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.
