Geitners plan....what are the stakes ?

Her en der is deze discussie in [AEX] gefragmenteerd aan bod gekomen. Als je dieper gaat graven achter de beweegredenen (en de vele analyses op het internet) van dit plan roept dit meer vraagtekens dan oplossingen op.
Feit is wel dat de belastingbetaler (FED/FDIC) toch wel heel erg all-on gaat (met 2 a 3 triljoen $dollar).
Maar gaat dit plan de aandeelhouders/banken of de economie redden (verschuiven van de toxic assets).... of is dit plan juist bedoeld om de status-quo van de economie van voor 2006 te redden.
Sommige lezen in dit plan zelfs een verkapte nationalisatie zonder dat Joe-sixpack dit doorheeft.
In mijn optiek is het meer dan de moeite waard om deze discussie nog eens centraal te zetten. Gewoon om te kijken welke afwegingen dit plan bevat, en ten koste van wat.

How it works.



Deze uitleg is heel simpel maar duidelijk. Maar het heeft een missing link (wie is de private investor ?). En een flaw.... FED = FDIC

Mish gaat hierop kompleet los.

I am changing my tune. Geithner's plan can succeed. Before anyone collapses on the floor or starts screaming that I have lost my mind, it's important to define what success means and what the plan is.

What Success Is Not

1. Getting banks to lend.
2. Having a fair bidding process.
3. Arriving at a fair market value of bank assets.


The first is not going to happen and it would be a bad thing if it did, even though Geithner is foolish enough to actually want that. Rather the idea is to make it appear as if there is a fair bidding process so that a fair market value of bank assets can be determined.

The key word in the above sentence is appear.

Geithner does not want a fair bidding process, nor does he want to arrive at a fair market value of assets. Rather, Geithner does want to avoid a hit to bondholders, at seemingly any taxpayer cost.

Putting Off Hard Choices

On March 23, John Hussman discussed the bondholder writeoff situation in Fed and Treasury - Putting off Hard Choices with Easy Money (and Probable Chaos).

quote:

From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount - the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.

Make no mistake - we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns' bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans.

I do not agree with Hussman's views on inflation, but he is always a great read. Please read the above article because protecting bondholders at any expense is indeed part of the plan.

Het wordt nog erger..... veel erger.

quote:

The ‘Dirty Little Secret’

What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (¤66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.

This is Geithner’s and Wall Street’s Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?

This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.

This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.

Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to ‘federalize’ the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.

The scam ... PIMROCK die seppuku pleegt.

quote:

Consider a hypothetical asset manager, PIMROCK. PIMROCK reviews a pool of loans held by the bank J.P. Citi of America, and its analysts determine they are worth 30¢ of par value. The bank holds them at 80¢ on its book. PIMROCK agrees to put down $10B to purchase loans from the pool at 82¢ thrilling stock markets everywhere. It was all just a bad dream!

Under Geithner's plan, PIMROCK's $10B permits a $10B equity investment from the Treasury. Then the FDIC levers the whole thing up, providing $6 of debt for every one dollar of equity. So, $140B of bad loans are lifted from J.P. Citi of America, nearly $90B of which is sheer overpayment to the bank.

Of course, as cash flows evolve, PIMROCK's $10B is wiped out entirely, as is the Treasury's investment. The FDIC gets repaid in a bunch of securities worth about $50B, taking a $70B loss. But, as Calculated Risk, likes to say "Hoocoodanode?" These were real market prices, Geithner or his successor will argue. Our private partners lost everything. There was no subsidy here.

Meanwhile, taxpayers will be out around $80B.

Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they've received assurances that if we can get the nation out of the financial pickle it's in, there will be no haircuts on those bonds. "Shaking hands with the government" means that nothing ever has to be put in writing.

Het is moeilijk om van dit plan/verhaal een samenhangend iets te maken. Vanwege de vele insighs op het internet.
Maar deze link - Fifty ways to scam the tax-payer: Geithner plan link-fest geeft wel een aardige overview. << Must read >>

Zal dit schema ooit eerlijk verlopen..... Sheila Bair (FDIC) denkt van wel.

quote:

But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made "in consultation with regulators" - a sign that the authorities might put pressure on banks to sell toxic assets.

Policymakers say the Geithner strategy is intended to fix the disconnect between the market and the banks by restoring investor confidence in their financial statements.

[ Bericht 0% gewijzigd door Drugshond op 31-03-2009 12:38:24 ]

Sheila Bair denkt van wel..... uche ik van niet.
Qua toezicht neem je een heel dure gok van pakweg 9:1 (negatief voor de belastingbetaler) om het proces eerlijk te laten verlopen. Het lijkt me kinderlijk eenvoudig voor de banken om hiermee fraude te plegen via diverse dekmantels. Juist dat extra stukje toezicht in de financiėle markt misten ze toen en nu.
Nu helemaal als de belangen zo groot zijn (dat worden een boel side-letters in the making).

Guest Contribution: The Real Geithner Plan, a ‘Nuclear Option’

The Obama administration last week proposed draft legislation for a “resolution authority” that would effectively permit the government to liquidate or restructure large systemic financial institutions. If passed by Congress, these powers would allow the governments to treat nonbank financial institutions more like regulated deposit-taking banks. This authority offers a clear path to recapitalize institutions without using taxpayer money and therefore avoiding some dimensions of moral hazard but, if implemented poorly, the existence of this “nuclear option” can cause panic in financial markets and substantially delay recovery. This fear may be with us already — despite all of the material and moral support already on the table, the market is pricing in the highest ever risk of default for Citigroup senior debt, i.e., about a one in three chance over the next five years. (See the credit-default spreads for major banks.)

