Let the gaming begin!

Thu, 03/26/2009 - 11:49am — lambert

The kind of people who figure out how to game Geithner-san's auction for toxic assets are already hard at work. Here's

Let's see an example. "Bank" has a mortgage-backed security (MBS) with original par (nominal) value of $100. In 2008 Bank "marked-to-market" and now values the MBS at $95 in its books. But we all know that this MBS is worth a lot less, maybe less than $60, but Bank won't acknowledge reality.

In 2009 we have the new Treasury plan, whereby "Peter" buys this MBS, for say, $90. That's because the bank won't take anything less. If it did, Bank would be shown to be insolvent and would be out of business.

Peter puts only $6 out of pocket. Uncle Sam puts another $6, and the remainder $78 is a nonrecourse loan from Uncle Sam to Peter. (Total, $90).

Then Peter turns around and sells the MBS to his pal "Paul" for $48. Paul pays $48 b/c he thinks the MBS is actually worth $58 as justified by what the homeowners will actually pay in monthly mortgage payments.

Peter's $6 investment is wiped out. So is the govt's $6. And the $48 Peter gets from Paul goes to pay back the govt loan of $78. So now, Peter lost $6 but Uncle Sam lost $36 ($84-$48).

Since Peter and Paul are buddies (co-conspirators), the latter can compensate Peter. Say, Paul gives Peter his $6 plus another $2 for his troubles. Paul pays $48 for something worth $58, but because he gave $8 to Peter, his profit is only $2. And the banks get fully $90 for paper that is worth actually $58.

Summary:
Peter puts in $6, makes $2 profit
Paul puts in $48, makes $2 profit
U.S. puts in $84, makes a $36 LOSS
Bank had paper that was really worth $58 but got $90 for it, makes a $32 profit

Again, no matter the rhetoric, no matter the budget, even with all the best intentions in the world, this is the biggest story in town.

If we keeping throwing trillions of dollars into the enormous hole that is the banking system -- with no accountability for those who created the problem, and no transparency for what's done with the money -- then we won't be able to afford anything else! And all the people who created the problem will still be in charge. How does this make sense?

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Comments

It is such bald-faced corruption. I am just stunned.

By basement angel on Thu, 03/26/2009 - 12:16pm

And I mean corruption in the moral sense. I understand that it's legal.

So a whole bunch of rich people, are going to get richer with the tax payers footing the bill. I am heartbroken that the Democrats are supporting this.

"Someone needs to point out that elephants produce infinitely more shit than donkeys." Brad Mays

Check this one out on collusion

By lambert on Thu, 03/26/2009 - 12:24pm

A commenter at Naked Capitalism:

If Geithner’s plan intentionally allows radically overpriced bids due to collusion (see below), then the Fed’s and FDIC’s loans and guarantees are underwater from inception and seem like illegal gifts. People should write their Senators and Congressmen asking them to demand that Geithner, Bair, and Bernanke explain why the Fed's loans and the FDIC's guarantees under Geithner's PPIP aren't illegal gifts.

It seems like extending underwater nonrecourse loans are gifts, and since Congress hasn't authorized the Fed and FDIC to give these gifts, they seem ILLEGAL.

People working at small credit unions, funds, and banks should complain about not being allowed to participate in Geithner's plan.
They should complain to the U.S. Senate Committee on Small Business & Entrepreneurship and the House Small Business Committee about Geithner's plan. On prior occassions Rep Manzullo has fought Treasury on behalf of small businesses. These committees aren’t beholded to the big buy side and sell side players.

People at small banks, credit unions, or asset managers should also write in to Congress, Senate, Treasury, the Fed, and FDIC asking why the Fed, FDIC, and Treasury aren't breaking the law by rolling out the program without regulations. If the program were rolled out under regulations, the administrative procedure act would require a notice to the public, a period for the public to comment, and a public hearing. If the program were rolled out with regulations, the agencies would also have to do analysis on whether and how they impact small businesses.

By collusion, I mean that if BAC and C are allowed to bid for each other’s assets at 2xFMV with taxpayer money, they will. If PIMCO and BLK are allowed to bid for each other’s assets at 2xFMV with taxpayer money, they will. If any of these players are allowed to collude with funds that bid for their assets (insulating the buyer from loss and giving them a kickback from the overbid) resulting in bidding at 2xFMV, they will. It is telling that Geithner said collusion between buyers was verboten, but didn’t say that collusion between sellers and buyers was against the rules.

