The U.S. as an emerging economy

[Firebird]

Just last night I was talking to my father about the various solutions and plans being bounced around Wall Street. In particular, about the government's plan to subsidize private investors to buy up the toxic assets and take them off the books of large companies. Basically, how it works is that a the investors will kick in a small percentage, the government will kick in a small percentage, and then the government will extend credit to pay for the bulk of it. Here's the example summary for how it will work from the treasury page:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

So the private investor will only have to front about seven percent of the cash, but will rake off a much higher percentage of the profit. As you can probably guess, it's mostly going to be hedge funds and private equity firms that are going to get this sweetheart deal. You and I are not going to get to participate, of course, at least on an individual basis.

I remarked to my father that this reminded me of nothing so much as the chaotic and disastrous "privatization" process in Russia after the collapse of the Soviet Union that resulted in the oligarchal system of "crony capitalism" in place today. There again, "investors" were able to purchase all sorts of assets (in this case, formerly state-run industries) without fronting much of their own money but rather using sweetheart government loans to finance purchases of government property.

Lo and behold, this morning's editorial by Smith-Barney's emerging market expert in the Washington Post...

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/25/AR2009032502226.html

[hunterbunter]

So we're screwed

[BDB]

woa..... no.....

[pied]

Difference is that it is somewhat the opposite transaction. The Soviets were selling off govt. assets and the worst case scenario here is that the govt. will own pieces of the private assets.

[hunterbunter]

Difference is that it is somewhat the opposite transaction. The Soviets were selling off govt. assets and the worst case scenario here is that the govt. will own pieces of the private assets.

i sure hope so, that way they can give it back to those poor indians.

[BDB]

i sure hope so, that way they can give it back to those poor indians.

http://www.aitcoc.com/Crow-Indian.jpg

or

http://www.goldcoast.com.au/images/uploadedfiles/editorial/pictures/2007/11/30/bollywoodWEB.jpg

[pied]

I had a conversation w/my boss, well a couple higher than that, but it's besides the point.

Here's the deal that seems to get lost, and I have alluded to it quite often. The people not making their payments gets the headlines, but if you look at the delinquency numbers, they indeed have gone higher, simply not to the level that is being reported.

The big companies levered themselves so much, that an uptick has had exponential affects on the values of the assets backed by the real estate loans. There is still a LOT of value in real estate, especially distressed real estate.

Delinqunecies have gone as high as close to ten percent, including all accounts in foreclosure. That seems high, and it is, but that ten percent is collateral and even at 40 cents on the dollar, means that you recoup 94% of your $$.

How does that compare to the market over the last year or two?

[Firebird]

Difference is that it is somewhat the opposite transaction. The Soviets were selling off govt. assets and the worst case scenario here is that the govt. will own pieces of the private assets.

It's a bit more complicated than that. Keep in mind, first of all, that a huge chunk of these "toxic assets" are coming from firms that the USG already has a significant stake in via the previous rounds of bailouts. So in a sense the USG already "owns" a lot of these assets. Then, keep in mind that the private investors are going to have access to USG loans so they don't have to risk too much of their own money in this deal, but under the profit sharing scheme will reap far more of the profits in relation to the share of cash they front. The private investors will also have complete control over the management of the assets. It's very, very sketchy.

[pied]

I think you will see the toxic assets come from a lot of regional type banks, and not as much as the big ones like BoA/Chase/Citi, although they wll be shedding them as well.

Watch Guarranty Bank in Dallas.

[Firebird]

I had a conversation w/my boss, well a couple higher than that, but it's besides the point.

Here's the deal that seems to get lost, and I have alluded to it quite often. The people not making their payments gets the headlines, but if you look at the delinquency numbers, they indeed have gone higher, simply not to the level that is being reported.

The big companies levered themselves so much, that an uptick has had exponential affects on the values of the assets backed by the real estate loans. There is still a LOT of value in real estate, especially distressed real estate.

Delinqunecies have gone as high as close to ten percent, including all accounts in foreclosure. That seems high, and it is, but that ten percent is collateral and even at 40 cents on the dollar, means that you recoup 94% of your $$.

How does that compare to the market over the last year or two?

No doubt that these assets are worth something. The problem is that no one knows exactly what, and no one is certainly willing to take on the risk of purchasing the stuff. At least, not with their own money. So instead the government has cooked up a scheme whereby you can purchase these assets with someone else's money, but keep the bulk of any profits for yourself. And the loss is limited as well. If the investements work out, great. If they don't and the private investor taking advantage of this scheme loses their money, Uncle Sam is not going to come to Blackstone Group to recoup the 72%....the taxpayer will eat that loss. The USG has come up with a scheme to allow preferred major players to have easy credit, strictly limit losses, and share disproportionately in any profits. Seems the very definition of crony capitalism to me...

[pied]

No doubt that these assets are worth something. The problem is that no one knows exactly what, and no one is certainly willing to take on the risk of purchasing the stuff. At least, not with their own money. So instead the government has cooked up a scheme whereby you can purchase these assets with someone else's money, but keep the bulk of any profits for yourself. And the loss is limited as well. If the investements work out, great. If they don't and the private investor taking advantage of this scheme loses their money, Uncle Sam is not going to come to Blackstone Group to recoup the 72%....the taxpayer will eat that loss. The USG has come up with a scheme to allow preferred major players to have easy credit, strictly limit losses, and share disproportionately in any profits. Seems the very definition of crony capitalism to me...


Right now there are several organizations waiting to buy, the problem has been that although the levered assests have been writen down, you are right they are still not to the 1-1 level yet. When the companies do sell them off a HUGE chunk of the balance sheet will go "poof". If the govt. is able to help some of the ready buyers bid the price up a bit the deals will likely happen quickly. Towards the end of the second quarter I understand.

The other factor here, is that the govt. will likely recoup most of their loan unlike some of the propping up we have seen to date.

I do admit to being biased in this equation though.

[Firebird]

Right now there are several organizations waiting to buy, the problem has been that although the levered assests have been writen down, you are right they are still not to the 1-1 level yet. When the companies do sell them off a HUGE chunk of the balance sheet will go "poof". If the govt. is able to help some of the ready buyers bid the price up a bit the deals will likely happen quickly. Towards the end of the second quarter I understand.

The other factor here, is that the govt. will likely recoup most of their loan unlike some of the propping up we have seen to date.

I do admit to being biased in this equation though.

The whole thing stands or falls on that, since these are non recourse loans. I ask you, given what we've seen over the past year, would you be willing to risk your own fortune on the prospect of mortage backed securities not continuing to lose value?

Because the resounding answer from the financial community is "NO."

I don't agree with a lot of what Krugman writes, but his blog post makes the arithmetic very clear:

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/

[pied]

Most of the growth of the MBS value was in the trading of them.

As I have stated before you are around 90% paying, worst case you are around 85%. This is based on delinquency volumes. Average interest rate may vary but 6% would likely be a bit low on most pools.

So 6% return on 85% of the assets in a pool you will be buying at a discount. Note the remaining 15% has value as well, conservatively 40% after costs.

Depending on price it could be very lucrative for all parties.

[GoOwls]

Just last night I was talking to my father about the various solutions and plans being bounced around Wall Street. In particular, about the government's plan to subsidize private investors to buy up the toxic assets and take them off the books of large companies. Basically, how it works is that a the investors will kick in a small percentage, the government will kick in a small percentage, and then the government will extend credit to pay for the bulk of it. Here's the example summary for how it will work from the treasury page:



So the private investor will only have to front about seven percent of the cash, but will rake off a much higher percentage of the profit. As you can probably guess, it's mostly going to be hedge funds and private equity firms that are going to get this sweetheart deal. You and I are not going to get to participate, of course, at least on an individual basis.

I remarked to my father that this reminded me of nothing so much as the chaotic and disastrous "privatization" process in Russia after the collapse of the Soviet Union that resulted in the oligarchal system of "crony capitalism" in place today. There again, "investors" were able to purchase all sorts of assets (in this case, formerly state-run industries) without fronting much of their own money but rather using sweetheart government loans to finance purchases of government property.

Lo and behold, this morning's editorial by Smith-Barney's emerging market expert in the Washington Post...

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/25/AR2009032502226.html

I saw a report on this last night....it said that the crooks who got us into this mess can be subsidized by the govt. to buy this stuff, finance it, and make a fortune off it once the economy comes back up.

I guess Obama is really all about change after all...... :eek: :rolleyes: :rolleyes:

[pied]

I saw a report on this last night....it said that the crooks who got us into this mess can be subsidized by the govt. to buy this stuff, finance it, and make a fortune off it once the economy comes back up.

I guess Obama is really all about change after all...... :eek: :rolleyes: :rolleyes:

Look at Pennymac

[Firebird]

A much longer article re: same at The Atlantic. Well worth a read on your lunchbreak.

http://www.theatlantic.com/doc/200905/imf-advice

[pied]

talk about depressing.

