Thursday, March 26, 2009

Are We Really This Dumb?

Our government, still reeling from the multiple failures of its bailout plans and scandals, has come up with even more preposterous ways to rip off the American taxpayer. My thought is that they think we're dumb enough to be scared by the "toxic assets" that have caused all the problems, and when they're retired, banks will just resume their function as huge cash generators paying us their largess in dividend form. If you think Geithner and Bernanke haven't spent every waking moment devising a scheme to allow banks to not take the writedown on these things, you're crazy. Please read any or all of the following articles which explain how banks, hedge funds, and private equity will all reap huge rewards under the partnership while we will get stuck with the spread at a huge loss. I'll throw in a quote to get you acquainted with some of the principles at work:

Posted by Tyler Durden at 2:14 AM
The greatest bait and switch of this generation in all its visual splendor. As a result of the TALF's non-recourse nature, a hedge fund X can buy Bank X's MBS Portfolio which is marked on the bank's books at 80 cents on the dollar (but has a market price of 20 cents) for the marked price with a 3% equity check and TALF filling the balance. A day later, Bank X repurchases the portfolio from hedge fund X at the 20 cent market price, pays a $5 million fee for the "trouble" and waits for the portfolio to appreciate to 50 cents on the dollar by 2014. Hedge fund X takes a 75% loss on its nominal equity stake but more than makes up in transaction fees. The TALF portion takes a 75% loss with no recourse and no margin to fall back on. As a result Bank X takes no writedown now, and in 5 years may book an equity profit of as much as $25 million (net of transaction fees paid to the Hedge Fund X), while Hedge Fund X books a profit of $3.2 million for one day's work...Lastly the U.S. taxpayer loses $54.3 million on a $77.6 million TALF Investment, or 70% (net of 5 years of interest income).Note: the maximum TALF size is $1 trillion. Will U.S. taxpayers suffer $700 billion in losses from the TALF? Ask your congressman.

Even more disturbing perhaps, is The New York Post reporting that Bank of America and other should've been nationalized banks are actually already purchasing more of the toxic assets they already own, knowing the government will be forced to give them above market prices through this partnership.

But the market is loving it. 4th quarter GDP was the worst since the 1930s. The NYT and Washington Post have slashed salaries and promised layoffs. WSM, a former short, has lost 90% of its profits. Even Google is laying people off! Japan, the world's second largest economy, reported a 50% decrease in exports. And the WSJ is reporting that CRE defaults will also hit all-time highs.."the default rates on the $700 billion of commercial-mortgage-backed securities could hit at least 30%, and loss rates, which figure in the amounts recovered by lenders, could reach more than 10%, the peak seen in the early 1990s.Besides securities backed by commercial real-estate loans, about $524.5 billion of whole commercial mortgages held by U.S. banks and thrifts are expected to come due between this year and 2012. Nearly 50% wouldn't qualify for refinancing in a tight credit environment, as they exceed 90% of the property's value, estimates Matthew Anderson, partner at Foresight Analytics. Today, lenders generally won't loan over 65% of a commercial property's value."

So, I'm removing my own self-imposed ban quickly as we're likely to hit Dow 8K, maybe even tomorrow. Feel free to plunge into SRS, DXD, or any double inverse fund that will shine when this charade ends quickly. Perhaps it will be the Chinese selling bonds, perhaps Kim Jong-Il fires up a rocket, or perhaps with Build-a-Bear over $6, it's just the right thing to do.

1 comment:

Tiger Coach said...

Both scenario one and scenario two are outright scary. At what point is the charade over, or will we continue to let parasites bleed us dry?

Accounting issue...
The banks will have to disclose the amount of money they have in toxic debt before the TALF comes to fruition...even if they do make money on the deal. The bottom line as they will need to make disclosure sooner rather than later!

Last, are the losses currently being held in a ENRON type vehicle where valuations are totally hidden?