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

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.

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.

Ugly Indeed

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 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.

The new details simply suggest that Geithner wants to avoid a bidding war between "PIMROCK" and other hedge funds. This clearly helps "PIMROCK".

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.

Addendum

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
http://globaleconomicanalysis.blogspot.com
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Commercial Real Estate Limbo; Lenders Ignore Defaults

There is a new twist in commercial real estate action today. Lenders are ignoring defaults of $billions on commercial real estate as if nothing happened, praying that credit conditions will improve.

Please consider General Growth Avoids Chapter 11.

General Growth Properties Inc., struggling under a mountain of debt, said Monday that its latest effort to win a reprieve from bondholders had fallen short.

Under normal circumstances a company with as much past-due debt as General Growth would have been forced into Chapter 11 bankruptcy protection by now. Creditors so far have been willing to let deadlines pass because they believe there is little to be gained and much to be lost through a bankruptcy.

"This is really rare," said Kevin Starke, an analyst at CRT Capital Group LLC, a research company that tracks distressed securities. "It is corporate-bond limbo like I've never seen before."

Many creditors say that General Growth's management is doing a good job running the company. Its 200 U.S. malls, a portfolio second in size only to Simon Property Group Inc., generate enough cash to cover interest on the debt. But its properties are overleveraged and it lacks the borrowing capacity to retire those debts as their principal comes due.

"There's no question that General Growth is a liquidity issue," said Jeff Spector, an analyst with UBS AG. "The properties, for the most part, aren't broken."

My Comment: Jeff Spector, UBS AG analyst is dead wrong. This is not a liquidity issue. This is solvency issue. The properties are indeed broken. They are broken by debt.

There is more debt on those properties than can possibly be paid back. No one will possibly buy them for the amount owed. And every day that passes the value of those commercial properties sinks. Bondholders are only delaying the inevitable.

General Growth, based in Chicago, isn't the only real-estate borrower that is getting a reprieve from its lenders these days. Hundreds of property owners have had loans come due without a repayment made in recent months. But most lenders have agreed to extend loan terms, hoping that the credit market will improve.

Australian shopping-center owner Centro Properties Group, which owns 650 U.S. open-air shopping centers, last year sought one short-term extension after another.

Finally, in December, after nine extensions, it averted a liquidation by agreeing to eventually grant its lenders 90% of its stock in exchange for two and three-year payment extensions on $7 billion of debt.

My Comment: Boom, just like that, Centro lost 90% just to get a debt extension of 3 years.

To be sure, General Growth may still be forced to seek bankruptcy protection soon. Trying to dig out from under $27 billion in debt, the company until this month has had the relative luxury of negotiating primarily with dozens of banks on more than $4 billion of past-due debt and debt that could become due because of other defaults.

General Growth became even more vulnerable after a March 16 deadline passed for repaying $395 million in bonds. Now, rather than dealing only with several dozen banks holding past-due debt, General Growth must negotiate with hundreds of bondholders. Some holders bought the bonds at face value and are hoping for a recovery. Others bought the bonds at depressed prices and might want to force a liquidation to receive a quicker payout.

My Comment: Any bondholder hoping for recovery is delusional.

On Monday, General Growth said that it concluded efforts to get holders of $2.25 billion of bonds to grant it a nine-month reprieve from paying principal and interest on those bonds. It had three times extended the deadline on its so-called "consent solicitation" because not enough bond holders signed up.

In exchange, General Growth offered the bondholders quarterly payments of 62.5 cents for every $1,000 of bonds, with interest accruing. But that offer wasn't accepted because many bondholders were unwilling to forfeit their ability to demand immediate payment for nine months, these people said.

The result is an unusual situation in which borrowers have allowed the due date for corporate bonds to pass without the issuer either paying them or filing for bankruptcy protection. Often when a company defaults on corporate bonds, bondholders will force an involuntary bankruptcy petition.

A person familiar with the bondholder talks said that, while some creditors are angry, none appears ready to insist on an involuntary bankruptcy petition yet. It is possible that bondholders didn't go along with the consent solicitation primarily because they feared that making such a pledge would reduce the value of their bonds.

