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HomePimco Punts on the PPIP
Posted by Larry Doyle on July 9th, 2009 2:27 PM |
Did Bill Gross just flip off Uncle Sam? It would appear that he did. While the U.S. Treasury is touting the official launch of the Public Private Investment Program (PPIP) as a noteworthy event, the most significant aspect is the absence of Mr. Gross and Pimco as one of the managers. As Bloomberg highlights, U.S. Treasury Opens Distressed-Debt Program Without Pimco:
The U.S. plan to help buy as much as $40 billion in assets from banks got started almost four months after it was proposed and without Pacific Investment Management Co., the world’s biggest bond manager and an early supporter.
The Treasury Department picked nine money managers yesterday for the Public-Private Investment Program, or PPIP, including BlackRock Inc. and Invesco Ltd. Pimco, which in March announced plans to apply, said it withdrew its application in June because of “uncertainties” about the initiative’s design.
Uncertainties? How about if we return to Mr. Gross’ May 2009 Investment Outlook, in which he cautioned us all about business dealings with Uncle Sam:
If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned.
Over and above Pimco’s absence, the other notable development within the PPIP is the fact that Uncle Sam plans on injecting 75% of the initial equity capital while the private managers inject 25%. Given that equity split, why wouldn’t the taxpayer receive 75% of the returns? In my opinion, Treasury is injecting more capital simply because a $20 billion or even $30 billion launch would render this initiative as nothing more than PPIP: A Virtual ‘Odd Lot’, as I had written the other day.
. . . ‘without back turned’ . . . ‘odd lot’ . . . two strikes before the game has even begun.
Mr. Gross’ absence speaks volumes!!
LD
PPIP: A Virtual “Odd Lot”
Posted by Larry Doyle on July 7th, 2009 8:31 AM |
In Wall Street parlance, a trade of respectable volume is defined as a “round lot.” A large trade is often designated simply as “size.” A trade of relatively small size bordering on insignificant is defined as an “odd lot.” Obviously all of these definitions are relative measures predicated on the magnitude of the market and the prevailing situation. On that note, the initial launch of the Public-Private Investment Program, PPIP, appears as if it will be an “odd lot.”
As Bloomberg reports, Treasury’s Distressed Debt Plan Said to Begin With $20 Billion,
The U.S. Treasury Department may begin its program to spur purchases of mortgage-backed securities from banks with about $20 billion in public and private money, down from as much as $100 billion when it was announced in March, two people familiar with the matter said.
Recall that the PPIP has two programs. The program targeted at raw whole loans has been postponed indefinitely. This program highlighted above is targeted at asset-backed securities (ABS, collateralized by credit card receivables, student loans, and other receivables).
Why is the PPIP getting off with a whimper? Market pundits and government officials would promote the principal that the PPIP is less necessary for the financial industry currently. Why? The banks were able to raise billions in equity capital after the results of the Bank Stress Tests were released. If those investors were comfortable putting money into the system, then why should banks feel an urgency to raise more capital via asset sales utilizing the PPIP? Bloomberg reports as much,
Treasury Secretary Timothy Geithner said then that interest in such U.S. programs may be waning as market confidence improves.
I beg to differ. In my opinion, the PPIP is getting off to such a slow start for a variety of other reasons, including:
1. price:investors continue to believe the underlying assets will experience a greater level of delinquencies, defaults, and foreclosures and thus they are not willing to pay the price banks desire.
2. FASB’s relaxation of the mark-to-market: allows the banks to value these securities at levels above market and avoid taking the loss if they were to sell through the PPIP. Banks can not avoid the loss, though, as the underlying loans continue to suffer higher levels of defaults.
The New York Times highlighted this exact point this past Sunday in an article, So Many Foreclosures, So Little Logic,
But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.
Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.
Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.
3. Uncle Sam: investors have seen how Uncle Sam has changed the rules of the game as he goes along. Examples of Uncle Sam’s abusive tendencies include Congress’ lambasting AIG employees over contractual bonus obligations and the Obama administration ‘running over’ senior creditors of GM and Chrysler. Investors are shying away from doing business with Uncle Sam regardless of the attractive terms within the PPIP.
The PPIP looked good on paper but putting it into practice is a totally different ballgame. Given the strength of these three counteractive factors, I am not optimistic the PPIP will ever move off the “odd lot” desk.
LD
Sheila Bair and the PPIPs Tour: Cancelled
Posted by Larry Doyle on June 4th, 2009 7:56 AM |
What is going on with the PPIPs?
