RSS Feed
Twitter
Facebook
Email
HomeWe Still Have To Pay The Bill
Posted by Larry Doyle on May 5th, 2009 4:16 PM |
Equity markets have rallied back to unchanged on the year. Libor is back to 1%. Housing is showing signs of life. Other economic indicators are declining at a less rapid rate. Fed chair Bernanke provides a cautiously optimistic tone in his testimony today. So why am I as concerned as ever?
Perhaps I do not fully appreciate the benefits of the massive government injections of capital into our economy. Why? I view any short term benefit from the capital injections as merely covering for losses which are still embedded in the system. The bills associated with those losses, in terms of increased interest costs and principal writedowns, are yet to be paid.
Where are the losses? Well, the results of the Bank Stress Tests have been leaked and 10 of 19 banks will supposedly need more capital. The commercial real estate market is totally dependent on the government committing to 5 yr loans via the TALF. I view the rebound in the residential real estate market as mortgage mayhem, not mortgage magic. None other than the IMF continues to highlight that our economy has another $1 trillion plus in losses.
I will grant Obama and Bush and their respective administrations credit for succeeding to this point in what they were trying to accomplish. However, that success, in my opinion, only means that longer term costs will be steeper and longer term benefits will be further off as a result.
Nouriel Roubini and Matthew Richardson address these points in today’s WSJ, We Can’t Subsidize The Banks Forever.
From my perch, I view Obama and team as indiscriminately allocating capital across too many programs. I am becoming somewhat concerned that Bernanke is wondering if they have put too many chips on the table.
Roubini and Richardson offer:
. . . stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.
While the tone feels better, there is no doubt we still have challenges. Private enterprise’s interaction with Uncle Sam is one of the biggest challenges.
All this said, the government had a choice between immediate losses with excruciating pain or buying time with long term underperformance. They chose the latter.
We still have to pay the bill.
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…)
Games of Chance: TALF, PPIP, TARP, FDIC, FASB
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.
Let’s Make a Deal…or Maybe Not
Posted by Larry Doyle on April 7th, 2009 11:50 AM |
Two conflicting stories struck me in today’s WSJ. The gist of these stories highlights how and why private enterprise would not want to have Uncle Sam as a partner, unless absolutely necessary. Let me share the stories with my thoughts:
1. Bailout Man Turns the Screws
I fully respect a tough and honest negotiator. A person who deals in the best interest of his shareholders represents the essence of capitalism.
Regrettably, our economy has been littered with executives at a wide array of companies who have negotiated more on behalf of select constituencies than shareholders. Plenty of executives have not played by either the spirit or the letter of the law.
Any negotiator needs to understand their counterparty and their goals. Additionally, the ability to adapt is critical. Without sacrificing principles, a level of intransigence can often render negotiations worthless. To that end, it does seem as if the government is learning some of these lessons.
I do not pretend these negotiations are easy but, given that not every counterparty is the same, I believe slightly different tactics must be utilized as appropriate. Otherwise, no matter how compelling a deal may appear, counterparties may back away from the table. To wit . . .
2. Investors Back Away From Fed’s TALF
Please recall how the equity markets surged 5% on the day Secretary Geithner announced the plans for the TALF and the PPIP. These programs are getting off to a very slow start. I just received some real time color from my friends at 12th Street Capital in regard to the TALF:
I’m not really sure why the government can’t get their act together and do multiple fundings during the month, but I guess I shouldn’t be surprised given that these were the same people that thought all of this paper should just trade on an exchange. If they fail to make this program work within a realistic market dynamic they run the risk of this falling by the wayside.
LD
Putting the Genie Back Inside the Bottle
Posted by Larry Doyle on April 5th, 2009 11:43 AM |
The genie, in the form of the Federal Reserve, has granted the markets a lot more than three wishes over the course of these challenging economic times. What are some of the wishes granted so far? Let’s review:
1. cutting the Federal Funds rate to a range of 0-.25%.
2. backstopping a wide array of short term funding operations, including the Commercial Paper market, Money Market funds, and Swaps market.
3. opening the Federal Reserve discount window for investment banks prior to their conversion to commercial banks.
4. utilizing a massive Quantitative Easing program to purchase government, mortgage-backed, and government agency securities in an attempt to bring interest rates down and jumpstart borrowing by consumers and corporations.
5. working in concert with the Treasury and FDIC to implement the TARP (Troubled Asset Recovery Program), TALF (Term Asset-Backed Lending Facility) and PPIP (Public-Private Investment Program).
In the process of implementing all of these activities, this genie, the Federal Reserve, in the person of chairman Ben Bernanke, has gone places no genie has ever gone before.
The question before the court is whether the free market can ever get the genie back in the bottle. Additionally, aside from getting the genie back in the bottle, these wishes granted by the genie aren’t exactly free. How so? (more…)
Bullish on Ms. Bair!!
Posted by Larry Doyle on March 28th, 2009 3:30 PM |
The Bull and the "Bair"
Is there anything worse than engaging a dishonest broker? Regrettably, our financial landscape (banking, investing, real estate, insurance, et al) is littered with shady brokers. How and why these people remain in business is another topic for another day. This piece is to highlight the integrity of an honest broker, Sheila Bair, and her involvement in the PPIP (Public-Private Investment Program) designed to handle toxic assets, both securities and loans.
For those unaware of the specifics of the PPIP, the toxic securitized assets will be sold via a facility known as the TALF (Term Asset Backed Lending Facility) and via partnerships with 5 large private money managers.
Toxic loans (unsecuritized) are the much more difficult part of the program. The bulk of these loans are likely still held on banks’ books at origination cost (not yet marked down) and pose a much greater disparity in perceived value and challenge in reaching agreeable prices. (more…)
Gimme Credit
Posted by Larry Doyle on March 20th, 2009 8:56 AM |
In the midst of all the wrangling in Washington, Wall Street, and literally all around the world, the biggest concern for everyday Americans is the accessibility of credit. I am sure everybody reading this post has either had issues gaining credit or knows of people who have had issues gaining credit. The knee jerk reaction for this lack of credit is to lash out at those big, bad banks. Well, those big, bad banks along with their smaller counterparts only provide approximately 50% of the consumer credit in our economy.
Where did the other 50% of credit emanate and where did it go? Welcome to the world of asset-based financing and in turn Asset-Backed Securities. I highlighted back on November 12th that the Wall Street Model is Broken…and Won’t Soon Be Fixed. Well, the breakdown and discontinuation of the ABS market is truly the equivalent of the total collapse of one of your lungs. Try to go about your daily business and all of your activities with access to only half the oxygen supply as normal. Might get a little winded? Might struggle to perform? Might tire rather quickly? Might be less efficient and productive? Well, folks, given the shutdown of the ABS market that is exactly what our economy has been experiencing. (more…)
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?
Posted in General, PPIP, TALF | No Comments »