Credit Market Hope Is Moot

The lenders are hoping that the credit market will improve. I have news for them: It won't.

Moreover, even if credit does free up, what is the likelihood that General Growth Properties can meet their debt schedule?

The value of that property is sinking every day while debt due and interest on the debt due is rising every day. No lenders will refinance if the debt exceeds the value of the property. Therefore, bondholder hope for improved credit conditions is moot.

A forced bankruptcy is coming either sooner or later.

Time Limit On Limbo

Many regional banks are at risk over ludicrous deals like this. Indeed, huge writeoffs are coming, not just on this property but on countless commercial real estate properties.

What ridiculous mark-to-fantasy values are the creditors placing on this debt anyway? Creditors' reluctance to force bankruptcy suggests far too much.

However, the debt clock is ticking and creditor patience is not unlimited. There is a time limit on limbo. I suspect we are going to find out what that limbo time limit is sooner, rather than later.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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New Credit Card Rules; FDIC Borrowing Limit Upped

With stiff objections coming from Republicans, a Senate Panel Approves Bill Limiting Credit-Card Rates.

A Senate panel approved new restrictions on credit-card interest rates that are broader than those adopted by the Federal Reserve in December, brushing aside objections from Republicans and the banking industry.

Senate Banking Committee Chairman Christopher Dodd said the measure was needed to protect consumers from having their interest rates raised on previous balances, unless certain conditions are met. The legislation would prevent credit-card companies from unilateral changes to the terms of an agreement.

The bill, known as the Credit Card Accountability, Responsibility and Disclosure Act, also would require the signature of a parent for a borrower under age 21, unless there’s proof of independent income or completion of a financial education course. Universities that forge marketing deals with card companies would be subject to the rule.

“The list of troubling credit-card practices is as lengthy as it is disturbing,” said Dodd, a Connecticut Democrat. The measure passed on a 12-11 vote, with all the panel’s Republicans opposing it.

The legislation also would require card companies to disclose how long it would take to pay off a balance when making a minimum monthly payment and require statements to be mailed at least 21 days before the payment due date, up from 14 days.

It would also prohibit banks from charging interest on fees, such as those imposed for late payments or exceeding credit limits.

Consumers are falling behind on credit-card payments as U.S. unemployment reached 8.1 percent in February, the highest level in more than a quarter century.

Almost all of the cards studied -- 93 percent -- allowed the lending company to raise any interest rate at any time. Also, 87 percent of the cards allowed automatic penalty interest averaging 27.99 percent on all balances even if the account was less than 30 days past due, Pew said in a statement today.

When it comes to over limit fees, there should not be any. Banks approve the transaction so should be comfortable with it. If they do not want to authorize the amount it is simple enough to reject the transaction.

I also object to self-modifying contracts. Sadly 93% of cards issued allow rate hikes at any time for any reason upon notice. Moreover, sending a notice to someone in fine print that no one can understand even if they manage to read it hardly constitutes "notice" in my book.

Also irritating is the practice of banks mailing out statements a mere 14 days before payment is due such that anyone on two week's vacation is bound to be late, triggering late fees and interest. Another thing banks do is require payment by 10:00AM when the mail for the day does not come in until Noon. This effectively cheats customers out of one of the days.

The credit card industry is getting what it deserves for their practices, even though a case can be made that such things ought to be left to the "free market" to solve. Then again self-modifying contracts under such terms hardly seems to be a "free market construct".

Moreover, the reason people can get credit lines way bigger than they deserve stems from the Bankruptcy Reform Act of 2005 whose sole purpose was to make people debt slaves forever. That act is now blowing up, just as I predicted it would.

Geithner's Heist America Plan

In a galling move that has nothing to do with credit card reform at all, the Senate slipped in a provision to allow the "FDIC to borrow up to $100 billion from the U.S. Treasury, an increase from $30 billion now. The FDIC has said the additional borrowing authority may reduce a special one-time fee imposed on banks to replenish the deposit insurance program."

This tactic has nothing to do with replenishing deposit insurance, but rather is a move to cater to more bank implosions and to provide a cushion for Geithner's Heist America Plan (GHAP). Please see Geithner's Plan Can Succeed for details about Heist America.

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