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?
Posted by Larry Doyle on April 11th, 2009 7:29 AM |
As many people travel this weekend to be with friends and family, I would like to take an opportunity to navigate the highways and byways of links and material connected to Sense on Cents.
I hope this post will open more eyes and ears to wider avenues of information as we collectively try to make sense of the economy, markets, and world of global finance.
If I could beg your indulgence, if any of these links do not interest you but you feel they may help others, please pass them along. I thank you in advance.
With no further adieu, let’s travel around Sense on Cents . . .
Career Planning: I have always taken pleasure in providing career guidance. I provide a wealth of Must Read articles from a variety of sources along with a Workshop for developing a game plan.
Market Data: this page connects to real time market data from the Wall Street Journal. Every sector of the market is a mere point and click away. Stocks, bonds, currencies, commodities, economic data, international markets, historical graphs, and more…
Newsworthy: some stories have made headlines, while others are off the beaten path. These stories come from your local papers and from posts around the world. I welcome sharing them with you.
No Quarter Radio: “Sense on Cents with Larry Doyle” is my weekly Sunday evening radio program. I share insights and perspectives on the markets and economy while also hosting outstanding professionals from all corners of finance as my guests. All shows are archived and available as podcasts on iTunes. I also provide an audio player right here on Sense on Cents immediately after the completion of each show so that you can listen to a playback of the show right from this site.
The Reading Room is filled with a variety of books (pleasure, finance, inspirational, educational) that I have enjoyed and found impactful.
For those working their way up the learning curve (aren’t we all?), I have Primers on the following topics:
I also closely track a number of professional money managers, economists, and analysts. This collection of pro’s pros are my Economic All-Stars and include:
Laszlo Birinyi: outstanding equity manager and Wall Street veteran
Jeff Gundlach: the highly acclaimed Chief Investment Officer of Trust Company of the West
Bob Rodriguez: along with his First Pacific Advisors colleague Tom Atteberry, named Morningstar’s 2008 Fixed Income Managers of the Year
Bill Gross: the highly acclaimed bond manager at Pacific Investment Management Company
Greg Mankiw: widely respected Harvard Professor of Economics
John Mauldin: a true favorite of mine, this market analyst is amazingly well connected
Sheila Bair: the chair of the FDIC and, in my opinion, the preeminent regulator in the U.S. government today.
Carmen Reinhart: Professor of Economics at the University of Maryland
Thought Leaders: 22 of the finest economic minds in the world today connected to Project Syndicate, an international association of 415 newspapers in 150 countries !!
If you are reading this post, I hope this trip has opened new avenues of interest for you. As the moderator, I actively engage readers, so please do not hesitate to ask questions and leave comments, or – as some may say – sign the Guest Book!! Please share the site with friends, family, and colleagues.
Ultimately, I hope you enjoy coming to Sense on Cents as much as I do!
Posted by Larry Doyle on April 9th, 2009 7:14 AM |
A mixed bag of items you may have missed in the midst of some of the daily noise and pandering:
1. Bloomberg reported this morning that the government (Treasury and Federal Reserve) expects ALL 19 banks undergoing the Bank Stress Tests to pass!! Wahoo!! Bloomberg further reported, however, that certain banks may continue to need ongoing capital injections. Would the proctors of the exam please release the questions so the FDIC can provide a more thorough review? What a SHAM.
2. The Federal Reserve yesterday released the minutes of its March 18th meeting. The Fed revised its projection for a bottoming of unemployment to mid-2010 from the end of 2009. Additionally, they lowered their projections for a turn in the economy. Lastly, in regard to the Fed’s purchases of government and mortgage-backed securities, they had differing opinions as to how to approach these purchases. The FT reports:
one Fed policymaker wanted to stick to buying mortgage-related securities. Another wanted to add only more Treasury purchases. Buying both was a way to keep everyone happy and hedge the Fed’s bets in the light of uncertainty as to which type of asset purchase might prove effective.
“Several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,” the minutes say.
Michael Feroli, an economist at JPMorgan, said the “uncertainty rationale” was novel. It added up to an experimental, portfolio-based approach to policy rather than one driven by strong conviction.
For what it is worth, on the day of the Fed’s announcement to buy both government and mortgage-backed debt, rates rallied close to 40 basis points, a truly historic move. Since then, those rates have totally reversed. While the Fed is buying, obviously somebody else is selling. Who may that be? The U.S. Treasury for one. I mean, the Treasury could literally walk the government notes and bonds down the street in Washington to the Fed and put these securities in their vault while the Fed simultaneously puts cash deposits into the Treasury vault.
Do you get the sense, though, that Fed officials are winging it to a large extent? I do. (more…)
Posted by Larry Doyle on April 8th, 2009 11:35 AM |
Why is it urban school dropout rates are 50%? Well, I am sure there would be as many reasons for that horrendous statistic as there are dropouts. The fact of the matter is, though, the state of urban education has promoted a phenomena known as “social promotion.” If students aren’t qualified to do the work, testing has been gamed, standards have been lowered, and corners have been cut. As a result, urban education at this stage is an unmitigated disaster. What does this have to do with the current state of our economy and the world of finance? I am glad you asked.
If banks, much like students, are not required to pass rigorous testing, then “social promotion” in finance will produce results not unlike those in education–underperformance and ultimately an inability to compete on the global stage.
Against that backdrop, I personally looked forward to the results of the Bank Stress Tests. Let’s finally get an honest assessment of the “students.” Let’s see how they have performed and let’s project to see how they will perform!!
As with any test, the results are only meaningful if the process and proctor have unquestioned integrity. The proctors for the Bank Stress Test are none other than Treasury Secretary Tim Geithner and Fed chair Ben Bernanke. Why is a testing authority of the magnitude of FDIC, led by Sheila Bair, not more involved in the process? Ms. Bair is the one individual in our country with the greatest level of interaction with and understanding of the student body, that being the banking industry as a whole and individual banks specifically. (more…)
Posted by Larry Doyle on April 7th, 2009 2:40 PM |
In thinking about the economy, markets, and our banking system, my memory brings me back to my early days in New York. While working my way along 8th Avenue back to my apartment in Hell’s Kitchen, I would happen upon numerous versions of the classic NYC “hustle.” The shell game (also 3 card monte) was rampant in NYC in the ’80s. Mayor Giuliani cleared out this game, along with a host of other street scenes. For those not familiar with this game, there was a constant need for new players with new money to keep the game alive.
Why do these games remind me of our current banking system? The similarities are scary. Let’s access the most recent piece from John Mauldin’s site to “view the games.”
Mauldin’s guest, John Hussman, comments on these various “games” (TALF, PPIP, TARP, FDIC, FASB), in which taxpayers bear the brunt of the risk in the government’s engagement with financial institutions. Hussman writes of the PPIP:
this is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.
Posted by Larry Doyle on March 27th, 2009 11:58 AM |
There is NO doubt that our financial markets and financial firms will experience significant changes in regulation on a going forward basis. Turbo-Tim Geithner laid out those plans this week. President Obama is hosting the heads of the major banks at noon today to lay the groundwork for the universal acceptance of the new rules, amongst other topics.
Over the next few weeks and months, new regulations will be defined and a new division of responsibilities will be outlined amongst the various bodies (Fed, Treasury, SEC, FDIC, FINRA, CME). Rest assured, there will be some power grabs by the heads of these agencies and regulatory bodies in the process.
We have clearly just come through an ENORMOUS party on Wall Street, leaving our entire economy with a MASSIVE hangover. Do not forget, though, as with any good party, we need to review who was working the door, who got let in, who got the discount cover, who brought some attractive friends, and who was taking a little something on the side. I won’t dare venture as to who left together. (more…)
Posted by Larry Doyle on March 19th, 2009 2:41 PM |
Sense on Cents is very judicious in selecting our Economic All-Stars (highlighted in the left sidebar). These individuals continually display a level of professionalism, maturity, consistency, and integrity which are not commonly found in our financial or political spectrum. I deeply appreciate their insights and perspectives and enjoy sharing them with our audience at Sense on Cents and No Quarter USA.
I thank Susan and Andy for tipping me off to remarks made earlier today in which Sheila Bair Says “Too Big to Fail” Strategy for Financial Institutions Must End. The administration and other political pundits are trying to make the case that the Federal Reserve should serve as the systemic risk regulator. In my opinion, Sheila Bair should occupy that role. There is a major political battle developing over this turf. Make no mistake that how this battle plays out will have deep and longstanding implications for our financial system as a whole and for individual consumers. (more…)
(Robert Reich was the nation’s 22nd Secretary of Labor and is a professor at the University of California at Berkeley. His latest book is “Supercapitalism.” This is his personal journal.)