Imagine what happens when these powers are passed. The U.S. Treasury and FDIC would immediately have the tools need to walk into America’s largest financial institutions, such as Citibank or Bank of America, and liquidate them, or rewrite their contracts and capital structures. Such powers are clearly useful: if the banks are undercapitalized, and private money is not available, then the government could force creditors to swap claims into equity, thus instantly recapitalizing the banks while avoiding use of taxpayer funds. With such steps, the problem of moral hazard, where creditors to banks are bailed out by taxpayers, would at once be forgotten. Shareholders in banks would lose through dilution, some (unsecured?) creditors would lose with debt-equity swaps, while the nation would be better off having a well-capitalized banking system. The banks would remain private but now be controlled by (ex)creditors.

However, today these powers don’t exist, and none of us know exactly how this authority would be used if it ever lands on Mr. Geithner’s desk. We’ll now have a healthy debate in Congress and then see revised versions passed and signed into law. But as this debate proceeds, creditors and shareholders in all such institutions will be nervous. We’ll be giving the Treasury a “nuclear option” and no one can be sure who is safe. A natural reaction by clients and investors of these banks will be to edge towards the exit immediately and to stay away until the dust has settled. It won’t matter whether institutions are solvent: Due to the uncertainty and risk of losses, investors and clients may run. We’ve seen repeated waves of such panics over the last year, and we can live through them, but each successive one hurts the institutions we are trying to save and delays recovery.

What should the administration do to prevent the panics that can ensue from this legislation? First, if they plan to use it soon, they need to pass this legislation quickly. There is good logic behind requiring creditors to bear part of the cost of restructuring, but we can’t afford to have this hanging over credit markets for months to come.

Second, once passed, the new authority should be used. There is no point in incurring the political and financial costs of passing this legislation now unless it is really needed.

Third, as in any major crisis, the aim should be to use this weapon once and decisively. If the government first hits one “weak” institution then another, and piecemeal restructures the sector, then investors and creditors will constantly “game” the system. This will drive down share and debt prices, forcing the government into action, gradually moving down the chain of institutions. We’ve seen this with successive panics at Bear Stearns, Lehman, AIG, Citigroup, etc. The most solvent institutions today could be made insolvent through higher credit costs brought on by the uncertainty, and the recession will be deeper.

To be decisive, the government needs to implement this authority on large scale at once. For example, they could use a very rigorous stress test to triage institutions (i.e., more serious than the current stress test). Those that would be clearly insolvent in the face of a severe recession can be intervened over a weekend. The government could force a debt-equity swap to recapitalize the institutions, and then reopen them the following Monday as highly capitalized entities. While not all creditors with the same seniority would be treated equally — this would be a major difference and potential advantage relative to bankruptcy — the benefits of rapid actions can be justified for the economy as a whole. The institutions that are solvent, but require more capital, could be given a short timeframe to raise funds in private markets. If they cannot raise funds, the government could still intervene. With a gun to their head, there is no doubt they will find new capital, at very low share prices, that will ensure they are highly solvent.

This route to recapitalization would not be pleasant. Bank shareholders and creditors will cry foul. There will be several months of turmoil in markets, and there will be substantial disruption since bond holders and some creditors may be required to take losses when they receive equity. It will also send shockwaves to other undercapitalized institutions around the world, and could lead to their share and debt prices falling in anticipation that other governments will follow America’s example.

However, it is surely better than doing nothing, or too little, and waiting to see what happens. America needs a well capitalized financial system to restore confidence in general and the flow of credit in particular. Given there is little chance of new funding for banks from Congress, there is no easy path to recapitalize banks. Creditors probably do have to pay — this legislation will simplify and help manage that process. Let’s hope the Treasury understands how to use the weapon it is seeking.

[ Bericht 0% gewijzigd door Drugshond op 01-04-2009 02:24:33 ]

Will the Real Geithner Plan Please Stand Up?

By Simon Johnson

With all the material and moral support for U.S. mega-financial institutions currently on the table, why are bank holding company credit default swap (CDS) spreads at new highs?



The most plausible explanation is that creditors - unlike equity investors - are spooked by the new resolution authority that is now sought by Treasury and the Fed. This would, after all, allow the government to manage something akin to (but potentially better than, from a social perspective) a bankruptcy process for our largest financial institutions.

These creditors are right to be worried; the authority, if granted, would almost certainly be pressed by events (and creditors’ self-fulfilling runs) into use.

But, if handled right, this authority can help solve the financial mess at minimal cost to the taxpayer (although there are no magic bullets or easy exits at this stage). The key - as always in any major crisis - is decisive action.

Er schijnt ook nog een plan B (actief) in omloop te zijn om US banken te herkapitaliseren.

Zijn de winsten van Amerikaanse banken in het eerste kwartaal NEP?


Weer gedonder met die Amerikaanse verzekeringsblackbox

Weet u nog, die strategische gelekte interne memo waarin Citigroup jubelde dat er winst werd gemaakt in januari en februari? En JP Morgan en Bank of America die ook beweerden dat het reuze lekker ging in Q1? Allemaal nep, fake, faux, als we een insider moeten geloven.

Deze operationele ‘winsten’ zouden namelijk het gevolg zijn van een actie van AIG die zijn credit default swaps (daar zijn ze weer) voor dumpprijzen aan banken verkocht. Handelaar ‘Lou’ schrijft dit in een verontrustende e-mail aan het weblog Zero Hedge.

Volgens ‘Lou’ gaf AIG in januari en februari opdracht grote delen van zijn CDS-portefeuille voor uitverkoopprijzen van de hand te doen. De handelaar hoorde andere handelaartjes om zich heen roepen dat ze ‘nog nooit zulke grote en winstgevende transacties hadden gedaan - ooit’.

Euh, winstgevend voor de banken dan: ‘Lou’ vermoedt dat de AIG-uitverkoop de grote Amerikaanse banken $1 tot $2 miljard (per bank) heeft opgeleverd. ‘AIG, wetende dat het sowieso veel meer geld moest vragen aan de overheid, besloot de handdoek in de ring te gooien en grote banken deals te geven die schandalig winstgevend waren voor die banken,’ schrijft hij. AIG kreeg in totaal al ruim $170 miljard steun.

CDS=Pontiac Aztek
In de e-mail trekt 'trader Lou' een parallel met een autohandelaar. ‘Vergelijk het met een autodealer die weet dat de Amerikaanse belastingbetaler een oneindige hoeveelheid geld zal verschaffen om de verkoop van zijn afschuwelijke auto’s (denk Pontiac Azteks) te financieren. Het bedrijf besluit alle auto’s die ze hebben staan te verkopen voor prijzen ver onder de marktwaarde. Daarmee genereert het bedrijf enorme winsten voor de kopers die de auto’s met enorme winsten kunnen doorverkopen, exclusief gefinancierd door de Amerikaanse belastingbetaler.’

'Lou' wijst er ook op dat de toezichthouder ISDA (International Swaps and Derivatives Association) dit soort handel in CDS die onder de marktwaarde worden verkocht, toestaat. In de traditionele aandelenhandel is dit wel verboden.

Als dit hele verhaal klopt, is de beursrally met de flink stijgende bankaandelen van de afgelopen weken gebaseerd op drijfzand. Het zou betekenen dat de banken de weg naar boven helemaal nog niet hebben gevonden, maar via een omweg geld van de regering hebben gekregen, een soort secundaire bailout. Ook interessant is de vraag in hoeverre de Fed en minister van Financiėn Geithner op de hoogte zijn dat AIG zijn CDS-portefeuille op een dergelijke manier afbouwt. Wordt vervolgd?
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During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds.
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Als je e.e.a. in conjunctie leest... Dan kan het bijna niet anders dat dit een death cat bounce moet voorstellen van de US banken. En dat het vertrouwen/herkapitalisatie van de banken via omwegen moet gebeurden wel op kosten van de bailouts van de belastingbetaler.

De Amerikaanse economie draait op dit moment bijzonder moeizaam. Zeker nu blijkt dat AIG zijn posities aan het afbouwen is voor een grijpstuiver (aan Amerikaanse banken ?!?). Dan kan het bijna niet anders dat er nog behoorlijk veel zand in de lagers van de Amerikaanse financiėle wereld zit.
Maar goed.... complete portfolios verkopen kun je maar 1 keer. En de bailouts van AIG lopen op zijn einde.
Het plan van Geithner is slechts de volgende en overtreffende trap.

Nassim Taleb Says Geithner’s Bank Plan Will Fail

April 1 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s plan to remove toxic assets from bank balance sheets will fail to revitalize the financial system, “Black Swan” author Nassim Nicholas Taleb said.

“We’re heading in exactly the wrong direction,” Taleb said in a Bloomberg television interview. “I want an overhaul, I want something drastic. This is going to fail, this is not it.”

Geithner has proposed to revive banks without resorting to nationalization through the Public-Private Investment Program that will buy difficult-to-value assets. Leaders from the Group of 20 nations meeting in London this week are unprepared to fix the global financial system because they don’t grasp how markets work or the root causes of the credit crisis that has led to $1.2 trillion in losses and asset writedowns, Taleb said.

Rare and unforeseen events are known as “black swans,” after Taleb’s 2007 book, “The Black Swan: The Impact of the Highly Improbable.” Taleb is a professor of risk engineering at New York University and also advises Universa Investments LP, a Santa Monica, California-based firm opened in 2007 by Mark Spitznagel, Taleb’s former trading partner.

The Treasury’s plan is unfair to taxpayers and rewards the failure of banks that didn’t understand the risks they took when using debt to boost returns in the mortgage market, Taleb said.

Subsidize Failure

“I don’t understand why I as a taxpayer need to subsidize those who failed, by giving them options so they can rebuild their balance sheets,” he said. “Taxpayers take the downside and Wall Street as usual is going to take the upside, another classical problem of socializing the losses, privatizing the gains.”

Taleb said it’s “shocking” that the government would allow banks to estimate the value of the toxic assets that remain on their books because there is effectively no market for the securities, making them almost impossible to value.

“I don’t understand letting banks mark to market, after all this incompetence,” he said. “Why don’t we allow people to mark their house at what they think the value of their house is?”

An open letter to FDIC

[Reader Note: FDIC is soliciting public comments on its Legacy Loans Program. Below is the letter I sent them this morning. For those interested in signing this letter, I have created an online petition.]

TO: LLPComments@fdic.gov

RE: Legacy Loans Program

To Whom it may concern:

I write to urge you NOT to institute the Legacy Loans program as part of Treasury Secretary Geithner’s plan to resurrect the banking sector. No doubt you’ve heard many arguments regarding the perverse incentives created by such a program. Providing non-recourse financing to fund these purchases will encourage financial institutions that face further writedowns, or creditors who would bear the consequences of them, to effect a transfer of risk from bank balance sheets to the public’s. They sacrifice a sliver of equity in order to trade “toxic assets” for government-backed assets. A great deal.

No doubt FDIC recognizes these conflicts of interest and is put off by them. I’m sure you wouldn’t be instituting the Legacy Loans Program if you didn’t think your hand was being forced: If you don’t rescue the banks, they will become the responsibility of the very-much-depleted Deposit Insurance Fund. Better to provide government guarantees on assets in order to avoid that outcome. But government guarantees won’t avoid that outcome. The financial system will fail anyway and FDIC will have wasted precious resources that could have been used to clean up the mess.

Pumping more credit into the market to artificially inflate asset prices does nothing to repair the fundamental value of the underlying collateral. It’s well-known that house prices got “too high” because their values during the bubble had, by too-cheap credit, been totally divorced from people’s incomes. Few could actually afford their over-priced houses based on their earnings potential; no, they levered up using cheap, non-recourse financing to buy an option on further appreciation. The banks were stupid enough to sell buyers these options because they deluded themselves into believing house prices never go down. And because they paid their bankers based on loan production, not loan quality.

But of course asset prices can go down. Even in this Age of Leverage, there was a limit to the amount of credit that banks could manufacture on and off their balance sheets. When credit dried up, asset prices had no choice but to return to more fundamentally sound levels, which is to say, prices that can be supported by buyers’ incomes.

FDIC’s plan to provide subsidized financing in order to prop up asset values puts taxpayers in the position once occupied by irresponsible bankers: we are lending at too-low interest rates to subsidize the purchase of overvalued assets.

Again, you probably recognize this to be foolish, yet you believe it is a better alternative than having to deal with failed banks via the receivership process typically imposed by FDIC. Where I fear you are terribly mistaken is your belief that this plan will avoid that outcome.

Let’s say this plan succeeds in cleansing banks of their toxic assets. What then? They’re likely to start lending again, which, contrary to popular opinion, is exactly what we DON’T want to happen. It was after all, too much credit that inflated the bubble in the first place. Does the government honestly believe that re-inflating the bubble is the solution to this economic crisis? American society is now largely bankrupt because we have run up debts that are simply unpayable. What is the merit in manufacturing still more debt to artificially re-inflate asset prices?

My point is that de-leveraging can’t be avoided. Asset prices can’t, by too cheap credit, be permanently divorced from the cash flows they are capable of generating. Runaway speculation on ALL assets financed with credit has led to the accumulation of so much debt, there’s simply no way to pay it all back. Much has to be written off.

Yes, this wave of writedowns looks scary, like a tsunami about to wash over the world’s financial system. But Geithner’s plan can’t stop it; it is tantamount to building a bigger sand castle in order to hold the tsunami at bay.

It makes no sense to waste the public’s meager resources on a plan that solves nothing. The unwind is coming. Adding more leverage to delay it will only increase the pain.

Sincerely,

Rolfe Winkler, CFA
Principal
Winkler Advisors
New York, NY
--------
Rolfe Winkler is zeker geen domoor. Heeft vele bijdrages op zijn naam staan op diverse financiėle blogjes.
- Former hedge fund analyst, met een academische graad -

De reden van dit topic had eigenlijk in de OP gemoeten.
Dit is het beoogde herstelplan ... wat erg veel lijkt op H.Paulson (zie youtube plan 1 en 2). Dit plan heeft van bovenaf goedkeuring gekregen. Op het internet zijn er vele voor en tegenstanders van dit aangepaste plan... de reden dat Obama graag met Geithner verder wil heeft meer te maken met balans van voor en tegenstanders waardoor juist dit plan uniek lijkt. Of eigenlijk ook weer niet als je door de historie van T.Geithner gaat ploegen. Vooral de catch22 achter dit plan spreekt me aan (of who is holding the bag).

[ Bericht 5% gewijzigd door Drugshond op 01-04-2009 23:16:47 ]

Al moet ik de volgende 100 posings zelf verzorgen...... dit is wel een redelijke trigger of hoe ver we onder water staan.

Obama’s Ersatz Capitalism (www.nytimes.com)

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

Simply put just the N-word... it's killing in the name of. And it will happen.
Nationalization

Deze discussie hoort overal bij..... BNW, NWS, AEX
Als je een beetje het verhaal van de hoed en de rand kent...... go wild.
Deze discussie lijkt me zo 1-tje.... (ik heb een [klein] voorgevoel).

Geithner’s Non-Recourse Gift That Keeps on Giving to Bill Gross

April 2 (Bloomberg) -- Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.

The plan may reward investors with 20 percent annual returns on “really ‘toxic” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben S. Bernanke said March 20 that “credit market dysfunction” is countering efforts to fix the economy.

“One of the challenges has been that leverage has really been pulled away from the system and as a result the kinds of returns investors are looking for haven’t really been available,” said Ken Hackel, head of fixed-income strategy at RBS Securities in Greenwich, Connecticut. RBS is one of the 16 primary dealers that are obligated to bid at the Treasury’s auctions of government debt and which trade with the Fed.

