Geithner Plan for Buying Bank “Toxic Assetsâ€

[Tim Liston]

Here’s what I wanna know. Do any of you understand how Geithner’s plan to buy up banks’ toxic assets is gonna work? The Public-Private Investment Program (“PPIPâ€

[Jim DeVito]

I am pretty sure we are all about to be screwed.

Unlike Tim I am not "financially literate". So with that said can someone explain how when the PPIP buys this crap and it somehow turns into a good idea? Is that not the problem in the first place? No one knows how much this junk is worth. Will we not just be shifting junk around from one place to the other? How much is the bail out of the PPIP going to cost?

[Charlie Page]

http://www.reuters.com/article/GCA-Cred ... PY20090323

The Process for Purchasing Assets Through The Legacy Loans Program:

Purchasing assets in the Legacy Loans Program will occur through the following process: Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets - usually a pool of loans - they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.

Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.

Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.

Private Sector Partners Manage the Assets: Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight. Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC. Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector - in this example, $84 - would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages. Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity. Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6. Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis - using asset managers approved and subject to oversight by the FDIC.

Short story is the FDIC is guaranteeing 85%, the Treasury "invests" 7.5% and the buyer invests 7.5% and also services the loans.

If I had some cash laying around, say a billion, I might get into this game myself. If these assets are so toxic and no one wants to buy them, they should go for pennies on the dollar. First thing I would do is lower the interest rate so people can make the payments. Once people make payments on a regular basis, the loans aren't toxic and the loans value increases. Maybe Obama can give me an interest free loan of a billion to form my own mortgage company, subject to oversight by the FDIC of course.

[ryan costa]

if my memory serves me right, the Bailout happened during the last year of Bush's administration. Now that Obama is President he has been Briefed and understands the Way Things Are: The Big Banks and Wall Street own U.S. policy.

Our current situation is the ultimate result of the Mortgage Backed Security market, which was basically created by Leo Ranieri at Salomon Brothers in the Early 1980s during the years of Reagan Deregulation:

http://en.wikipedia.org/wiki/Salomon_Br ... .27s_Poker

http://en.wikipedia.org/wiki/Lewis_Ranieri

[Bret Callentine]

will congress have to post an "odds of actual payout" on each of these "Legecy Assets", kind of like how the Ohio Lottery has to post an "odds of winning"?

If you bundled them in one, five and ten dollar amounts and sold them in automated machines next to the scratch off tickets, I don't think anyone could tell the difference.

[Will Brown]

Actually, I've read that some investment companies are looking into the possibility of forming mutual funds to give all of us a chance to participate in this scheme.

I think almost all the assets to be sold consist of bundles of mortgages. For years, such bundles have been sold, based on the belief that they represent a cross section of mortgages, and that some may not be paid in full, but that most will. In buying such a bundle, investors realized that there was a certain risk that not all would be fully paid, and that the current value of the bundle would change as interest rates changed. Unfortunately, these investors didn't appear to believe that housing prices could decline, and that more borrowers would default in a declining housing market, and the value of the mortgages in the bundle would thus decline.

The current scheme (and it is Obama's scheme, not Bush's, but I'm sure the Obama people enjoy having the memory of Bush to blame for everything that goes wrong) is that these depressed bundles will be auctioned off, and that the banks that originally bought them will have these devalued assets removed from their balance sheets and recognize a loss on the sale. But after having taken that loss, they will appear to be in good shape, and can go forth and buy more bundles (they are obviously experts at evaluating such bundles), secure in the knowledge that when their new bundles crap out, we the taxpayers will again come to their rescue. So my guess is that the trillions of dollars we will be paying out shortly is just the first in a series of bailouts.

As to buying the devalued assets, the price will no doubt be very low, and there is certainly a chance that if the economy improves, the value of these assets will increase, but it seems to be the tenor of our government now that if you make too much on these investments, they will levy a retroactive tax on you.

I won't debate whose fault all of this is, as I think it is the consequence of many years of government policy to discourage prudence and encourage reckless financial conduct. I would suggest that Obama is a very adept speaker, and I suspect if a less adept speaker, such as Bush, were saying the same things that Obama is saying, we would be a lot more skeptical.

[ryan costa]

we woke up one morning during President Bush's term to learn a 700 billion plus bailout was immediately necessary.

McCain and his running mate and previous contenders for the GOP nomination have the luxury of not being President and not having a majority in Congress. If that situation were reversed I believe they would be doling out the same bailout. Only faster, and with fewer interviews and direct speeches.

[Lynn Farris]

From everything I have read the toxic assets are a win/win to investors who we need to get back into the market. Sounds like a good plan to have these as mutual funds.

I completely agree with you Will. I think the problem is what Obama stated last night and what Ross Perot was warning about years ago. We can raise GDP by derivative trading mainly. We aren't manufacturing anything.

The only place we dominate are college educations (which are reduced since we aren't letting foreigners into the country - it is very hard to get a student visa.)

The other product we export big time are movies and TV but that doesn't benefit very many. But it does spread our culture around the world. Sadly it often portrays us as bad people.

[Tim Liston]

Late last week the head of the FDIC pitched the PPIP to a “by invitation onlyâ€

[Bill Call]

The trick is to make Joe Sixpack think that the state employee pensions are actually taking a risk when in reality they are not. The only way you can do that is to make the PPIP impossible to understand, and so far they are doing a great job.

Simply printing a few trillion dollars to bail out state employee pensions might bring out the pitchforks, especially in today's economy. This will work so much better....

You are very astute.

In an open market many of the "sick" assets might have more value than people think. In an open market we would really know what those assets were worth. The feds are borrowing $1 trillion dollars to bail out public pensions.

I think your analysis rings true.

[Tim Liston]

I don't normally resurrect month-old threads but this is so absurd as to be laughable....

This is from a daily online newsletter that I receive in my line of work....

“Banks selling bad assets into Treasury's public-private investment funds should be prohibited from investing in those investment funds to prevent abuses, according to the Shadow Financial Regulatory Committee. The panel of finance experts and academics view the Obama administration's plan to cleanse bank balance sheets as ill-conceived. The shadow regulators expect the government will have to "over-pay" to get banks to sell their assets. They also expect the investment funds will be very profitable for investors due to the amount of leverage and low-risk with the Treasury Department providing low-cost financing on a non-recourse basis. As a safeguard, banks selling assets into the program should be "prohibited from turning around and participating directly as investors in any fund formed to buy legacy assets," said professor Edward Kane. The Boston College finance professor also pointed out that distressed institutions with little capital to lose may find PPIFs to be "especially attractive" investments.

Believe it or not I did not lift this from The Onion.

Do the banks really think they should be able to sell “legacy assetsâ€