paid for by taxpayers, and the people down the hall are simply the investors and/or astute financial professionals who understand what's going on here. By the way, there won't be gas in the car soon because it'll be too damn expensive.
The song itself was about drug dealers but it can apply to Wall Street greed as well. Money can be an addiction for greedy people from Wall Street, and these "dealers" in the Obama administration enable greedy "trickle-down" economics to feed that addiction.
It just does not bode well in a change-oriented administration.
Thursday, May 28, 2009
Telling It Like It Is
At first, I wanted to write about the number of people receiving unemployment benefits is at record pace--the worst since 1967.
Then, I was going to mention how foreclosures hit new records--and prime mortgages were affected because of increasing unemployment.
As unemployment lags recovery, foreclosures will also likely continue into 2011, according to the Mortgage Bankers Association's National Delinquency Survey.
I also wanted to write about how the Wall Street actors sit on Capitol Hill--which I may write about at another time.
However, I came across JimQ's blog--The Burning Platform and an article that states everything exactly the way I see it and, frankly, I could not express it any better than him.
Jim Q has a Masters of Business Administration from Villanova University. He also holds an accounting degree from Drexel University and is a Certified Public Accountant so this financial professional is no chump.
He eloquently states this whole economic dilemma and the frustration for anyone that can see clearly through the "smoke and mirrors" of this economic crisis.
That said, I might replace some things in his article. For example, "good and evil" with "ethical and unethical" or "decent and indecent," respectively.
I would also say that universal healthcare, despite costs, can be a good thing if we weren't in this horrible deficit we are in now. Jim might not be in favor of universal healthcare.
But, again, this is a minor point because handling the economic mess we're in still stands as priority number one and I, too, am tired of panic czars as well as the smoke and mirrors.
Here's a link to his article. I think he nails it.
http://theburningplatform.com/economy/aint-no-rest-for-the-wicked-1
Enjoy.
Then, I was going to mention how foreclosures hit new records--and prime mortgages were affected because of increasing unemployment.
As unemployment lags recovery, foreclosures will also likely continue into 2011, according to the Mortgage Bankers Association's National Delinquency Survey.
I also wanted to write about how the Wall Street actors sit on Capitol Hill--which I may write about at another time.
However, I came across JimQ's blog--The Burning Platform and an article that states everything exactly the way I see it and, frankly, I could not express it any better than him.
Jim Q has a Masters of Business Administration from Villanova University. He also holds an accounting degree from Drexel University and is a Certified Public Accountant so this financial professional is no chump.
He eloquently states this whole economic dilemma and the frustration for anyone that can see clearly through the "smoke and mirrors" of this economic crisis.
That said, I might replace some things in his article. For example, "good and evil" with "ethical and unethical" or "decent and indecent," respectively.
I would also say that universal healthcare, despite costs, can be a good thing if we weren't in this horrible deficit we are in now. Jim might not be in favor of universal healthcare.
But, again, this is a minor point because handling the economic mess we're in still stands as priority number one and I, too, am tired of panic czars as well as the smoke and mirrors.
Here's a link to his article. I think he nails it.
http://theburningplatform.com/economy/aint-no-rest-for-the-wicked-1
Enjoy.
Wednesday, May 27, 2009
The 93-7 Rule
In my last post, I tried to correct myself and said Geithner's PPIP was only for bondholders who would purchase a small percent of their toxic assets and hold them in a special purpose entity until they can reach a decent value with, of course, taxpayers paying 93 percent of that.
But, it turns out I was right the first time. Banks do want to purchase these assets and, why not? If the federal government holds 93 percent of the stake and banks purchased them for 7 percent, they wouldn't have to take 100 percent of the loss like they would have to do on some of these "toxic assets." In reality, most of these assets would be a 40 percent loss at best.
http://online.wsj.com/article/SB124338836675757049.html
And, in about 6-10 years, they might be worth something and the banks might be worth something as well.
But, it turns out I was right the first time. Banks do want to purchase these assets and, why not? If the federal government holds 93 percent of the stake and banks purchased them for 7 percent, they wouldn't have to take 100 percent of the loss like they would have to do on some of these "toxic assets." In reality, most of these assets would be a 40 percent loss at best.
http://online.wsj.com/article/SB124338836675757049.html
And, in about 6-10 years, they might be worth something and the banks might be worth something as well.