Growing Interest

Since Geithner unveiled the plan on March 23, Pacific Investment, or Pimco, which manages the world’s biggest bond fund, and New York-based BlackRock Inc., the largest publicly traded U.S. asset manager, said they may be interested in participating in PPIP. Others include New York-based Apollo Global Management LLC, the private-equity firm run by Leon Black, and Los Angeles-based Colony Capital LLC, which has invested more than $39 billion since it was founded in 1991.

“This is perhaps the first win/win/win policy to be put on the table,” Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.

Pimco spokesman Mark Porterfield, Konstam and Lantz didn’t return calls seeking comment.

Geithner’s plan may already be working. Top-rated commercial-mortgage bonds rose 5.6 percent since March 20 to about 79 cents on the dollar on average, according to Merrill Lynch & Co. indexes. The most-senior class of benchmark 2005 securities backed by fixed-rate Alt-A home loans, or those ranked between prime and subprime, increased about 12 percent to 54 cents as of March 31, according to Deutsche Bank AG.

Government Loans

Geithner’s plan encourages investors to buy as much as $1 trillion of real-estate assets by using $75 billion to $100 billion provided by the Treasury and government loans. The goal of the Fed and the Treasury since September has been to cleanse banks of troubled assets.

The Treasury would match the money asset managers raise to join them in public-private funds. The Federal Deposit Insurance Corp. would guarantee borrowing offered to funds buying loans, while the Treasury and Fed would offer financing to mortgage- securities buyers. The Fed loans may be made available to investors that are not part of the public-private funds.

“Institutional investors, especially the largest, want to be able to put more leverage into trades so they can get higher returns for their efforts,” said David Castillo, a senior trader of structured-finance bonds at Further Lane Securities in San Francisco. “On paper the concept is wonderful, though I’m of the opinion most banks still won’t be able to sell.”

$12.8 Trillion

Analysts at JPMorgan Chase & Co., Barclays Plc and Deutsche Bank AG also say they don’t expect banks to sell many loans into the program because accounting rules mean they generally carry the debt at face value. That suggests they would record a loss when selling the assets, eroding their capital.

The credit markets began to seize up in 2007 as losses on subprime mortgages mounted. Since then, the world’s largest financial institutions have taken $1.3 trillion in losses and writedowns, according to Bloomberg data. Gross domestic product shrank 6.3 percent in the fourth quarter, the most since 1982, as banks reined in lending.

The government and Fed have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s, Bloomberg data show..

“Widening credit spreads, more-restrictive lending standards and credit market dysfunction are working against the monetary easing and leading to tighter financial conditions,” Bernanke said March 20, addressing the Independent Community Bankers of America’s national convention in Phoenix.

Congressional Skepticism

The Treasury’s role in buying securities with private investors raises the risk the government would interfere with the businesses of its partners, said Jim Shallcross, who oversees about $14 billion in bonds as director of portfolio management at McLean, Virginia-based Declaration Management & Research LLC.

Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in an April 1 interview that the distribution of half of the profits to the investor “does bother me.”

“But even beyond that, what bothers me even more is it’s taxpayer money,” Bachus said. “What you are doing is artificially inflating the price of those assets because at the present prices the financial institutions won’t sell them.”

Geithner signaled he’d oppose any attempt to claw back profits from investors participating in the program. Investors and banks “need to have confidence that the rules of the game are going to be clear, consistently applied in the future,” he said in an April 1 Bloomberg Television interview in London.

‘Taxpayer Loses’

Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.

“The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”

Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.

RTC Experience

While the government’s takeovers of failed savings and loans in the late 1980s and early 1990s cost taxpayers and let private investors gain, it succeeded in ending the crisis. The Resolution Trust Corp. recovered almost $400 billion from asset sales, short of their book value of $452 billion, the agency’s executives said on the day it was shut down on 1995. The government cost of the bailout totaled about $90 billion.

“There was a lot of concern that they were selling the assets too quickly and too cheaply,” said Raghuram Rajan, the former chief economist of the International Monetary Fund in Washington who’s now a professor at the University of Chicago. “There was a lot of second guessing, but it worked.”

The odds of Geithner’s programs succeeding would be low if the financing offered was “recourse,” Credit Suisse’s Lantz and Konstam said. That would require the funds to pay back the government funds with their own money if the value of the assets fell below the amount of the loans.

Declining Value

With recourse loans, the type of “toxic” mortgages identified by the Credit Suisse analysts, which have a hypothetical 40 percent annual default probability and only 10 percent expected recoveries, would be worth only 19.7 cents.

The type of loans that may be sold, New York-based Citigroup Inc. analyst Darrell Wheeler said in a March 27 report, include $93 billion of commercial mortgages that are probably carried on the books of banks at 65 cents to 75 cents on the dollar because they were meant to be packaged into bonds.

Unlike Geithner’s plan for loans, the public-private funds for securities will be limited initially to only five managers, such as Pimco and BlackRock, already overseeing $10 billion of the assets targeted. That program will buy securities from holders of toxic assets other than banks.

“There it’s probably going to work -- for five people,” said Dan Castro, chief risk officer at hedge fund Huxley Capital Management in New York. “You’re selecting a very small group of large guys and giving them all the advantages.”

Potential Profits

By providing loans, the government may allow investors to more than double their potential profits.

The most-senior class of a 2007 Goldman Sachs Group Inc. commercial-mortgage bond traded at 69.6 cents on the dollar on March 27, offering a yield of 12 percent, according to report that day from Bank of America Corp. analysts Roger Lehman and Julia Tcherkassova in New York.

If the Fed provides a five-year non-recourse loan and requires an investor to put up only 85 percent of the cost of the securities, then that investor could “walk away” when the loan expires and still have earned 25 percent returns, Lehman and Tcherkassova wrote. That assumes losses on the underlying loans don’t exceed 30 percent.

That type of bond has risen more than 10 cents on the dollar since the plan was announced, according to Wheeler.

The amount of leverage available under the Fed’s program hasn’t been announced. The FDIC program will offer as much as six times the money raised by the private-public funds from individuals and the Treasury.
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ghe ghe ghe... het is zelfs op bloomberg dat pimco erg verdacht is. Staat gelukkig in de OP.

[ Bericht 0% gewijzigd door Drugshond op 02-04-2009 06:54:14 ]

quote:

Op vrijdag 3 april 2009 07:44 schreef Potjebier het volgende:

[..]

De hele crux: als de banken er voor krijgen wat het waard is gaan ze failliet, dus ze willen er meer voor hebben anders verkopen ze niet. En als ze meer vangen is de belastingbetaler de lul.

Geithner is straks CEO van een van die banken, mark my words...

En ze krijgen er meer voor...
Mark to Myth approved.

_{Maar die had je al gezien.}

Obama Bank Policy Signals $1 Trillion in Writedowns (Update1)


April 3 (Bloomberg) -- U.S. regulators may force Bank of America Corp., Citigroup Inc. and at least a dozen of the nation’s biggest financial institutions to write down as much as $1 trillion in loans, twice what they’ve already recorded, based on Federal Deposit Insurance Corp. auction data compiled by Bloomberg.

Banks failing Federal Reserve evaluations of loans this month may be ordered to make sales worth as little as 32 cents on the dollar, according to FDIC data. That would be less than half of the 84 cents on the dollar the Treasury Department suggested was a possible purchase price. Some of the bank- insurance agency’s auctions brought 0.02 cent on the dollar.

Lower valuations would lead to new writedowns and capital injections from the $134.5 billion remaining in the Troubled Asset Relief Program, Nobel Prize-winning economist Joseph Stiglitz said.

“The only way banks will sell is under duress,” the 66- year-old professor at Columbia University in New York said in a phone interview.

Asset sales are the latest step in President Barack Obama’s effort to restart the U.S. economy through the most costly rescue of the financial system in history. Treasury Secretary Timothy Geithner’s Legacy Loan Program and Legacy Securities Program together are targeted to start at $500 billion and may expand to $1 trillion.

Auctioning Assets

Geithner’s plan will purchase loans and be overseen by the FDIC, which will offer debt guarantees while the Treasury invests capital alongside investors.

The FDIC would auction assets after the Office of the Comptroller of the Currency, Office of Thrift Supervision or the Fed signals that a bank is in danger of failing.

“If we thought that was the right decision to address their situation, we would certainly tell an institution to move in that direction,” said William Ruberry, an OTS spokesman in Washington.

Geithner’s plan to buy loans and securities “can be very useful,” Comptroller of the Currency John Dugan said in a Bloomberg Television interview today. “It’s one more arrow in the quiver to address problems with assets on banks’ balance sheets.”

Treasury spokesman Isaac Baker said in an e-mail that the program is voluntary and the government expects banks will want to sell assets to clean their balance sheets and make it easier to raise capital from investors, he said.

Financing Help

“Past auctions cannot reliably predict asset prices in the Public Private Investment Program, as we are creating a new market that has not previously existed to help value these assets, and offering financing to help investors purchase them,” Baker said.

Setting up a facility to purchase distressed loans will allow the FDIC to put a bank into “a silent resolution,” said Joshua Rosner, a managing director at investment-research firm Graham Fisher & Co. in New York.

“This is a way to functionally wind down a bank as big as Citi without the world realizing that they’re essentially in resolution,” he said. “The real value of this is a tool to resolve a too-big-to-fail institution.”

The FDIC is considering allowing banks to share in future profits on loans sold to public-private partnerships to encourage healthier lenders to participate, according to Jim Wigand, the agency’s deputy director for resolutions and receiverships. The regulator is seeking comments through April 10 on the program, said spokesman David Barr.

Assets sold under the Legacy Loans Program may be worth an average of 56.3 cents on the dollar, based on the results of FDIC auctions at failed banks over the past 15 months.

‘Large Amounts’

Writedowns would total $1 trillion if the program buys $500 billion in loans at 32 cents on the dollar, the average for non- performing commercial loans in the FDIC sales.

Geithner said March 29 that some financial institutions will need “large amounts of assistance.” He’s trying to avoid bank nationalizations by wooing investors to purchase loans with taxpayer-guaranteed financing to protect them against loss. The U.S. move to clear away distressed assets contrasts with Japanese financial authorities’ reluctance to do so in a 1990s financial crisis, which led to a decade of economic stagnation.

“This is going to be our Yucca Mountain right here,” said Joseph Mason, an associate professor at Louisiana State University in Baton Rouge and former FDIC visiting scholar, referring to the proposed radioactive-waste storage site in Nevada.

Half-Life

“You can put it in a train car and ship it across the country. The half-life of this stuff is real long, but it has to burn off,” he said.

The FDIC’s average auction value of 56.3 cents on the dollar for residential and commercial loans is based on 312 sales worth $1.1 billion since Jan. 1, 2008, according to the FDIC. The average for 348 commercial loans for which borrowers stopped paying was 32 cents on the dollar. Auction prices ranged from 0.02 cent to 101.2 cents on the dollar, according to the FDIC.

In announcing its loan-sale program last week, the Treasury provided an example of a purchase price of 84 cents on the dollar, with taxpayers putting up 6 cents, investors 6 cents and the FDIC guaranteeing 72 cents in financing.

“Eighty-four cents is just laughable” because the market value for loans is much lower, said Barry Ritholtz, chief executive officer of New York-based FusionIQ, an independent research firm.

The U.S. is structuring the loan purchases to leave the government with most of the risk, while investors stand to gain most of any profit, economist Stiglitz said.

‘Almost No Upside’

“There’s almost no upside for the taxpayer,” he said. “The government is giving a 110 percent bailout.”

How much investors offer for assets is “going to be the key” determinant of Bank of America’s participation in the government’s two asset-purchase programs, CEO Kenneth Lewis said in a Bloomberg Television interview March 27.

“If there’s an issue with the program, it’s going to be trying to get banks to sell assets,” FDIC Chairman Sheila Bair said in a speech the same day at the Isenberg School of Management of the University of Massachusetts in Amherst.

“If I have concern, it’s the pricing may not be where seller and buyer are willing to meet,” she said.

Any standoff between investors and banks over loan prices may scuttle Geithner’s plan to segregate non-performing assets and restart lending, said Bob Eisenbeis, chief monetary economist with Vineland, New Jersey-based Cumberland Advisors and a former Atlanta Federal Reserve Bank research director.

‘Really Bad Stuff’

“It’s hard to believe that the really bad stuff that’s causing all the problems are going to be offered for sale,” Eisenbeis said. “The institutions won’t want to sell them if they get a true price, because their capital would take too much of a hit.”

With preparations for auctions under way, U.S. banks are being put through so-called stress tests, which Geithner said last month are a comprehensive set of standards for the financial system’s most important lenders. The examinations of loans and their collateral and payment histories are scheduled to be completed by April 30.

Banks have almost $4.7 trillion of mortgages and $3 trillion of other loans that aren’t packaged into bonds, according to the Fed. The vast majority are carried at full value because they don’t need to be written down until they default, according to Daniel Alpert, managing director of New York-based investment bank Westwood Capital LLC.

“Just because it’s being held at full value doesn’t mean it’s not bad,” Alpert said.

Obama Effort

While regulators don’t intend to publish the details of their stress tests, the results will effectively become known once banks announce how much capital they need to raise. Regulators will then give lenders six months to obtain funds from investors or taxpayers as a last resort.

The tests are designed to mesh with Obama’s effort to remove banks’ distressed mortgage assets that have hampered lending to consumers and businesses. Officials aim to have the first loan purchases by private investors financed by the government within weeks of the conclusion of the stress tests, according to the Treasury.

Including TARP, the U.S. government and the Fed have spent, lent or guaranteed $12.8 trillion to combat the financial collapse and a recession that began in December 2007. The amount approaches the $14.2 trillion U.S. gross domestic product last year.

‘Constructive Plan’

Obama met with the CEOs of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

Lenders undergoing stress tests include New York-based Citigroup, which has received three rounds of capital infusions valued at $60 billion, including $45 billion from TARP, according to Bloomberg data.

“The administration has put forth a constructive plan to address the critical issues facing the financial services industry, and we are committed to working together with the industry to help achieve the goals of the plan,” CEO Vikram Pandit said in a statement before meeting with Obama.

Citigroup spokesman Stephen Cohen declined to comment.

The U.S. tests also involve Charlotte, North Carolina-based Bank of America, which also received $45 billion from TARP. It bought Merrill Lynch & Co. -- the largest underwriter of failed collateralized debt obligations, according to Standard & Poor’s -- and home-lender Countrywide Financial Corp.

Bank of America spokesman Scott Silvestri declined to comment.

Option ARMs

San Francisco-based Wells Fargo purchased Wachovia Corp., the nation’s biggest provider of option adjustable-rate mortgages, for $15 billion. In doing so, it took responsibility for about $122 billion of option ARMs sold by the Charlotte bank.

Option ARM loans allow borrowers to defer part of their interest payments and add it to their principal. When housing collapsed, many holders of the mortgages were left owing more than the value of their homes.

Wachovia issued more than half its option ARMs in California, according to bank filings. Wells Fargo was already the biggest lender in the state.

“Wells Fargo supports any plan by the Treasury that helps financial institutions efficiently sell troubled assets while still providing an investment return to the U.S. taxpayer,” spokeswoman Janis Smith said in an e-mail.

Web Distribution

The ability to distribute loan information over the Internet will also support prices by expanding the number of buyers and allowing for sales as small as $100,000, said Stephen Emery, a managing director at New York-based Mission Capital Advisors, which brokered $3 billion of real-estate loan sales last year.

Terms offered under the Legacy Loans Program, including government-backed financing, will also help boost demand and selling prices by as much as 20 percent, he said.

“The leverage will allow buyers to bump their price a little bit,” Emery said. “But that still doesn’t mean that something that was worth 30 is now worth 60. What’s going to happen is now it’s worth 35 or 36 cents.”

=====================================================================
Nou , nou.... dit gaat een leuk ritje worden.


Ben benieuwd naar de uitkomsten.

kick
Big fund firms such as BlackRock, Pimco seen on short list for PPIP
But red tape may lead some managers to opt out, observers say
By David Hoffman
June 14, 2009, 6:01 AM EST


BlackRock Inc., Franklin Templeton Investments, Invesco Ltd., Pacific Investment Management Co. LLC and Western Asset Management Co. are among the leading candidates whose selection may come as early as this week to run funds for the Legacy Securities portion of the government's Public-Private Investment Program, according to observers.

But some industry watchers said that though many firms may have expressed interest in the program initially, some could be having second thoughts now.

“Based on my own experience to date, asset managers have an interest in the program, but I'm not sure how many have said they will go forward with it,” said Barry Barbash, a partner in the Washington office of New York law firm Willkie Farr & Gallagher LLP. He is a former director of the Securities and Exchange Commission's Division of Investment Management.

“The degree of red tape and intrusive regulation is a stumbling block,” Mr. Barbash said.

Judging by the amount of interest expressed by asset managers in PPIP, it appears at least initially not to be much of a worry.

Vincent Ricardel
Barry Barbash: Red tape and "intrusive regulation" are stumbling blocks.
The Department of the Treasury on April 29 announced the receipt of more than 100 applications from potential fund managers interested in participating in the Legacy Securities portion of PPIP.

Under the Legacy Securities program, institutional investors that have $10 billion of comparable assets will purchase pools of mortgage-backed and mortgage-related securities from banks and other financial institutions.

The program is potentially appealing to asset managers because they would be able to put together products — most likely closed-end funds, hedge funds and private-equity funds, and to a smaller extent, mutual funds — that have the potential to deliver huge returns.

Once a fund manager is pre-qualified, it can begin raising the expected minimum of $500 million in private capital that would serve as the investment that, pending further approval, would be matched with taxpayer funds.

Fund managers may then choose to use leverage pursuant to the Legacy Term Asset-Backed Securities Loan Facility.

Several high-profile individuals at the firms have made clear their interest in the program.

Bill Gross, co-chief investment manager at Pimco of Newport Beach, Calif., has been particularly vocal about his support of PPIP, calling it a “win-win-win” policy.

Laurence Fink, chairman and chief executive of New York-based BlackRock, has also been a staunch supporter of the program, and so has Martin L. Flanagan, president and chief executive of Invesco in Atlanta.

“We strongly believe that [PPIP] will help stimulate the mortgage market and provide individual and institutional investors globally with compelling investment opportunities in the Legacy Securities and Legacy Loan programs,” Mr. Flanagan said in an April 27 statement.

The Legacy Loan program calls for banks to sell pools of residential mortgages to individuals and institutions through the Federal Deposit Insurance Corp.

That part of PPIP appears to be on hold, partly as a result of banks' reluctance to take part out of concern that they wouldn't be getting what the loans were worth, attorneys familiar with PPIP said.

"PRICING PROBLEM'
There are similar concerns, however, over the Legacy Securities program.

“It's always been a pricing problem,” said Donald G. Ogilvie, independent chairman of the Center for Banking Solutions at Deloitte LLP of New York. “The people that own these assets think their value is higher than the people that want to buy them.”

As a result, there are a number of potential buyers but few sellers, Mr. Ogilvie said.

Even the buyers, however, may be getting cold feet, according to several securities attorneys.

After asset managers applied to run PPIP funds, President Obama signed into law the Helping Families Save their Homes Act of 2009, which was aimed principally at stemming home loan foreclosures.

But the act also has various provisions related to PPIP participants.

Among other facets, the act requires consultation with the special inspector general for the Troubled Asset Relief Program to impose strict conflict-of-interest rules on PPIP fund managers; allows the special inspector general access to all PPIP fund books and records, including all records of financial transactions in machine-readable form; and requires each fund manager to acknowledge, in writing, a fiduciary duty to both the public and private investors in a PPIP fund.

“I don't think it's going to stop the program,” said Jeff Taft, a Washington-based partner with Mayer Brown LLP of Chicago.

But the new rules and regulations could prove to be a “speed bump” warning some asset managers of the difficulties of doing business with the government, he said.

None of the asset managers that are potential Legacy Securities program participants would comment on the problems that they could face as a PPIP fund manager.

Firms under consideration are in a “quiet period” until the Treasury Department announces the names of the asset managers it selects, said one company spokeswoman, who asked that neither she nor her firm be identified.

She did express skepticism, however, about the notion that asset managers who have expressed interest in managing funds for PPIP are thinking twice about it.

“A lot of naysayers are stirring a big pot of what-ifs,” the spokeswoman said.

Fund watchers, however, said that asset managers should be asking themselves if it is a good idea to get in bed with the government.

“A lot of financial firms have been shocked by what they thought was a good thing,” said Reuben Gregg Brewer, director of mutual fund research at Value Line Inc. of New York.

New York-based JPMorgan Chase & Co. is one of those firms.

During the company's first-quarter earnings call in April, James Dimon, the firm's chairman, president and chief executive, said: “We're certainly not going to borrow from the federal government, because we've learned our lesson about that.”

JPMorgan Chase received $25 billion from TARP last year — money that comes with strings attached concerning issues such as compensation.

In terms of PPIP, Mr. Dimon said that JPMorgan Chase would participate neither as either a buyer nor a seller of the mortgage-backed securities.

A potential buyer has reason to be leery of participating in PPIP for another reason: bad public relations.

“If you do participate and you do well, will you be chastised?” Steve Kandarian, chief investment officer of MetLife Inc. of New York, reportedly said this month at a conference, referring to the potential image problem of a fund manager's making a killing on toxic assets.
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Het plan leeft nog steeds.... lijst met kandidaten is wel erg dun. Maar dat PIMCO hier bij zit zal nauwelijks een verrassing zijn.