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Posts Tagged ‘will banks sell assets via PPIP’

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

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:

In a slightly different version of the game – and in attempt to attract more players, if not necessarily truly new money – the government is considering allowing the sellers of toxic assets to also be buyers. How does that version of the game work? The sellers (Citi, BofA, JP Morgan, et al):

. . . can put up a few percent of their own money, and swap each other’s toxic assets financed by a bewildered public suddenly bearing more than 90% of the downside risk. The “investors” in this happy “public-private partnership” keep half the upside while ordinary Americans take the downside off of their hands. Some partnership. [From John Hussman at John Mauldin’s Outside the Box

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:

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government’s Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government’s overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

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:

“To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm’s books but really doesn’t offload it is highly problematic,” said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

“The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts,” said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

One risk is that certain hard-to-value assets mightn’t be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

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

Wall Street: Moving Business or Storage Business?

Posted by Larry Doyle on March 29th, 2009 11:39 AM |

A standing joke on Wall Street trading desks was a question posed by sales management to trading management.

Sales Manager, looking to sell products and generate commissions, would ask Trading Manager, looking to manage risk and maximize profits or minimize losses, “Are we here at Bank (fill in the blank) in the “moving” business or “storage” business?” Meaning, would the trading desk be competitive in pricing so as to allow the sales desk an opportunity to sell product (stocks, bonds, loans, et al).

This very question is at the heart of a rapidly developing conflict in the PPIP (Public-Private Investment Program) and an expectation of relaxing the FASB’s (Federal Accounting Standard Board) mark to market. (more…)






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