Friday, May 22, 2009
Smoke and Mirrors
Just to follow up on my "smoke and mirrors" comment, here's a post from Marketwatch:
Fed: TARP injection is high-level capital
Ronald D. Orol
WASHINGTON (MarketWatch) - The Federal Reserve on Friday adopted a rule that will allow banks receiving capital from the bank bailout fund to consider some of the financial injections they have received to be a high-level of capital.
According to the Federal Reserve, banks can consider senior perpetual preferred stock they have received from the Treasury Department as grade-A, Tier 1 capital, the kind of assets a bank needs to have lots of. Private preferred equity stakes are often considered Tier 2, a lower form of capital, while common equity has traditionally been considered Tier 1 capital.
However, the Treasury is considering the preferred stake investments it has been making in banks to be considered Tier 1. As the financial crisis has worsened, some banks in the program have found that their common equity value has diminished, making the government preferred investment a larger percentage of their Tier 1 Capital. Banks typically need to have a large percentage of their risk-weighted assets as Tier 1.
In a nutshell, the Fed has once again changed the rules--just as FASB changed its rules on mark-to-market accounting in the middle of the crisis--and made it easier to show banks as solvent. Fact is, if the stress tests were accurate, they would not have had to change anything.
Bottom line: what investor worth their weight is going to trust the United States Federal Government for anything that has to do with investment in this country? Only the bondholders who might be able to get something out of it--which the Fed is choosing itself in the Geithner's Public-Private Investment Partnership Fund.
As mentioned in the previous blog, with attribution to "Mish," bondholders will purchase toxic assets at a discount with government backing, put them in a Special Purpose Entity, and not lose the full 100 percent on them. When they regain their value, probably in 10 years, they will not have lost anything. The taxpayers? That's another story.
And a correction to that posting. The bank will not be buying the assets, the bondholders will.
Fed: TARP injection is high-level capital
Ronald D. Orol
WASHINGTON (MarketWatch) - The Federal Reserve on Friday adopted a rule that will allow banks receiving capital from the bank bailout fund to consider some of the financial injections they have received to be a high-level of capital.
According to the Federal Reserve, banks can consider senior perpetual preferred stock they have received from the Treasury Department as grade-A, Tier 1 capital, the kind of assets a bank needs to have lots of. Private preferred equity stakes are often considered Tier 2, a lower form of capital, while common equity has traditionally been considered Tier 1 capital.
However, the Treasury is considering the preferred stake investments it has been making in banks to be considered Tier 1. As the financial crisis has worsened, some banks in the program have found that their common equity value has diminished, making the government preferred investment a larger percentage of their Tier 1 Capital. Banks typically need to have a large percentage of their risk-weighted assets as Tier 1.
In a nutshell, the Fed has once again changed the rules--just as FASB changed its rules on mark-to-market accounting in the middle of the crisis--and made it easier to show banks as solvent. Fact is, if the stress tests were accurate, they would not have had to change anything.
Bottom line: what investor worth their weight is going to trust the United States Federal Government for anything that has to do with investment in this country? Only the bondholders who might be able to get something out of it--which the Fed is choosing itself in the Geithner's Public-Private Investment Partnership Fund.
As mentioned in the previous blog, with attribution to "Mish," bondholders will purchase toxic assets at a discount with government backing, put them in a Special Purpose Entity, and not lose the full 100 percent on them. When they regain their value, probably in 10 years, they will not have lost anything. The taxpayers? That's another story.
And a correction to that posting. The bank will not be buying the assets, the bondholders will.
Increase Confidence or Provide a False Sense of Security?
The great thing about blogging is to watch "smoke and mirrors" and release all frustration by anonymously writing about it and thinking that someone is actually reading it.
Conventional wisdom says the next shoe to drop in this economic crisis will be commercial real estate and, in fact, it is already happening. That's nothing new to anyone reading the Wall Street Journal or any other financial or business-related news.
My sources, however, tell me a wave of banks--mainly community and mid-to-super regional banks--will be closing by the end of the third quarter as FDIC offices staff up in California and Florida. Bank United--taken over yesterday--is just the beginning.
I forecast a collapse in the stock market around mid-November. Why?
Well, let's see. First, mark-to-market rules now make banks look more solvent than they really are, which is insolvent. Geithner, himself, even said that the job right now is to increase confidence and the Treasury and Fed do this by using "smoke-and-mirrors" to make the picture better than it really is.
Basic economic indicators and human nature, however, do not lie--nor does common sense, which has been the one consistent indicator in this crisis.