[HUM398]

It's a bit more complicated than that. Keep in mind, first of all, that a huge chunk of these "toxic assets" are coming from firms that the USG already has a significant stake in via the previous rounds of bailouts. So in a sense the USG already "owns" a lot of these assets. Then, keep in mind that the private investors are going to have access to USG loans so they don't have to risk too much of their own money in this deal, but under the profit sharing scheme will reap far more of the profits in relation to the share of cash they front. The private investors will also have complete control over the management of the assets. It's very, very sketchy.

I just like to refer to it as Smoke and Mirrors.

Its a horrible idea....

[JMSFan]

No doubt that these assets are worth something. The problem is that no one knows exactly what, and no one is certainly willing to take on the risk of purchasing the stuff. At least, not with their own money. So instead the government has cooked up a scheme whereby you can purchase these assets with someone else's money, but keep the bulk of any profits for yourself. And the loss is limited as well. If the investements work out, great. If they don't and the private investor taking advantage of this scheme loses their money, Uncle Sam is not going to come to Blackstone Group to recoup the 72%....the taxpayer will eat that loss. The USG has come up with a scheme to allow preferred major players to have easy credit, strictly limit losses, and share disproportionately in any profits. Seems the very definition of crony capitalism to me...

Wouldnt this be similar to a ponzi scheme?

[mad_fan]

I've opposed this joint-venture approach from its first mention...
The government doesn't have enough smart people working in Treasury to keep up with how much they are actually getting screwed by the smart guys...
I'd rather see a federal bad bank...The Federal Reserve Bank of Suck...created to buy this stuff outright...
It makes no sense to offer the upside to come...when you are at the low...
But I fully expect these guys to do exactly that...

[mad_fan]

No doubt that these assets are worth something. The problem is that no one knows exactly what, and no one is certainly willing to take on the risk of purchasing the stuff. At least, not with their own money. So instead the government has cooked up a scheme whereby you can purchase these assets with someone else's money, but keep the bulk of any profits for yourself. And the loss is limited as well. If the investements work out, great. If they don't and the private investor taking advantage of this scheme loses their money, Uncle Sam is not going to come to Blackstone Group to recoup the 72%....the taxpayer will eat that loss. The USG has come up with a scheme to allow preferred major players to have easy credit, strictly limit losses, and share disproportionately in any profits. Seems the very definition of crony capitalism to me...

I call that my Options trading account...:rolleyes:

[mad_fan]

Most of the growth of the MBS value was in the trading of them.

As I have stated before you are around 90% paying, worst case you are around 85%. This is based on delinquency volumes. Average interest rate may vary but 6% would likely be a bit low on most pools.

So 6% return on 85% of the assets in a pool you will be buying at a discount. Note the remaining 15% has value as well, conservatively 40% after costs.

Depending on price it could be very lucrative for all parties.

This seems to be where most in America...and Washington...get lost...
The banks are holding paper that is still cash flowing...
To the banks...these things (mortgage pools) still have value...
The AICPA says...if you can't trade it no market)...it's worthless...mark it to zero (or something slightly higher) on the balance sheet...and take the 'loss'...
I see great problems ahead...getting the banks to agree to selling paper for much less than they think it is worth...just because the marketplace and the government tell them so...
At this point...the banks have taken their major loses...why give the paper away now???

[pied]

Agree. Problem, is some of the assets are still not valued low enough, and many of the organizations don't have the knowledge to service to realize the cash flow. They can feel free to PM me.

[JMSFan]

I guess no one will answer my question:(

[pied]

Wouldnt this be similar to a ponzi scheme?

No. At the heart of a ponzi scheme there is no assets and it comes crumbling down. If you own a home, it is very possible if not likely that your home is part of the assets of these MBS's.

You can debate price or the funding proposed, but not in the end there is value to the asset. Well I guess you could, but I don't think it's a very good one.

[JMSFan]

No. At the heart of a ponzi scheme there is no assets and it comes crumbling down. If you own a home, it is very possible if not likely that your home is part of the assets of these MBS's.

You can debate price or the funding proposed, but not in the end there is value to the asset. Well I guess you could, but I don't think it's a very good one.

So, does the market dictate what the value of these assets are, or do the banks have the final say?

[pied]

So, does the market dictate what the value of these assets are, or do the banks have the final say?

Ultimately the markets will decide, but several banks know they are in a precarious position. No one is selling at this point, so the value they have marked to and losses already realized are safe. The fear amongst many is that the "sale" price would be in fact lower and again hurt their balance sheet.

Likely the FDIC will have to intervene and force them to put them on the market and see what they can get, otherwise you will probably see more traditional failures.

[Firebird]

I call that my Options trading account...:rolleyes:

I am not sure why the USG should be in the business of offering put options to private investors.....