Well, it’s a fine mess your getting us into now!
Just to provide a quick synopsis, the government plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road. The plan focuses on (1) toxic backed mortgage securities, which is the toxic bad debt held by the banks; and (2) troubled loans on bank books in the process of going bad.
For those who don’t want to read this entire post, the following three paragraphs sum up my opinion of Turbo Tax Tim’s plan.
The “Toxic Bad Debt Program” is okay, but it won’t set the world on fire. As a professional real estate consultant, let me assure there are too many problems in the real estate industry that are unsolvable given our current paradigm. The only way to make this portion of the plan work is to give the private sector an assurance real estate prices will go up in the future - - and the only way this can happen is by future mass inflation. If this portion of the plan works, it will be the market voting that mass inflation is imminent.
As much as I hate to say it, the “Troubled Loan Program” portion of the program is entirely a scam. It just plain stinks all over itself. It’s a thinly disguised bank bailout - - another one - - at the greatest possible potential future cost to the taxpayers. Tim Geithner is scamming the system for his banking cronies. With up to 33:1 leverage ratios offered by this program, it will be gamed. The prices paid to banks for their troubled loans will be set by the most unethical of unethical investors gaming the system. And we taxpayers will be obligated to pay top dollar as determined by these gamers when real estate values go south.
What Geithner is saying is the banks are willing to assume the bad debts already on the books, but they don’t want any responsibility for future bad debts coming down the line. Really, it’s that simple. They want to shift the responsibility and risk to the taxpayers.
The Toxic Bad Debt Program:
To target the toxic debt held by the banks, the government will create several investment funds with the Treasury, who will co-invest by contributing $1 for every $1 of private sector money invested. At this time, the plan does not specify how the profits and losses from any investment will be divided between the private investors and the taxpayers.
If one subscribes to free market intervention, then what is there not to like? It could take a lot of toxic assets off the bank books to stabilize them. But, the only way to get the private sector to invest is if they are reasonably assured real estate prices will go up. Given the current economic paradigm, there are too many problems in the real estate industry that are unsolvable. Thus, investors must be assured of future MASS INFLATION to make this portion of the plan to work. But then again, maybe I give the hedge funds and private equity firms too much credit.
Yes, there is a way to solve this problem, but it doesn’t involve continuous feeding of the big derivative black hole. The total value of home all mortgages in the US is about $10 trillion dollars. The total amount of money committed to cleaning up this toxic mess is about $12 trillion dollars with about $5 trillion already spent (not exactly sure as it goes higher each week).
If that $5 trillion were rebated back to taxpayers with the caveat at least half of the money be used to pay off debt, the financial crisis would be solved. The banks would be recapitalized, citizens would have less debt, and life could go on its merry way. But our overlords are shortsighted and too beholden to the banking elitists. This will be the subject of some later posts.
For those who don’t want to read this entire post, the following three paragraphs sum up my opinion of Turbo Tax Tim’s plan.
The “Toxic Bad Debt Program” is okay, but it won’t set the world on fire. As a professional real estate consultant, let me assure there are too many problems in the real estate industry that are unsolvable given our current paradigm. The only way to make this portion of the plan work is to give the private sector an assurance real estate prices will go up in the future - - and the only way this can happen is by future mass inflation. If this portion of the plan works, it will be the market voting that mass inflation is imminent.
As much as I hate to say it, the “Troubled Loan Program” portion of the program is entirely a scam. It just plain stinks all over itself. It’s a thinly disguised bank bailout - - another one - - at the greatest possible potential future cost to the taxpayers. Tim Geithner is scamming the system for his banking cronies. With up to 33:1 leverage ratios offered by this program, it will be gamed. The prices paid to banks for their troubled loans will be set by the most unethical of unethical investors gaming the system. And we taxpayers will be obligated to pay top dollar as determined by these gamers when real estate values go south.
What Geithner is saying is the banks are willing to assume the bad debts already on the books, but they don’t want any responsibility for future bad debts coming down the line. Really, it’s that simple. They want to shift the responsibility and risk to the taxpayers.
The Toxic Bad Debt Program:
To target the toxic debt held by the banks, the government will create several investment funds with the Treasury, who will co-invest by contributing $1 for every $1 of private sector money invested. At this time, the plan does not specify how the profits and losses from any investment will be divided between the private investors and the taxpayers.
If one subscribes to free market intervention, then what is there not to like? It could take a lot of toxic assets off the bank books to stabilize them. But, the only way to get the private sector to invest is if they are reasonably assured real estate prices will go up. Given the current economic paradigm, there are too many problems in the real estate industry that are unsolvable. Thus, investors must be assured of future MASS INFLATION to make this portion of the plan to work. But then again, maybe I give the hedge funds and private equity firms too much credit.
Yes, there is a way to solve this problem, but it doesn’t involve continuous feeding of the big derivative black hole. The total value of home all mortgages in the US is about $10 trillion dollars. The total amount of money committed to cleaning up this toxic mess is about $12 trillion dollars with about $5 trillion already spent (not exactly sure as it goes higher each week).
If that $5 trillion were rebated back to taxpayers with the caveat at least half of the money be used to pay off debt, the financial crisis would be solved. The banks would be recapitalized, citizens would have less debt, and life could go on its merry way. But our overlords are shortsighted and too beholden to the banking elitists. This will be the subject of some later posts.
The Troubled Loan Program:
To target troubled loans, the government will create a Disposition Finance Program (DFP) working with the FDIC to act as co-investor. The banks will “package” their troubled loans for sale. Since the loans are by definition troubled, a large portion will go to foreclosure. The DFP will contribute up to 80% of the financing with private investors putting up 20% or more; i.e., 5:1 leverage. The FDIC would guarantee against losses on bad assets the banks want to sell up to $500 billion.
However, the NY Times implies the program has even greater leverage. To provide further enticement for private investors to buy these “packages,” the DFP will provide no recourse loans back to private investors up to 85% of the value of the “package.” The remaining 15% will come from government and the private investors. The DFP would put up as much as 80% of this 15% with private investors putting up the remaining 20% of the 15%. If you crunch the numbers, private investors could be contributing as little 3% of the total purchase price of the “package.” That’s a 33:1 leverage ratio.
A lot of investors are willing to spend $3 to buy a $100 “package.” That’s super leverage. The downside is private investors can only lose their original $3, but if the “package” doubles in value down the road, they could make big money. The specifics on how the profits would be divvied up are not yet available.
The problem is, with this type of leverage, the system can be gamed. As the Market Ticker explains:
Quote - - Let's say I'm "Frobozz Bank" and have $100 billion of this trash (a lot!) on my balance sheet. Its mostly performing (for now) on a cash-flow basis, but I know what the deterioration in on-time payment flow looks like, and as a consequence I know in advance that eventually this paper is going to be worth much less than my "internal" marks (that I'm reporting every quarter on Level 3.)
To target troubled loans, the government will create a Disposition Finance Program (DFP) working with the FDIC to act as co-investor. The banks will “package” their troubled loans for sale. Since the loans are by definition troubled, a large portion will go to foreclosure. The DFP will contribute up to 80% of the financing with private investors putting up 20% or more; i.e., 5:1 leverage. The FDIC would guarantee against losses on bad assets the banks want to sell up to $500 billion.
However, the NY Times implies the program has even greater leverage. To provide further enticement for private investors to buy these “packages,” the DFP will provide no recourse loans back to private investors up to 85% of the value of the “package.” The remaining 15% will come from government and the private investors. The DFP would put up as much as 80% of this 15% with private investors putting up the remaining 20% of the 15%. If you crunch the numbers, private investors could be contributing as little 3% of the total purchase price of the “package.” That’s a 33:1 leverage ratio.
A lot of investors are willing to spend $3 to buy a $100 “package.” That’s super leverage. The downside is private investors can only lose their original $3, but if the “package” doubles in value down the road, they could make big money. The specifics on how the profits would be divvied up are not yet available.
The problem is, with this type of leverage, the system can be gamed. As the Market Ticker explains:
Quote - - Let's say I'm "Frobozz Bank" and have $100 billion of this trash (a lot!) on my balance sheet. Its mostly performing (for now) on a cash-flow basis, but I know what the deterioration in on-time payment flow looks like, and as a consequence I know in advance that eventually this paper is going to be worth much less than my "internal" marks (that I'm reporting every quarter on Level 3.)
So here comes Treasury. They offer 20:1 leverage (I put up 5%) and the "private parties" bid for the assets, with their maximum loss being capped at their contribution (that is, if there's more than a 5% loss the taxpayer eats it.)
Aha! Now if I can be the "private party" I can overpay on purpose, capping my losses at 5% of whatever I "buy" from myself! I am thus able to transfer the other 95% of the risk onto the taxpayer and I escape with a 5% penalty off the purchase price!
That, if it happens, is an enormous scam and Treasury and the FDIC must absolutely guarantee that it not occur. If it does, we the taxpayers are going to be violated to an insane degree while the true "risk money" (and there's a lot of it out there) won't go anywhere near this program, because they, being unwilling to overpay, will simply lose the bidding contests.
So in order to prevent intentional overpayment you must as a matter of policy (and even law) enforce strict separation of the funds that are doing the buying from anyone that has an interest in the sellers, and make clear that if you catch anyone cheating extremely severe sanctions - like 100 years with Bubba - will be the consequence.
If you do not the process will get gamed and the taxpayers will lose. --End Quote
What this means is if private investors do in fact overpay for these “packages,” which they will because of high leverage, it will obligate taxpayers to pay money over and above what the assets are worth down the road if these “packages” go more than 3% south in value.
To put it mildly, this plan absolutely stinks! It’s a thinly disguised bank bailout - - another one - - at the greatest possible potential future cost to the taxpayers. High leverage helped get us into this mess, now they want to mess up the mess.
How much this plan will cost taxpayers will depend on the most unethical of the private investors. The more unethical the investor, the higher they will pay for the “packages” to game the system. If real estate prices head south; there’s no question taxpayers will pay far more for these troubled loans than they’re worth. It’s a profitable no-lose deal for the banks. They will get top dollar for their crap and once these troubled loans are off their books, they’re gone. They don’t have to worry about them again. The banking gods will be laughing all the way to the bank.
Aha! Now if I can be the "private party" I can overpay on purpose, capping my losses at 5% of whatever I "buy" from myself! I am thus able to transfer the other 95% of the risk onto the taxpayer and I escape with a 5% penalty off the purchase price!
That, if it happens, is an enormous scam and Treasury and the FDIC must absolutely guarantee that it not occur. If it does, we the taxpayers are going to be violated to an insane degree while the true "risk money" (and there's a lot of it out there) won't go anywhere near this program, because they, being unwilling to overpay, will simply lose the bidding contests.
So in order to prevent intentional overpayment you must as a matter of policy (and even law) enforce strict separation of the funds that are doing the buying from anyone that has an interest in the sellers, and make clear that if you catch anyone cheating extremely severe sanctions - like 100 years with Bubba - will be the consequence.
If you do not the process will get gamed and the taxpayers will lose. --End Quote
What this means is if private investors do in fact overpay for these “packages,” which they will because of high leverage, it will obligate taxpayers to pay money over and above what the assets are worth down the road if these “packages” go more than 3% south in value.
To put it mildly, this plan absolutely stinks! It’s a thinly disguised bank bailout - - another one - - at the greatest possible potential future cost to the taxpayers. High leverage helped get us into this mess, now they want to mess up the mess.
How much this plan will cost taxpayers will depend on the most unethical of the private investors. The more unethical the investor, the higher they will pay for the “packages” to game the system. If real estate prices head south; there’s no question taxpayers will pay far more for these troubled loans than they’re worth. It’s a profitable no-lose deal for the banks. They will get top dollar for their crap and once these troubled loans are off their books, they’re gone. They don’t have to worry about them again. The banking gods will be laughing all the way to the bank.
This plan actually has me wishing for mass inflation so real estate prices go up to get taxpayers off the hook. Matter of fact, I wonder if there’s a way I could invest $10,000 in this - - heck, I’m willing to pay top dollar and I could make big $$$$$$.
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