The Public Private Investment Program was “scheduled” to play a grand national tour in helping the banking industry cleanse itself of toxic assets. Did the “lead singer,” Sheila Bair, lose her voice? Did the “backup” in the form of the banks and investors lose their rhythm? Let’s “boogie” on over and check it out.
The FT reports, FDIC Stalls Sale of Toxic Loans:
Details of the Treasury’s toxic asset plan are in doubt after the Federal Deposit Insurance Corporation on Wednesday said it was suspending a test run of the legacy loans programme.
Sheila Bair, chairman of the FDIC, said development of the programme – designed to encourage investors to buy toxic, or legacy, loans from banks in order to restart the flow of credit – would continue but a pilot sale of assets was on hold.
“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” Ms Bair said in a statement.
Is this all that it appears to be or is there more of a smokescreen on the stage inhibiting all parties – Uncle Sam, the banks, and investors – from “giving it their all”? Let’s dive into the mosh pit.
Sense on Cents views the situation as follows:
1. Impetus for banks to liquidate toxic assets (now called legacy assets by the Obama administration) is dramatically lessened. Why? Are they now less toxic? No, anything but that. With the relaxation of the mark-to-market accounting standard, banks can now “mark to model.” As such, banks are not forced to write the asset value down. In so doing, banks are now not compelled to sell it at a price which would incentivize an investor to purchase.
2. What about all of the equity capital raised by banks over the last few weeks after results of the Bank Stress Tests? Has that had an influence on banks need to raise capital via the PPIP?
Yes, but remember that the Bank Stress Tests only covered the largest 19 banks in our nation. These banks have been largely successful in raising new capital. That said, the toxic legacy assets remain on their books. Do not forget, though, that many small to medium sized banks and thrifts have a sizable amount of underperforming loans (residential mortgages, commercial real estate, corporate loans) on their books. These banking institutions were neither put through a “stress test” nor are they in a position to raise capital as easily as the large banks.
A successful PPIP program would have helped these institutions.
3. Hints of potential self-dealing by banks involved in the PPIP, both as seller of assets and buyer of assets, would have created a firestorm. I addressed this problem in writing, Putting “The Fix” in the PPIP.
4. With all due respect to the lead singer, Sheila Bair, all indications are that her handler – an individual named “Uncle Sam” – can not be trusted. Potential investors have been very reluctant to get overly involved with Sam. Why? In other performances, Sam has “strip searched” individuals upon entry and also played various iterations of “bait and switch.”
As the FT reports:
Banks and investors, meanwhile, had misgivings over taking part in the PPIP amid fears the politically charged climate could prompt Congress to change rules on issues such as executive compensation for those firms that participated in the programme.
While this tour is being cancelled, don’t get overly despondent. I am sure our Summer concert series will be able to provide plenty of entertainment going forward!!
LD
The Red Sea
Posted by Larry Doyle on April 24th, 2009 11:26 AM |
While there is tremendous focus on the Bank Stress Tests, there remains limited focus overall on the centerpieces of our domestic housing finance industry. I am talking about Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Some have categorized these institutions as “black holes.” I believe a more appropriate designation would be The Red Sea as these institutions are awash in losses and continue to bleed money.
We may never know the circumstances surrounding the death of acting Freddie Mac CFO, David Kellerman, but there is a lot of focus by government officials on these institutions. There has been much less focus by private analysts. To that end, I am most grateful to Bloomberg’s David Reilly for reporting on Fannie Mae Creates Housing Mirage With Bum Loans.
Effectively, Fannie Mae is giving funds away to very high credit risk individuals who would have otherwise most likely already defaulted on their mortgages. As Reilly reports:
Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.
Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.
The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.
Make no mistake, this Fannie Mae program was also being utilized by Freddie Mac. Reports have come out that Freddie Mac’s Kellerman was pressured by Freddie’s accountants to improperly report their financials. In a similar vein, Fannie is playing another version of the “shell game” in order to buy time and forestall losses. (more…)
Will Bank Stress Tests Be “Put on a Curve?”
Posted by Larry Doyle on April 22nd, 2009 9:10 AM |
Will the soon to be released Bank Stress Tests provide real clarity on the health of our banking industry or will the tests be “curved?” Meredith Whitney, highly regarded bank analyst, has indicated that the tests will provide plenty of wiggle room for the banks. Just yesterday Secretary Geithner “goosed” the market by indicating the majority of banks have sufficient capital. To what degree can we trust what Turbo-Tim is telling us?
