Wednesday, April 1, 2009

Boosting the Fund Managers Retirement Package

A Hat Tip To Mish for the following;

The new PPIP plan is quickly being labeled as nothing but a back door for the banks that hold the most toxic of assets to dump them onto the taxpayers. Allowing a small, select group of companies to run the program, especially those most vocally for the program, leaves too much room for abuse.

The investors are limited to the largest firms. Of course, most of these firms are partly responsible for the mess. Lesser sized firms are prevented from the bidding process. By limiting the number of bids, the selected managers can control the prices, with little true bidding occurring.

Guess what that leads to - Overvaluing credit derivatives. It is the overvaluing of credit derivatives through level 3 accounting and off-shore accounts that has us in this mess in the first place. Had we had true mark to market rules for the last three years, as the market moved down in housing, the losses and unwinding of credit derivatives based on housing would have taken place immediately. As each downgrade happened, the loss would be recognized. Instead, under the current system, the holder can claim full value, even though the derivative may have received several downgrades.

Because we do not have true mark to market, the banks have since been securitizing credit card debt, student loan debt, even boat loan debt. What do you think these will be worth two years from now?

As Mish explains, it is most certainly a scheme allowing the bondholders to not lose a dime, the managers to realize a huge windfall, and the taxpayers exposed to massive losses. As more information comes out, the likelihood of success for this plan seems more remote. And it is apparent the burden to the taxpayer will increase.

From The Wall Street Journal, Treasury's Very Private Asset Fund;

"The Obama Administration insists it wants to "partner" with private investors for its new toxic-asset purchase plan. But the more details that emerge, the more it seems Treasury wants to work with only a select few companies. This is no way to conduct a bank clean-up.'

"The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as "fund managers" to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible.'

"But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks.'

"Hedge Fund Intelligence recently estimated total assets under management at Avenue Capital Group at $16.4 billion, King Street Capital at $15.8 billion, Fortress Investment Group at $13.7 billion, and Elliott Associates at $12.8 billion. Presumably, the portion of these portfolios devoted to toxic assets is significantly smaller. "It's difficult to imagine why most firms would even bother to apply now," one hedge fund manager told us.'

"Treasury rules also say the $10 billion limit must be comprised of commercial and residential mortgage-backed securities that are "secured directly by the actual mortgage loans, leases or other assets and not other securities." This is another way of saying that they must be "first tier" assets, for instance collateralized debt obligations (CDOs). But what many private players instead deal in are "CDOs squared" or CDOs secured by other CDOs, which would not count toward the requirement. This, too, will make it harder to take part in the program.'

"While dozens of banks and insurance companies today hold more than $10 billion in toxic securities, the vast majority are trying to get these assets off their books -- not lining up to buy more."This is ugly," says Joshua Rosner, the managing director of Graham, Fisher & Co., an independent research firm. "As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn't serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury."

"None of this bodes well for the bank rescue. The purpose is to create new buyers for these toxic securities, a process that, in Treasury's own words, will lead to better "price discovery." .......The weaker asset-holding banks are already wary of selling into this program, worried that low bids will result in big losses that will further hurt their balance sheets. They will be even less likely to take part if only a handful of managers, who have every incentive to keep prices low, are doing the bidding.'

".........smaller players can now only take part in this program if they agree to "buy" into the funds run by one of the exclusive managers. So not only is the government going to be anointing a favored few to invest in these assets. It is also giving those favored few the opportunity to collect fees and profit-sharing from anyone else that wants to go in with them. In the wake of the AIG bonfire, Mr. Geithner is tempting another outcry."

How all of this is to be paid for is through the sale of more Treasuries. Without real economic activity increasing, the world will tolerate our Treasury printing only so many more bonds. At some point, our GDP must reflect the ability to pay those bonds back. We never want foreign buyers of Treasuries to doubt we can service them.

$8 Trillion is the amount estimated for new Treasuries over the next few years. Every dime given the banks has a high likelihood of doing nothing but covering losses. How many jobs in new technologies would $8 Trillion create?

It is better the top banks go bankrupt rather than the US. And soon.

The Economy May Well Doom Social Security

The Social Security Fund may not be as well funded, therefore in trouble much sooner, than many believe.

Since it's inception, the intent of Social Security was to provide a modest income to retirees who would otherwise have none. It worked marvelously well for decades, with its surplus being held by US Treasuries, which of course gained interest. Had it been left alone, the Fund would have had enough money to make it through any economic cycles, and provide a small safety umbrella for many generations of retirees.

Over the years, several changes have left the Social Security Fund basically empty. Starting in 1968, the SS Fund surplus was thrown into the congressional general fund to help pay for the escalating costs of Vietnam. That change robbed SS of interest gained on the surplus. In 1972, congress amended SS to include immigrants who had never paid into the system to receive the same benefits as anyone else 65 or older.

The biggest changes came in 1983, when the government began using the bonds within the SS Fund, to balance the national budget, and exchanged them for basic IOU's.

In a report by Tim Iacono, a light is thrown in one dark corner of government mandates;

"Among the plethora of new ills plaguing the U.S. economy as it goes stumbling toward its uncertain future is a problem that, until very recently (meaning two days ago), was believed to be one reserved for the latter half of the next decade - the dwindling social security surplus.'

"The initiative to reform the nation's second largest entitlement program and undo the marvelous mid-1980s accounting change that would make the U.S. budget deficit look deceptively small for decades was a resounding failure and the quacking started long before most had ever dreamed.'

"In any event, word now comes from the CBO (Congressional Budget Office) that yet another fallout of the recent economic tailspin is that payroll taxes have fallen off a cliff along with home values and stock prices leading to the real possibility that the Social Security surplus will turn into a deficit much sooner than originally thought, all but vanishing next year according to the most recent calculations.'

"While this will have no impact on current recipients as incoming funds will about equal the monthly payments to more than 50 million senior citizens, it will have an untoward impact on funding the government's budget deficit, a shortfall that has been masked by these surpluses for years.'

"In what some refer to as the biggest Ponzi scheme of them all, the Treasury Department has been borrowing money from the Social Security trust fund to pay today's bills leaving behind just slips of paper stored in that file cabinet above."

To add, in the comments section of Tim's article, Aaron Krowne, owner of ML-Implode, submitted a comment from one of his readers, which expands the peril Social Security may soon face;

"A reader wrote in with an important clarification to our pickup of this article on ML-Implode. I thought I would relay that here for everyone's benefit. The upshot is the "IOUs" are not, as I had always assumed, run-of-the-mill Treasury's -- they are formally no different than the ad hoc IOU sticky notes from the movie "Dumb and dumber". The reader writes:'

"... there are no accumulated Treasuries in the Trust Fund. The Trust Fund is nothing more than a collection of interdepartmental markers, and is considered non-negotiable debt. It is not part of the national debt, and does not pay interest. If it was negotiable debt (Treasuries) it would be an asset to the fund, and could be sold on the open market to pay for future obligations just like any other retirement plan (and also would have sky rocketed in value during the greatest bond market rally in at least a generation). In 1980 the real change was to place all of the proceeds from Social Security into the general fund, replace it with non-negotiable markers in filing cabinet somewhere and call it unfunded pension liabilities. This has the advantage of making the national debt look lower. If it was funded by Treasuries then no new debt would need to be issued by the Treasury, but since it is not funded with negotiable debt, new debt will need to be issued (or benefit decreases, or increased taxes). Social Security is a pay as you go system, and the massive tax increases in 1980 to save it were nothing more that a middle class tax increase. When suckers will no longer fund the national debt, this program will be under serious pressure for massive change.. "

Serious pressure for massive change... It is truly a sad fact. When the Social Security program was started, it was a natural extension of a truly rich nation taking care of its own. Though born during the Great Depression, it has provided for basic needs among millions that would otherwise have been penniless.

For generations, it has been the one government program that required so little, yet gave so much.

Had no changes ever been made to the Social Security Fund, it would have run forever, benefiting every succeeding generation of retirees for eternity. Due to the governments lack of ability to manage the tax proceeds they collect from us, this magnificent program may well soon meet its demise.

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