Optimism is great, but polyannish behavior can cause even the most well-intentioned CFO to lose not only his or her job but put his or her business into bankruptcy.
Let's look at the facts:
1. Unemployment continues to increase and economists say it will continue to increase into 2010 if not further;
2. Credit remains tight--Despite the TED spread dropping, credit is tighter than ever. A business that needs the loan may not get it; one that does not need it may not want to go into debt for fear shareholders will consider it a weakness--as large, insolvent banks do.
(By the way, when do banks become solvent? When toxic assets turn non-toxic. Give it...oh...6-10 years. The Fed is optimistic saying we won't have a full recovery for six years. I don't believe home and/or commercial real estate values will return that quickly. I give it 10 years--like Japan's lost decade. It's easy to tell another country the right thing to do is let banks collapse. It's the right answer, and the U.S. said this to Japan before their decade-long recession. But try letting that happen to your own country. Wasn't so easy for the Paulson-Bernanke Bush team. The Geithner-Bernanke Obama team are keeping it up. Nobody wants large banks to fail when they're leader and certainly Congress doesn't want it. How else will they get paid?).
3. Strong regulation is coming for the financial markets which will--rightly so--keep the markets disciplined in the future. Let's hope long-term future. The U.S. needs a gradual recovery once it hits bottom--whenever that is. Which brings me to my next point.
4. Consumers are into not spending money. It's not just practical, it's the new fad sweeping the nation--Don't Spend...Save! Just as the past 30 years have been all about materialistic needs and increasing debt to make the middle-class feel as if they're upper class (because their wages never increased) the next 10 years or longer will be about savings and not letting the corporate executives be the ones with all the money. After 9/11, consumers were spending for their country and housing took this country right out of a brief, minor recession. Not this time. Businesses want consumer cash? They'll have to lower costs on those discretionary items. Lower costs is DEFLATION, not INFLATION (that might come later).
5. So now, with less items purchased, less manufacturing, less income for stores, less retail, less accountants and office services, less Wall Street, less office tenants, less real estate-related jobs, less housing boom, less income for REITs, less warehouse, less travel, less hotel jobs, less money to pay the commercial mortgages and commercial mortgage-backed securities on all of these loans made between 2005-2007 that mature in 2015-2017. Although many of them are going into default right now, refinancing them remains difficult in the long term. Keep your fingers crossed--we may have fully recovered from this "recession" in six years, according to the Fed. That would make it 2015. If not....commercial mortgages in default...like residential, it ties to derivatives and credit default swaps and bondholders losing money and everything that made the economy collapse in the past year. Can you say "double-dip recession?"
6. It will be at that time, when we discover the second shoe to drop, that the stock market investors sell off financials and all that goes with it because the dollar won't be worth the reams and reams of paper the Fed has used to print it on. Therefore, they won't be able to bail out banks and some large financial institutions will eventually meet their destiny--failure. Just like Bank United's failure only on a larger scale.
7. So then what happens? Just look at the history books, which Ben Bernanke has done so throughly. The Great Depression, 21st Century Style. 75 percent of people employed (depending on how you look at statistics, we're only about 10 percent unemployment away from that number and many people are still living on unemployment checks, not looking for work. Some still have jobs that may not very soon. Some may be starting their own consulting firms, which is a good thing to do right now). Soup lines? Well, there was unemployment insurance back then.
8. And then, when we've hit rock bottom and realize true value in this world does not come from monetary gain but in personal pride, investors with plenty of money on the sidelines--much of it foreign capital--step in to gobble up that real estate. Entrepreneurial minds create and manufacture for the future. Green manufacturers and/or technology leads the economic recovery--possibly forming a new wave of optimism and dare I say, another bubble that awakens the greed again in mankind. At that point, enjoy the rising market, the 401K income and its ensuing wealth. Hopefully, though, everyone will remember this economic event and gain some wisdom from it.
For me, I'm no investor, but I know that when that stock market hits anything near 11,000-14,000--if it does again in my lifetime--my money's going into the most conservative fund possible or maybe even under my mattress!
Conventional wisdom says the next shoe to drop in this economic crisis will be commercial real estate and, in fact, it is already happening. That's nothing new to anyone reading the Wall Street Journal or any other financial or business-related news.
My sources, however, tell me a wave of banks--mainly community and mid-to-super regional banks--will be closing by the end of the third quarter as FDIC offices staff up in California and Florida. Bank United--taken over yesterday--is just the beginning.
