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The PLAN

The BBC says they are calling it the Public-Private Investment Program, but it’s Baldrick’s [Timothy Geithner] cunning plan to clean up bank balance sheets.

They are building a “Bad Asset Relief Fund” to create a Septic Bank to deal with the paper, and they say it is undervalued.

First off, no one knows how to value this stuff, because there has been no clear explanation of what they are trying to sell. No one wants to buy it, because they don’t know what they would get for their money. There is no market for these things because people have finally figured out that the people who were selling them lied about what they were selling.

What has been proposed is that the government will loan investors the majority of the money to buy this garbage, and if it turns out to be worthless, the loans don’t have to be paid back.

Consider that you are approached to buy a house, sight unseen, and the deal is that you make a down payment, say 15%, on the stated price of the house. When you sell the house you get to take the amount of your down payment, and the loan is paid off from any excess.

For example: the house is said to be worth $100K. You put up $15K. You later sell the house for $50K, pocket your $15K and the $35K pays off the loan. If the house sells for $120K, you pay off the entire original loan and make a profit.

Baldrick is hauling the FDIC into his cunning plan. I don’t guess he’s heard that the FDIC is running out of money because the Republican Congresses wouldn’t let it collect its fees from the banks for a decade.

I’m sorry, but this is magical thinking, not economics. As long as there is a government program, no one is going to buy these things in a open market. Until people know what is being sold, no one is going to go near this paper.

Oh, BTW, the uptick in housing sales – locally that is banks dumping foreclosed houses for whatever they can get, and I suspect that is occurring in a lot of places.

3 comments

1 LadyMin { 03.24.09 at 1:52 pm }

“BARF” is the correct acronym for sure! This investor, meaning me, isn’t going to play that game. I really don’t understand what they are doing. I don’t think they do either. I wouldn’t touch those mortgages with a hazmat suit!

I have no confidence in any investment right now. I’m using this little bear market rally this week to get money out of stocks while I can still make a profit on a few of them.

LadyMin´s last blog post..Project Budburst

2 Bryan { 03.24.09 at 2:39 pm }

It think the market and the toxic paper are over-valued by the psychotic Bears that have been eating Ayn’s magic mushrooms since Ronnie entered the White House. We have been moving from one bubble to the next because no one wanted to invest in the future, they wanted to milk the past for the maximum.

When the goal of a business is to maximize shareholder profits, rather than the continuing existence of the enterprise, the enterprise dies.

3 Badtux { 03.25.09 at 10:30 am }

When the goal of the enterprise is to maximize the CEO’s bonuses for the five years that it takes him to amass enough millions to retire for the rest of his life, rather than to continue as a going concern, the enterprise dies. And that, alas, is all too often what happens here. I’ve never worked for a CEO who made a lot more than I did. Back in the day when I was making $75K/year, the CEO of the company I worked for made $150K/year. I’m baffled as to how any company can justify paying their CEO millions and millions of dollars, it just incentivizes them to think about the short term (making sure short-term profits are enough to get the millions needed to retire within five years), rather than long term. My suggestion: Make executive bonuses contingent upon long-term performance, and only allowable on a one-time basis every ten years. You’ll suddenly start seeing a *lot* more long term planning from CEO’s :-).

Regarding “cash for trash”, the question is whether the securities in question are mortgage-backed securities backed by real pools of mortgages (i.e., there are some real assets that can be foreclosed and repossessed to pay back at least part of their face value), or are derivatives of derivatives of derivatives that have no assets backing them, that in essence are just bets about whether housing prices will rise or fall (well, the bets about falling prices have already been cashed in, so huh). If we’re talking “cash for trash” as in buying $500K mortgages on $250K homes, eventually there will be recapture of at least part of that cash, when the home is sold either via foreclosure or when the mortgage cashed out as part of transferring it to the new buyer. My read of the Treasury plan is that rather than have the banks write down these mortgages to market and then re-valuing the pools (and thus the “real” underlying value of the mortgage-backed securities backed by the pools) according to the market value rather than face value of the mortgages, they’re going to basically take them off the market entirely and hope that solves the problem as the mortgages slowly dribble away to foreclosure or sale. The hope is that once the “bad” mortgage pools are off the market, investors will not be so loathe to invest in new “good” mortgage pools, thus freeing up money for loans.

Which of course still leaves all these derivative bets flying around on balance sheets. They should be immediately made illegal by Congress, the loss taken when written down to $0, and then we get to move on with all that mess done with once and for all. And then there’s the problem that banks currently have no shortage of money to lend. They’re just not lending because they view the future value of the money, if they wait to lend it, as greater than the present value of the money. So I’m unclear how this will solve any real problem. It’ll make some accounting books look neater, but that seems to be it, as far as I can tell.

– Badtux the Economics Penguin

Badtux´s last blog post..Ah yes, the nuttiness continues…