The Feds’ Bank Plan looks as Solid as Swiss Cheese
Mar 29, 2009
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.