I forecast a collapse in the stock market around mid-November. Why?
Well, let's see. First, mark-to-market rules now make banks look more solvent than they really are, which is insolvent. Geithner, himself, even said that the job right now is to increase confidence and the Treasury and Fed do this by using "smoke-and-mirrors" to make the picture better than it really is.
Basic economic indicators and human nature, however, do not lie--nor does common sense, which has been the one consistent indicator in this crisis.
Optimism is great, but polyannish behavior can cause even the most well-intentioned CFO to lose not only his or her job but put his or her business into bankruptcy.
Let's look at the facts:
1. Unemployment continues to increase and economists say it will continue to increase into 2010 if not further;
2. Credit remains tight--Despite the TED spread dropping, credit is tighter than ever. A business that needs the loan may not get it; one that does not need it may not want to go into debt for fear shareholders will consider it a weakness--as large, insolvent banks do.
(By the way, when do banks become solvent? When toxic assets turn non-toxic. Give it...oh...6-10 years. The Fed is optimistic saying we won't have a full recovery for six years. I don't believe home and/or commercial real estate values will return that quickly. I give it 10 years--like Japan's lost decade. It's easy to tell another country the right thing to do is let banks collapse. It's the right answer, and the U.S. said this to Japan before their decade-long recession. But try letting that happen to your own country. Wasn't so easy for the Paulson-Bernanke Bush team. The Geithner-Bernanke Obama team are keeping it up. Nobody wants large banks to fail when they're leader and certainly Congress doesn't want it. How else will they get paid?).
3. Strong regulation is coming for the financial markets which will--rightly so--keep the markets disciplined in the future. Let's hope long-term future. The U.S. needs a gradual recovery once it hits bottom--whenever that is. Which brings me to my next point.
4. Consumers are into not spending money. It's not just practical, it's the new fad sweeping the nation--Don't Spend...Save! Just as the past 30 years have been all about materialistic needs and increasing debt to make the middle-class feel as if they're upper class (because their wages never increased) the next 10 years or longer will be about savings and not letting the corporate executives be the ones with all the money. After 9/11, consumers were spending for their country and housing took this country right out of a brief, minor recession. Not this time. Businesses want consumer cash? They'll have to lower costs on those discretionary items. Lower costs is DEFLATION, not INFLATION (that might come later).
5. So now, with less items purchased, less manufacturing, less income for stores, less retail, less accountants and office services, less Wall Street, less office tenants, less real estate-related jobs, less housing boom, less income for REITs, less warehouse, less travel, less hotel jobs, less money to pay the commercial mortgages and commercial mortgage-backed securities on all of these loans made between 2005-2007 that mature in 2015-2017. Although many of them are going into default right now, refinancing them remains difficult in the long term. Keep your fingers crossed--we may have fully recovered from this "recession" in six years, according to the Fed. That would make it 2015. If not....commercial mortgages in default...like residential, it ties to derivatives and credit default swaps and bondholders losing money and everything that made the economy collapse in the past year. Can you say "double-dip recession?"
6. It will be at that time, when we discover the second shoe to drop, that the stock market investors sell off financials and all that goes with it because the dollar won't be worth the reams and reams of paper the Fed has used to print it on. Therefore, they won't be able to bail out banks and some large financial institutions will eventually meet their destiny--failure. Just like Bank United's failure only on a larger scale.
7. So then what happens? Just look at the history books, which Ben Bernanke has done so throughly. The Great Depression, 21st Century Style. 75 percent of people employed (depending on how you look at statistics, we're only about 10 percent unemployment away from that number and many people are still living on unemployment checks, not looking for work. Some still have jobs that may not very soon. Some may be starting their own consulting firms, which is a good thing to do right now). Soup lines? Well, there was unemployment insurance back then.
8. And then, when we've hit rock bottom and realize true value in this world does not come from monetary gain but in personal pride, investors with plenty of money on the sidelines--much of it foreign capital--step in to gobble up that real estate. Entrepreneurial minds create and manufacture for the future. Green manufacturers and/or technology leads the economic recovery--possibly forming a new wave of optimism and dare I say, another bubble that awakens the greed again in mankind. At that point, enjoy the rising market, the 401K income and its ensuing wealth. Hopefully, though, everyone will remember this economic event and gain some wisdom from it.
For me, I'm no investor, but I know that when that stock market hits anything near 11,000-14,000--if it does again in my lifetime--my money's going into the most conservative fund possible or maybe even under my mattress!
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