Yes, I am being facetious! There is very little that is new or novel about the Treasury Department’s Public-Private Investment Plan.
In fact, the plan can simply be described as let the FDIC do all of the heavy lifting using their old “Savings and Loan” bailout model.
What is interesting is that actual guts of the plan were described in my January 8th blog, “FDIC & PennyMac: A Steal of a Deal?” which highlighted how such a private-public plan might work and raised additional questions about the program.
Of course, as with all plans, one needs to deal with the devil – as in the devil is in the details – to determine the plan’s ultimate success or failure. Knowing the Wizards of Wall Street and the essential nature of politicians, one can bet that, in the long run, the taxpayer will still be paying for the perfidy of the financial institutions which overleveraged themselves.
But there are a few matters left for consideration …
Question: What will the “Geithner plan” do to stabilize the housing market? Without stable home values, it would be the height of banking folly to make additional loans on homes whose values continue to slide. Even if foreclosures were mitigated, interest rates lowered and principal loan balances reduced, in the final analysis the collateral for any loan must be worth at least as much as the loan – or you have violated the tenets of good banking. If a government guarantee, in the form of lender insurance from the FHA, is required, is this not a further gamble with the taxpayer’s money that housing prices will rise sometime in the future. What makes me suspicious of the housing market is that housing prices were based on an artificially inflating bubble and that home prices have not fallen enough to even regress to traditional, adjusted for inflation and growth pre-boom values. Thus there is an unknown amount of risk in mitigation adjustments to loans that might be purchased under the plan.
Of course, since the investor is getting a loan at a greatly reduced (negotiated) price, they can attempt some form of mitigation and still make a profit. But the pressure to maximize such profits might be antithetical to providing real mortgage relief to borrowers. The very reason that the voluntary efforts of the lenders to mitigate loans has been an abject failure and a source of frustration to many borrowers honestly seeking to retain their homes and pay-off their obligations.
Question: what is to keep investors from re-monetizing the acquired loans, now with government guarantees, into new derivative securities – based on, guess what, the same old collateral: the home itself? One can easily imagine the Wall Street Wizards borrowing funds to bid in the FDIC auctions and then collateralizing these loans for syndication into the broader investment community. Perhaps to retirement funds, hedge funds and bank portfolios. What would keep a bank from investing in these securities and then submitting them to the Federal Reserve’s Loan Guarantee program in return for “good funds?” And what would be the role of the self-serving ratings agency in evaluating these deals?
Unless one reads the actual deal prospectus and is allowed access to the exact terms, conditions, warrantees and representations to evaluate the deal, there is the possibility that this program will do little more than kick the can down the road.
By layering detail upon detail and withholding so-called “proprietary” information from the public, we cannot be sure that we are not getting hosed by the very same people who hosed the economy in the first place.
As for Geithner’s genius in spawning this plan … perhaps we should simply thank the folks at FDIC and the old Resolution Trust Corporation for their pioneering work. In any event, I would much rather bet on Sheila Bair of the FDIC, than on the Wall Street Wizard who assisted former Treasury Secretary Henry Paulson, formerly of Wall Street Investment House Goldman Sachs who pulled the TARP numbers out of his ass without any estimate of the true numbers needed to mitigate the financial crisis.
Bottom line ...
Of course, the bottom line of Geithner's program is that this is a sweetheart deal for investors. Consider the nature of this type of leveraged transaction. The investor puts up $1 million, the government effectively loans them another $9 million or so. If there is a profit to be made, it will be shared on some proportionate basis. However, if the deal goes south, the government loses their portion of the loan and the investor is only responsible for the $1 million dollar seed capital. We will know within the month how good this deal appears to be to the financial community by the number of financial groups taking advantage of the deal. The investor will also be able to siphon-off additional profits to service the loans and for other professional services.
What will be extremely interesting is: if financial companies are now willing to do business with the government in the face of the government's threat to tax large bonuses given to CEOs of companies taking government funds. And the hedge fund investors and private capital pool executives do like their profits, perks, priviledges and outsized bonuses.
What can YOU do?
Trust yourself. Take care of yourself and family first. There is no guarantee that this plan will work, or even makes good investment sense, without first stabilizing home prices. I ask myself how Geithner's scheme is different from what Countrywide Funding did in offering loans with impaired collateral and little oversight and then sold them to the broader public marketplace. And I also wonder if this program is designed to fail? You will notice that Barack Obama has distanced himself from the program, not making the announcement of this "fix" standing next to Geithner. I truly believe that there will come a time when Obama will throw Geithner under the bus and make a further move to impose even stricter controls (possibly to the point of nationalization) on the financial sector.
Ask yourself why, in the face of a widely announced program of government transparency, there were no press cameras present during the announcement? Perhaps because Obama was using the teleprompters?
The government's announcement that they may impose further controls on public companies which have not taken TARP or government funding is absolutley frightening.
Remember, it is a sad fact of life that those who purchased more home than they could afford – based on the promises of a happier day, have little choice in the matter. Instead of homeowners, they are now renters with the government as their landlord.
Also remember, that the financial crisis extends far beyond the mortgage meltdown. You need to see what the Treasury Department and Federal Reserve do with other non-mortgage assets such as unsecured credit card debt which has no underlying collateral.
As for all of the mainstream media hoopla … remember, they are the ones who talked down the economy to discredit President Bush, talked up the change and hope of now-President Obama – and quite frankly, cannot be trusted to report news coming from the Administration without a leftward bias. If you want to read about finances, the Wall Street Journal and Investor’s Business Daily present an unbiased view of the situation.
Be well and be safe.
-- steve
Quote of the day: “It may be written in black and white, published in plain sight and be widely discussed in the media – and still contain hidden loopholes and exceptions.” -- steve
A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…
The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius
Reference Links:
FDIC & PennyMac: A Steal of a Deal?|OneCitizenSpeaking
Notice how everyone is asking or writing a letter to Treasury Secretary Tim Geithner to loan money to the bank so the bank can lend it to them. How will we know to stop making application at the banks and to send them to 1500 Pennsylvania.
Posted by: chris loydds | July 13, 2009 at 05:25 PM