Saturday, March 21, 2009

The cover comes off Geithner's plan

From Zero Hedge:

As ZH regulars can divine, what all this verbiage means, is that hedge funds will be allowed to establish investment positions, levered up to 10x with the government's aid, on which the funds will have only a stop loss of a certain percentage, and all incremental losses will be borne by you, dear (American) reader. And while this risk was "somewhat" acceptable for TALF 1.0, now that Geithner is opening it up to the whole morass of uber toxic and even more uber illiquid garbage floating on banks' balance sheets, the Treasury has just gone all in with taxpayer money in its bet that the market will recover. Geithner's Put has just been transformed to Geithner's All In. Is this vaguely reminiscent of what the rating agencies were doing: excel models which would crash if one tried to assume a reduction in housing values?

So in a nutshell:

1. The government is opening up the tax money spigot for market intermediary vehicles (hedge funds and other PPIFs or public-private investment funds) to buy up virtually all toxic assets with no accounting for default risk or loss assumptions, on the bet asset prices (i.e.the market) will go nowhere but up from this point onward. This is a huge gamble as macro economic conditions indicate we are nowhere near a bottom.

2. PPIFs use taxpayer provided leverage to agree with the Treasury that this is, indeed, the market bottom.

3. If this, gasp, is not the real bottom, hedge fund losses are limited as the TALF is non-recourse and non-remargining in nature and PPIF first-loss downside is at worst roughly in the 10% ballpark (of course they get to keep the spoils if the ploy succeeds), all the while no collateral has to be posted.

4. Banks and other companies offload all their toxic assets to these leveraged vehicles.

5. In the meantime the FASB is adjusting accounting rules to make sure that whatever assets remain can take advantage of Hummer-size FAS 115 loopholes and mark them at par.

6. Also in the meantime, the FDIC is buying up non-securitized toxic products (whole loans), and providing government backstopped capital to banks via the TLGP, all the while Sheila Bair is complaining that the Deposit Insurance Fund (DIF) is at or near zero.

7. Investors, whose deposits currently have no statutorily-required insurance as per the above point, are supposed to believe that banks are healthy, the accounting opacity is the new transparency, that the soon to be $15 trillion in total new bailout-related government debt and guarantees is sustainable as China bails and the Fed is left to purchases it own treasuries, that the FDIC will restore its DIF from fees banks pay for TLGP issues (even though banks will soon be able to issue debt cheaper in the Eurodollar market, until such time as LIBOR spikes again), and are expected to buy up equities and fixed income securities.

8. As more and more buy into this all is good "new-age bull market" rally, the PPIFs will suddenly decide to sell off their resecuritized toxic garbage at a profit to themselves, people will ask just what these toxic legacy assets are really worth (again) and the whole system will crash once more, this time with the implicit guarantee of tens of trillions of US debt.

No comments: