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The Wall Street Journal has more details on Geithner's Heist America Plan (GHAP). Please consider Treasury's Very Private Asset Fund.
The Obama Administration insists it wants to "partner" with private investors for its new toxic-asset purchase plan. But the more details that emerge, the more it seems Treasury wants to work with only a select few companies. This is no way to conduct a bank clean-up.Ugly Indeed
The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as "fund managers" to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible.
But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks.
Hedge Fund Intelligence recently estimated total assets under management at Avenue Capital Group at $16.4 billion, King Street Capital at $15.8 billion, Fortress Investment Group at $13.7 billion, and Elliott Associates at $12.8 billion. Presumably, the portion of these portfolios devoted to toxic assets is significantly smaller. "It's difficult to imagine why most firms would even bother to apply now," one hedge fund manager told us.
Treasury rules also say the $10 billion limit must be comprised of commercial and residential mortgage-backed securities that are "secured directly by the actual mortgage loans, leases or other assets and not other securities." This is another way of saying that they must be "first tier" assets, for instance collateralized debt obligations (CDOs). But what many private players instead deal in are "CDOs squared" or CDOs secured by other CDOs, which would not count toward the requirement. This, too, will make it harder to take part in the program.
While dozens of banks and insurance companies today hold more than $10 billion in toxic securities, the vast majority are trying to get these assets off their books -- not lining up to buy more. As for asset management firms that hold such a big portfolio -- and are also healthy enough to serve as fund managers -- there is only a small pool, such as Black Rock, Pimco, Goldman Sachs or Legg Mason, as well as a titan or two of the hedge fund industry, such as Bridgewater.
"This is ugly," says Joshua Rosner, the managing director of Graham, Fisher & Co., an independent research firm.
Let's review the nature of the plan. If you have not yet done so, please read Geithner's Plan Can Succeed.
Geithner does not want a fair bidding process, nor does he want to arrive at a fair market value of assets. Rather, Geithner does want to avoid a hit to bondholders, at seemingly any taxpayer cost.The new details simply suggest that Geithner wants to avoid a bidding war between "PIMROCK" and other hedge funds. This clearly helps "PIMROCK".
The Real Plan
Here is the real plan that now seems odds on to succeed.
The Plan: Dump $500 billion of toxic assets on to unsuspecting taxpayers via a public-private partnership in which 93% of the losses are born by the taxpayer.
Blatant Lies From Geithner
Geithner's two statements below are blatant lies.
1) “The investors are taking risk, their money is at risk and at stake”
1R) The reality is the investors at "PIMROCK" who participate in this plan will be reducing risk. They are willing to take a 7% hit by overbidding on toxic assets in order to guarantee payout on $trillions of bonds.
2) Allowing investors to leverage their money with government contributions and guarantees “is a relatively conservative structure,” similar to when an individual obtains a mortgage to buy a house.
2R) The reality is that Geithner's plan is NOT a "relatively conservative structure". Geithner's plan is a purposeful attempt to dump trillions of dollars worth of toxic assets right into taxpayers' laps, just to bail out the banks that got us into this mess.
Ironically, this helps taxpayers too as the smaller number of bidders, the less taxpayer risk there is.
The Big Boy's Club
Remember that banks can refuse the bids. And remember that the big boys involved are all aligned in one goal: To dump $500 billion of toxic assets on to unsuspecting taxpayers to bailout both the banks and the bondholders.
The whole scheme is not really a bidding process at all but rather backroom political dealing by the "Good Ole Boys" on how to split the pie.
Pie Splitting Rules
1) Bail out the banks at taxpayer expense
2) Do so at the least possible cost to the major bondholders (not the taxpayer)
The more players (hedge funds, etc.) one ads to the backroom poker game, the harder it is to accomplish rule number 2. This explains Geithner's steep rules for entry into the club.
That the backroom process is actually better for taxpayers than a full bidding war would be, is just a happenstance side artifact of the plan.
Here is an anonymous comment that came in that I happen to agree with.
"I have a theory why they're limiting the number of players and it's NOT to help the taxpayers. Its to prevent non-bank bondholders from looking under the Kimono. Imagine if they allowed smaller investors to bid. They'd want to take a look at the quality of the assets. What happens if they take a look and scream bloody murder? The bad bank's credibility would be shot.
So by limiting it to the big boys club, you keep the illusion that the assets are worth something (since the big boys have all the incentive to trump up the value to rescue their bond positions)."
Mike "Mish" Shedlock
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