I’ll believe Geithner’s plan isn’t to intentionally allow radical overbids through rampant collusion when he issues detailed rules prohibiting collusion, sets out severe penalties for collusion, and appoints an aggressive prosecutor to investigate and prosecute violators.

Yep.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

And small banks, well run banks will pay for the Big Banksters'

By jawbone on Thu, 03/26/2009 - 7:42pm

bailouts not only with their income taxes but with the addtional levy FDIC will need to impose to get the monies for the non-recourse loans. Shafted fore and aft.

An anonymous commenter links to HuffPo where Arianna says that a Feb 10th NYTimes article pointed out that Axelrod lost a battle with Geithner to require more regulation of how the banksters could use their bailout funds, meet requirements to make loans, how much in compensation, bonuses, etc. That worked out well....

What's with Obama? Axelrod pointed out the populist arguments which could redound to Obama's benefit as well as helping the people (which the Repubs are now using. with perhaps less concern about the little people), but Obama went with Geithner and the Big Bankster Boiz. Why? Why doesn't he get the politics and optics of this?

Is a puzzlement.

More reaction to "Let the games begin-er, the gaming has begun"

By jawbone on Thu, 03/26/2009 - 11:14pm

Dave Johnson at Seeing the Forest

Why would a bank that is receiving TARP funds because they hold toxic assets be buying any toxic assets anyway?

Nationalize the insolvent banks, please. And fire Geithner for this, if it turns out to be true. At first I thought it was a creative idea, but maybe it's just more ideological blindness.

Dave's also been asking when was the last time any MCMers have spoken approvingly of unions and union workers.... Hhhmmm. Bill Moyers?

Ian Welsh at his own eponymous blog --about a month old, it appears

The plan will eventually lead to a technical GDP recovery, and to employment not recovering before the next recession. That’s the Japanification phase. After that, well, we get a real depression, because the US (and the rest of the world) will have used up too many resources to be able to handle the next catastrophe. Since nobody will have put in place the necessary structural changes to avoid a catastrophe or gotten rid of the fools who caused this one, a catastrophe will occur.

Is anyone else noticing anything significantly different between Geithner’s actions and those Paulson would have taken? Because frankly, I’m not.

I'm sure there will be more reactions along this vein.

See also Spitzer here

By lambert on Thu, 03/26/2009 - 11:49pm

Casting light on Cuomo's move today. Slate:

The AIG scandal is getting ever-more disturbing. Goldman Sachs' public conference call explaining its trading relationship and exposure with AIG established, once again, that Goldman knows how to protect itself. According to Goldman, even if AIG had failed, Goldman's losses would have been minimal.

How did Goldman protect itself? Sensing AIG's weakening capital position through 2006 and 2007, Goldman demanded more collateral from AIG and covered outstanding risk with instruments from other firms.
But this raises two critical questions. The first is why $12.9 billion of taxpayer money went from AIG to Goldman. What risk—systemic or otherwise—was being covered? If Goldman wasn't going to suffer severe losses, why are taxpayers paying them off at 100 cents on the dollar?

But what were the government officials possibly thinking? The only rationale for what we should call the "hidden conduit bailout" to AIG's trading partners is that the cascading effect of AIG's inability to pay would have been devastating. But Goldman has now said very clearly there would have been no cascade. Not even a ripple.
Is the same true of AIG's other counterparties, including several foreign banks? What examination of the impact of an AIG failure did federal officials undertake before deciding to spend countless billions bailing out AIG and its trading partners?
The government decision to bail out AIG was made after the private parties, supposedly at risk, had declined to structure a private series of investments that might have avoided the need for use of public money. Perhaps they knew the impact of an AIG default would be small, or perhaps they knew that the federal officials in the room would blink and ante up. In a post-Lehman moment when panic, not reason, was dominating the discussion, perhaps they figured they could walk away with extra billions—and, indeed, they did.
This issue cries out for immediate government inquiry. Maybe one or two of the more than two dozen government entities now beating their chests about bonuses can redirect their energies to this much larger issue confronting us: Who signed off on this $80 billion bailout—now approaching $200 billion—and why?

Why, one might almost think that the bonus kabuki was a diversion! And then there's this: