Geithner's Gift To Pimco

Geithner's Heist America Plan is receiving words of self-serving praise from Pimco's Bill Gross. Indeed, Geithner’s Non-Recourse Gift Keeps on Giving to Bill Gross.

Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.

The plan may reward investors with 20 percent annual returns on “really toxic” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

“This is perhaps the first win/win/win policy to be put on the table,” Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.

Geithner’s plan may already be working. Top-rated commercial-mortgage bonds rose 5.6 percent since March 20 to about 79 cents on the dollar on average, according to Merrill Lynch & Co. indexes. The most-senior class of benchmark 2005 securities backed by fixed-rate Alt-A home loans, or those ranked between prime and subprime, increased about 12 percent to 54 cents as of March 31, according to Deutsche Bank AG.

Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in an April 1 interview that the distribution of half of the profits to the investor “does bother me.”

“But even beyond that, what bothers me even more is it’s taxpayer money,” Bachus said. “What you are doing is artificially inflating the price of those assets because at the present prices the financial institutions won’t sell them.”

‘Taxpayer Loses’

Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.

“The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”

Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.

‘We intend to participate and do our part to serve clients as well as promote economic recovery,’’ Pimco’s Gross said in the e-mail.

I seldom agree with Krugman but Obama is indeed "squandering his credibility”. And Stiglitz certainly nails it with “The Geithner plan works only if and when the taxpayer loses big time.”

Thus we must be careful to evaluate what Gross means when he says “This is perhaps the first win/win/win policy to be put on the table.”

Previously I proclaimed Geithner's Plan Can Succeed. However, "success" must be defined in terms of the plan's goals.

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 so that bondholders are made whole.

Yesterday, More Ugly Details Emerge On "Geithner's Heist America Plan"

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.

Exclusive Invitation Only Club

And it's not just the small players excluded from the poker game.

I have it from a reliable source "They are excluding large (over $25 billion) hedge funds, who would have the sophistication and resources to look under the Kimono and declare with vicious authority that the emperor has no clothes."

They are very emphatically not letting in big boys who had not previously been foolish enough invest in this crap. They only want big boys with a vested interest in propping up bank bondholders.

The only way into the "club" is to have demonstrated prior foolishness in a major way, somewhere along the line.

Pimco Needs A New Name

‘We intend to participate and do our part to serve clients as well as promote economic recovery,’’ Pimco’s Gross said in the e-mail.

I think Pimco needs a name change. Does PimpCo work?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Subprime Financing Resumes at GMAC

GM sales are down 51%. GM is sitting on tons of inventory it cannot get rid of. What to do?

Please consider GMAC to resume car loans to subprime borrowers.

GMAC Financial Services said it will resume making car and truck loans to subprime borrowers and will lower inventory financing costs for cash-strapped auto dealers, part of a series of moves intended to spur sales at General Motors Corp.

The moves announced Wednesday come as the embattled automaker races to restructure and get customers back into its showrooms amid growing risk that it will be pushed into bankruptcy by the Obama administration.

GM, whose U.S. sales plunged 51 percent in the first two months of this year, also began rolling out a program that will cover some payments for customers who lose their jobs after buying a car, an incentive intended to bring back shoppers worried about job security amid the recession.

GMAC, which provides financing to many GM vehicle buyers, said it would make at least $5 billion of credit available to customers over the next 60 days, a period during which GM has to prove to U.S. officials it can win sweeping concessions from bondholders and its major union.

The finance company plans to resume accepting finance applications from car and truck buyers who have credit scores below 620, a line dividing prime borrowers from less creditworthy subprime borrowers. The median U.S. credit score is 723, according to Fair Isaac Corp's myFICO unit.

Zombies Continues To Haunt

GMAC is a failed corporation. It should have gone under. Instead, the Bush administration kept this zombie corporation alive long enough to haunt taxpayers under the Obama's regime.

Flashback Monday, December 29, 2008: Paulson's $6 Billion Foot In The Door Play

The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., the latest step in the government’s widening effort to keep the largest U.S. automaker out of bankruptcy.

Treasury said it will purchase a $5 billion stake in GMAC, and lend $1 billion to GM so the automaker can participate in a rights offering at GMAC to support the lender’s reorganization as a bank holding company. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

U.S. plans to ease GM into bankruptcy

Inquiring minds are reading U.S. plans to ease GM into bankruptcy.

The Obama administration is seeking to ease General Motors Corp into a "controlled" bankruptcy by persuading some creditors to agree to a plan that would divide the company into two pieces, the New York Times reported on Wednesday.

Citing people briefed on the matter, the Times said the plan is to push GM into a structured bankruptcy "somewhere between a prepackaged bankruptcy and court chaos," using taxpayer financing for leverage.

Plans are still under discussion and details are subject to change, the report said.

Desperation At GMAC

As long as "plans are still under discussion and details are subject to change" GMAC has nothing to lose and everything to gain by resuming subprime financing. Taxpayers are going to foot the bill for this complete nonsense, but from the point of view of GM and GMAC, subprime financing makes perfect sense.

This is exactly the kind of economic stupidity one should expect to see when government interferes in the market.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ADP Reports March Nonfarm Private Employment Decreased 742,000

Nonfarm Private Employment Decreased 742,000 according to the March ADP National Employment Report®.

Nonfarm private employment decreased 742,000 from February to March 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from January to February was revised down by 9,000, from a decline of 697,000 to a decline of 706,000.



Highlights

• Total Nonfarm employment fell by 742,000
  
• Service sector employment fell by 415,000.
• Employment in the goods-producing sector declined 327,000, the twenty-seventh consecutive monthly decline.
• Employment in the manufacturing sector declined 206,000, its thirty-seventh consecutive decline.
• Construction employment dropped 118,000. This was its twenty-sixth consecutivemonthly decline, and brings the total decline in construction jobs since the peak in January 2007 to 1,135,000.

Sharply falling employment at medium and small-size businesses clearly indicates that the recession is spreading aggressively beyond manufacturing and housing related activities.

Medium Businesses Leading The Decline



The above chart, 4th in a series of 5 interesting charts (click on the first link above to see all the charts) shows that medium sized businesses, defined as 50-499 employees are now leading the decline in jobs lost as of summer 2008. Small sized companies (1-49) employees were hanging very tough until July 2008. That is no longer the case.

ADP vs. BLS

Here is an interesting chart showing ADP vs. the official BLS statistics.



click on chart for sharper image

The chart can be customized for date ranges and type of employment, at least in theory. I cannot get any parameters to work other than what shows on the link above.

ADP was tracking the BLS numbers very close until July 2008. Since then ADP reported losses have been way larger than the BLS numbers. However, that does not seem to be reflected in the chart. This could be due to back revisions. I am attempting to get an answer from ADP.

Small Business Report

The ADP Small Business Report notes the following breakdowns.

• Total small business employment: -284,000
• Total medium business employment: -330,000
• Total large business employment: -128,000

“Large businesses, defined as those with 500 or more workers, saw employment decline by 128,000, while medium-size businesses with between 50 and 499 workers declined 330,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 284,000. The sharp employment declines among medium and small-size businesses indicate that the recession continues to spread aggressively beyond manufacturing and housing-related activities to almost every area of the economy.”

Look for another grim employment report on Friday, perhaps in the range of 600,000 to 800,000 jobs lost. This will be the 15th consecutive months of jobs lost with no end in sight.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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