Killing it like a hooker in Hong Kong

PPFI: Going to be a disaster

The Toxic Asset Plan detail trial balloons are starting to be floated. This piece in the NYT has some preliminary details.

Basically, FDIC will provide leverage of 85% at something like 1% interest. Then FDIC will also chip in 12% of equity, and the private investor will put in 3% equity.

This is supposed to encourage the private investor to buy assets which are worth 30 cents on the dollar for the 60 cents that it’s marked on the bank’s book.

Devil in the details.

Basically I see only two ways this can play out, either A) It’s not going to work or B)It’s going to work, but produce massive profits for investors and massive losses for taxpayers… at the same time.

A) It’s not going to work

Because the investor still bears the first loss piece. So he is highly incentivized to pick and choose among the assets on offer and price them correctly. What happens when they hold the first auction and all the bids come in below the bank marks? Do you force the banks to sell? Or do you allow the banks to keep them on the book?

B) It’s going to work, but with massive losses for the taxpayer, and massive profits for private investors

This goes back to my earlier ringfencing post. Someone is going to figure out a structure so that assets can be segregated. Investors are going to punt, and they’re going to take the massive profits when they win, and leave everyone else saddled with losses when they lose.

Other considerations:

Special treatment: What happens if Treasure chooses say 5 firms, Blackrock, PIMCO, Western Asset Mgmt, Oaktree and Goldman. Won’t all the other firms scream bloody murder? Varde in Minnesota, Citadel in Chicago, Berkshire in Omaha? Each with it’s own congressional delegation making the appropriate noises? How are they not going to play favorites?

Spreading the wealth: Say due to the last point, anyone with say 50 mil under management gets to play. First it’s going to be an administrative nightmare, they’re going to be thousands of firms. Second, if the SEC didn’t know what Madoff was doing for 20 years, how are they going to keep track of this? What’s to prevent investors from playing games and money laundering and using derivatives to milk the taxpayer?

Is the money really out there? : Treasury seems to think that there’s 30 bill or more waiting to jump into this stuff. I doubt it. Firstly most of the private equity funds have far less money than the stated fund size. Secondly even if they could access it, they probably couldn’t draw all of it down in 1 go. It’s a practical matter because their investors are institutions like Harvard Management Company which simply don’t have liquid assets to fund PE commitments.

So where might the money come from? Foreign investors. That’s right. The guys holding the Treasuries who can put them into this. But it’ll have to be washed, so they’d pump money in through Blackstone or the other group.

Foreign governments are effectively going to assetize their US government debt, and end up owning large portions of the US economy.

March 21, 2009 - Posted by | Credit Crisis | , , , , , , , , , ,

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