FRIDAY, MARCH 13, 2009 Paul Volcker to Barack Obama
Former Fed Chair Paul Volcker is briefing President Obama today on how well the stimulus package is doing. I have no inside knowledge of what he’s saying, but if I were Volcker (and I’m not — he’s almost two feet taller than I am), I’d say the following:
Mr. President, it’s way too early to know exactly what the stimulus is doing because the money is barely out the door, but I’ve got to tell you I’m worried as hell. Unemployment is at 8 percent, and underemployment is over 14 percent of the workforce. The economy is shrinking much faster than it was when you put the stimulus together. It will be more than a trillion dollars short of its full capacity this year, and I have every reason to believe the same next. State governments alone are hundreds of billions in the hole, creating a huge drag. So your $787 billion over two years, only two-thirds of which is direct spending, isn’t going to get us nearly far enough. I’d strongly recommend you make ready a second stimulus, about the same size, and get it enacted as soon as possible, with the proviso that it will be implemented if and when unemplyment hits 8.5 percent or underemployment reaches 15 percent.
Oh, and by the way, Mr. President. You may not want to hear this, but your Treasury Secretary is making things worse. His dithering on what to do about Wall Street, and his incapacity to speak clearly to the Street and to the public about what needs to be done, is spooking everyone. Why doesn’t he just put the irrevocably insolvent banks into receivership under the FDIC, sell off their assets, protect depositors, and reimburse taxpayers with whatever remains? Let the rest of the banks fend for themselves — working out their bad loans with their creditors. As to AIG, well, that’s a complete basketcase. Put it out of its suffering. Take it over, sell its assets, protect policy holders (you’ll need to create a big co-insurance plan with every other major insurer in the world), then get out.
Want a cigar?
I don’t smoke, but a cigar and a health shot of tequila is sounding good about now. And it couldn’t make the sick feeling in the pit of my stomach any worse.
Posted by Larry Doyle on March 10th, 2009 5:50 AM |
I thoroughly respect Sheila Bair (see my list of Economic All-Stars in the left sidebar). Our Head of the FDIC has been an honest broker each and every time I have heard her speak. I looked forward to her interview with Paul Gigot of The Wall Street Journal.
Ms. Bair addresses the finer points of the Obama Foreclosure Mitigation Plan which is targeted at helping 9 million homeowners stay in their homes. Specifically she touches on:
1. how this program will not reward bad behavior; 2. how it can be viewed as helping people who have managed their finances appropriately; 3. expectations of redefaults given her experience with the failed institution Indymac.
As I initially mentioned, I believe Sheila Bair is an honest broker in an impossible position. Her seeming lack of enthusiasm does not strike me as not believing in the benefits of this program, but rather a subtle acceptance that this program can only go so far. Additionally, this type of program will have plenty of unintended consequences. Will people who are currently paying their mortgages on schedule start to become delinquent on their mortgages in order to gain the benefits of this program?
I think Ms. Bair will make the best of a bad situation. That said, no program will be totally effective. I am fully supportive of programs that will assist Americans, but don’t be fooled to think that we will get 100% return on all dollars spent.
Posted by Larry Doyle on March 5th, 2009 9:45 AM |
In very short order, the FDIC (Federal Deposit Insurance Corporation) has seen its reserves plummet from $50 billion to $18.9 billion at the end of 2008. At that pace and with the expectation of more bank failures, could this bedrock of our national banking system go broke? Well, FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year. Is Sheila Bair unnecessarily sounding warning signals? Am I running to the bank to withdraw my money? No and no.
Sheila Bair is proactively managing expectations for all concerned, those being politicians, regulators, bankers, and consumers. In fact, if she did not highlight the current state of the FDIC reserve fund and expectations for future declines, she would not be fulfilling her obligations. (more…)
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Why is it urban school dropout rates are 50%? Well, I am sure there would be as many reasons for that horrendous statistic as there are dropouts. The fact of the matter is, though, the state of urban education has promoted a phenomena known as “social promotion.” If students aren’t qualified to do the work, testing has been gamed, standards have been lowered, and corners have been cut. As a result, urban education at this stage is an unmitigated disaster. What does this have to do with the current state of our economy and the world of finance? I am glad you asked.
There is NO doubt that our financial markets and financial firms will experience significant changes in regulation on a going forward basis. Turbo-Tim Geithner laid out those plans this week. President Obama is hosting the heads of the major banks at noon today to lay the groundwork for the universal acceptance of the new rules, amongst other topics.
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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