Mohamed El-Erian, CEO of PIMCO (Pacific Investment Management Company) provides a blueprint for an honest review of the Stress Tests. Mr. El-Erian highlights the following in a Financial Times article:
First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity. Obfuscation would result in damaging market noise and further derail the real economy. At the minimum, policymakers need to provide credible details on the methodology, the underlying assumptions and scenario analyses.
To this point, neither the banks nor the government have provided real transparency. What are we to expect when Congress pressures the FASB to relax mark-to-market accounting thus forever clouding real transparency?
Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled. (more…)
“White House Ties to Wall Street Doom Bank Rescue”
Posted by Larry Doyle on April 17th, 2009 6:37 AM |
None other than Nobel Prize winner Joseph Stiglitz of Columbia University provided a direct shot across Washington’s and Wall Street’s bow today. As I read Bloomberg’s Stiglitz Says White House Ties to Wall Street Doom Bank Rescue, the little voice in my head kept repeating, ” he’s right” or “I agree.” I am reluctant to copy and paste entire articles, but this one is so important that I feel compelled and will add commentary or links as warranted.
The Obama administration’s plan to fix the U.S. banking system is destined to fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
Seems as if Stiglitz would agree with How Wall Street Bought Washington.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.” (more…)
The Scarlet Letter
Posted by Larry Doyle on April 16th, 2009 12:44 PM |
Competitive people by their very nature like to win. There is nothing wrong with that. In fact, our country was built upon risk taking entrepreneurs who blazed trails and opened markets in the pursuit of profit.
Clearly, we have experienced enormous abuses in many parts of our economy over the last decade. The fact that rating agencies and regulatory authorities have been negligent – if not complicit – in the process has only added to the turmoil. In my opinion, our legislators have been as much a part of the problem as the solution.
For many of those who have either mismanaged their business or abused business ethics along the way, the government has stepped in with billions in support. Our markets have suffered as a result.
Against this backdrop, the major rub in the world of finance is distinguishing between the strong banks and the weak banks. Well, Jamie Dimon issued as aggressive an assessment as I have ever seen on this specific topic. In a Bloomberg report on JP Morgan’s earnings,
Chief Executive Officer Jamie Dimon, who today reported first-quarter profit that beat analysts’ expectations, said his firm could repay U.S. government rescue funds “tomorrow.”
Dimon, called money received through the Troubled Asset Relief Program “a scarlet letter.”
Putting “The Fix” in the PPIP
Posted by Larry Doyle on May 27th, 2009 7:03 AM |
Is the Obama administration once again going to be party to “underworld” business principles in an attempt to promote the success of a program to clean up the banks? Let’s go down into ‘the street.’
The TALF (Term Asset Based Lending Facility) so far has had middling success. The PPIP (Public-Private Investment Partnership) is yet to be rolled out. Investors have been reluctant to participate in these programs, despite attractive financing terms, because of concerns in partnering with a capricious and at times vindictive Uncle Sam. These programs, as with any transactional program, have one major potential flaw: self-dealing. I highlighted this point on April 7th in my post Games of Chance: TALF, PPIP, TARP, FDIC, FASB. I wrote:
Fast forward to May 27th and this version of the “game” is being proposed by the dealers. The Wall Street Journal highlights, Banks Aiming to Play Both Sides of Coin:
I can already hear the pontificating on how rigorous the oversight of this program will be. Geithner and team will produce a set of selling points to “make the case.” All that said, games of chance are actually exceedingly simple. The dealer and another player or two fabricate a reasonable chance for success for new participants (taxpayers) while knowing full well the table is tilted, the “fix” is baked in, and the “dough” is going home with them. The WSJ highlights these concerns:
The fact that banks want to “play the game” again truly indicates the character and integrity of this crowd. Self-dealing is common practice in the underworld. We have witnessed the violation of private contracts in the housing and automotive sectors.
Will Geithner and team allow taxpayers to be run over once again via self-dealing within the PPIP?
LD
Tags: Arthur Levitt comments on PPIP, attractive terms in TALF and PPIP, banks lobbying FDIC, banks self-dealing, banks self-dealing in TALF and PPIP, FDIC, games of chance, insider dealing in TALF and PPIP, issues with TALF and PPIP, Legacy Loan Program, Obama "underworld" practices, PPIP, PPIP self-dealing, problems with TALF and PPIP, TALF, TARP funding for PPIP, will banks sell assets via PPIP, will hedge funds participate in TALF and PPIP?, will TALF work?
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