Archive for March, 2009
The Feds’ Bank Plan looks as Solid as Swiss Cheese
Posted by Jody Eisenman | Filed under Uncategorized
As announced last week, The new TALF plan will allow investors to get financing via the government to buy these toxic loans. I originally had substantial doubt that this plan could work (along with Nobel Prize winner Paul Krugman and many others) for various reasons. However, according to an article from seekingalpha.com, , this plan might have an incredible hole in it. Apparently, there may be no restriction on banks participating in this plan. Goldman Sachs has already expressed an interest, which is curious considering they are already receiving money from both Warren Buffet and the government. Sheila Bair, the head of the FDIC, was open to banks taking equity stakes in those the public-private partnership funds as partial payment that will buy up illiquid loans from banks. The banks would be allowed to pay for their stakes with the very loans they are selling into the partnerships.
Are you kidding me? You may wonder why a bank would buy its’ own toxic loans. The answer is simple. Under the Feds’ plan, investors can buy these assets at 12/1 leverage. So, lets say BAC has $100 billion in toxic loans they want to get off their books. They think the loans are worth 50 cents/dollar while investors think they are only worth 30 cents/dollar. If BAC could bid on its’ own loan package they would only have to put up $8.5 billion, an could bid 50 cents/dollar. BAC would get the loans off their books, their stock would probably increase, and even if the loans went to zero, BAC only has 1/12 of the risk! Plus, what’s to stop banks bidding on each others’ loans? (I’ll buy $100 billion from you, you buy $100 billion from me). Who gets stuck? The taxpayers. I’d like to see a lot more transparency before this becomes law, because there is real potential for abuse.
The stock market had a great week until Friday. Most of the banks had previously stated that they were profitable in January and February, but they announced Friday that March was not good. I’m not sure why, as asset classes tended to do well. Unless, of course, you have doubt that they actually made money in the first two months. As usual, I expect the volatility to continue.
England’s Failed Auction: Ominous Sign for the US?
Posted by Jody Eisenman | Filed under Uncategorized, auto bailout
The UK tried to auction off $2.6 billion in 40 year bonds yesterday, but failed to get the requisite number of bids. This was the first failure of non-indexed bonds there since 1995. The government of Prime Minister Gordon Brown is in danger as the English economy continues to contract.
Why am I bringing this up? Because in an effort to stimulate their economy, the Bank of England cut their benchmark lending rate to half a percent. When that didn’t have the desired effect, they decided to buy up long term government bonds. Investors reacted by staying away from the auction. Here in this country, the Fed lowered its’ targeted Fed Funds Rate to essentially zero. When this did not have the desired effect, the Fed announced they would be purchasing long term bond, much like the Brits. As I described earlier this week. If investors refuse to buy long term treasuries, the Fed will almost certainly be forced to raise interest rates at a time they are desperately trying to keep them as low as possible. Should investors continue to stay away, there is a real default risk. UK Credit Default Swaps currently trade at around 111 basis points, substantially higher then other industrial nations such as the US, Japan and Germany. I continue to believe that the Feds’ actions comprise a high risk bet on stimulating the economy.
The Stock Market Roars!
Posted by Jody Eisenman | Filed under Uncategorized
As Timothy Geithner finally unveiled details of his plan to get the toxic assets off the banks’ balance sheets, the equity markets exploded on the upside. Not surprisingly, the financials led the advance. The Dow closed up over almost 500 points to finish at 7775. Under the plan, private equity would bid for bank assets with the government putting up most of the money. What I find rather amusing (and shocking!) is that the government is encouraging private equity to use leverage to buy these loans. If you remember, excess leverage is what got us here in the first place!
I have my doubts about whether this plan can work for the following reasons:
- The plan does not address the gap between what investors are willing to pay and what the banks are willing to sell them at. For example, if I thought the assets were worth 30 cents/dollar and the bank thought it was worth 50 cents/dollar, would having the government give me 6/1 (or perhaps 12/1) leverage induce me to pay 50?
- If the government is putting up most of the capital and taking most of the risk, what exactly do they need private equity for? Why not just buy the assets by nationalizing the banks?
- If private equity is unwilling to overpay, then only the most cash starved banks will participate.
In the end, Wall Street is at least happy over the fact that this is a real plan, as opposed to more rhetoric. I expect the market volatility to continue.
