In March, Treasury Secretary Timothy Geithner unveiled a Public-Private Investment Program in which the government and private firms would bid together to purchase toxic assets from banks, freeing them to increase lending and help revive the economy.
The program’s still not operating.
“We’re committed to getting it done, and expect to have it very, very soon,” said Andrew Williams, a Treasury spokesman. “It’s complicated and takes time.”***
Geithner is expected to announce this week the names of asset managers he’s decided to let participate in government-backed auctions of these troubled bank assets. Initial bold estimates of up to $1 trillion in asset purchases, however, have been scaled back to between $20 billion and $50 billion.
Even that’s questionable because banks may not want to part with assets voluntarily if they find the auction bids too low. Banks think that the assets have value, but until the housing market stabilizes, it’s difficult to price them.
“The banks are finding that if they raise enough capital they can hang on to those assets,” said Bert Ely, a banking consultant. Banks are trying grow their way out of their toxic-asset problem, but that takes time, and meanwhile the economy remains in the doldrums.
Why can’t they just do with the bad assets what they did with everything else the past couple decades? Just splice ’em up a bunch, sell and re-sell them so many times that no one knows what the hell is what, bundle them up, have the ratings agencies slap a AAA rating on them, and sell them to small towns in Georgia and Norwegian pension funds. Voila! Problem solved! Then have AIG insure them, and Goldman can make another ten billion in default swaps and hand out some bigger bonuses. Also, rename them- they are not bad assets, they are “Under-Priced Yields Offering Untold Riches For Offshore Overseas Longterm Speculators (UPYOURsFOOLS).” Screw you Kenny Lay! Let’s get rich, bitches! What could go wrong?
Is this necessarily a bad thing? We’ve given quite a bit of money to the banks as it is, and if they can raise capital without the government forking over more money, it seems like it’d be better for everyone involved. Or is it that there’s a direct trade off between the banks participating in a program like PPIP and economic growth come faster or raising capital on their own and risk letting growth come back at a slower rate?
THAT is just fucking brilliant!
UpYoursFool sounds good, where can I get some? Are they backed by the government for repayment even after they are indeed disocovered to be worthless? Because, like banks, I have decided the best way for my business model to succeed is to buy something that I can’t lose money on but could potentially my a shitload off of without risk. I call it
“Futures Under Calculated Knifing-Yield of Uniformity” (FUCKYOU).
You know what? We’re fucked.
Heckuva job guys.
Since most of this flies above my head, I may just be talking out of my ass. But Nassim Taleb, in a recent interview on CNBC, said:
So I think that John may have nailed it above: there’s been no movement because no one can figure out what they’re buying, who owns it, and how it’s leveraged.
I can’t prove this, but I’ll continue to believe that, somewhere around 2005-2006 in the Fed Control Room and Hookah Bar, steam was spurting from pipes, sirens were wailing, gauges were pegged in the red zone. But instead of acting, they kicked the can down the road, opting to dump it on the next administration.
I think NPR was reporting on how part of the problem is that the banks don’t want to sell the assets at a loss, because they don’t seem like such a bad deal anymore. Keeping the asset on the books gives the appearance of capital. Selling it means more red ink. The banks are looking more and more recapitalized, so why selling the junk now when they don’t really need the money?
I’m not sure what anyone is complaining about. A month ago, these boards were bleeding red with commentators who absolutely hated the idea. Now the idea is on the fast track to Super Fail. What’s to complain about?
What part of “if no one will buy them without a government favor then they are worth nothing” do the banks not understand?
It’s not that they’re hard to price because fluctuation blahblahblah. They’re hard to price because no one fucking wants them. They could offer the whole lot for a penny & the first thought in response would still be “I could lose money on this”.
Banks think that the assets have value, but until the housing market stabilizes, it’s difficult to price them.
So it looks like the banks will have to stop cooking their books in mid 2011. Good to know.
“Even that’s questionable because banks may not want to part with assets voluntarily if they find the auction bids too low. Banks think that the assets have value, but until the housing market stabilizes, it’s difficult to price them.”
Is it that they don’t want the assets valued?
Like mortgage lenders? It makes no sense that mortgage lenders won’t renegotiate those contracts, because they’re losing when they eventually foreclose. It’s better to keep the homeowner in the home, and making payments, even if those payments are lower, but they aren’t doing that. Gretchen Morgenstern in the NYTimes wrote last week that this is irrational behavior by mortgage lenders, and it is.
Why not? What’s the incentive for them to hang onto this uncollectable debt? They’re actually harming the housing market, because they’re adding inventory with each foreclosure. Why would a mortgage lender add excess inventory in a market they depend on? Why would a mortgage lender take a bigger loss on a foreclosure rather than renegotiate with the homeowner and get paid?
I think the incentive is they don’t have to register the loss. They can still keep the loan as a collectible asset at face value right up until foreclosure, and that makes them look healthier than they are, for the short term.
They aren’t willing to take the loss. They don’t want anything revalued. They’re going to continue to play musical chairs until someone else ends up with it.
They’re worth nothing as far as accounting is concerned if there is no market to buy, but if there are still homeowners paying their mortgages behind those assets, then they’re still paying the banks and the assets are still doing what the banks need. Unfortunately, because there is no market to buy them, the banks need to write them down, and that makes them cash strapped because that asset is no longer available to sell if the bank needed to raise cash.
Just because nobody wants to take my job doesn’t mean it isn’t providing value to me.
Brick Oven Bill
“Timothy Geithner unveiled a Public-Private Investment Program in which the government and private firms would bid together to purchase toxic assets from banks, freeing them to increase lending and help revive the economy.”
Designated Obama Grants Featuring Unethical Currency Kickbacks
The assets are valued, but they think the value is less than what they are worth.
Imagine putting your only, brand new car up on eBay with the intent of buying an old clunker to get to work and (for whatever reason) the highest bid was $20. Would you sell it? That’s the value the market has set. Or is the car worth more than $20 to you?
That’s just not true, though. You’ve got assets tied to mortgage payments. The mortgage backed securities still has some value so long as mortgage payments continue to come in. The credit default swaps still have some value so long as premiums keep rolling in. All these derivatives are worth some amount of money assuming individuals continue to pay into them.
The question at hand is how much is currently being paid and how much will be paid in the future. Factor in the explosive speculation surrounding their value, and an asset could have originally been priced at hundreds of times its current value. But 1% of a million dollars still isn’t what I’d call “worthless”.
Brick Oven Bill
It depends on your level of hunger Martin.
Comparable assets are already being traded, the problem is if the banks sell the assets at the market value then they will be insolvent. Thus the banks will only agree to a plan where the auction prices are more than the “mark to fantasy” prices. What is really disgusting is the terms the buyers get at the auctions. Not only do the taxpayers loan the buyers most of the money, they also take the greatest risk (see example calculations here ). I am not up to date on things but there still may be the possibility that banks could be sellers and buyers at the auctions. Collusion anyone?
If banks won’t even agree to prices with a system so slanted in their favor then just how cooked are their books? And why do so many people think recovery is just around the corner?
Montysano (All Hail Marx & Lennon)
Geithner/Obama Asset Triage Before Loss Of Worth = GOATBLOW.
This is fun, in a laugh-instead-of-weeping kind of way.
This is a slap in the face from the invisible hand.
Awesome acronym work btw. In IRC we used to play a game called acrotard where random letters would come out and everyone would try and make the funniest acronym out of it, and anonymously voting on the results. You have epically won this round of acrotard.
But the assets have been sliced and diced and given ratings from S&P that nobody trusts anymore. Sure there are payments coming in, but as a potential buyer, can you tell me what the *real* risk in those mortgages is? You can’t.
The mortgage backed securities market has turned into the ground beef market. When E coli outbreaks were really damn rare, it was worth the risk. When they get just a bit more common (but still rare) people aren’t willing to take the risk and suddenly stop buying. Unless you can prove to me that none of the thousands of cows you just ground up will make me sick, I’m not going to touch it – and you can’t do that because your ‘efficiencies’ of mixing thousands to millions of pounds of the stuff eliminates your ability to assess the risk of your product.
By tranching the shit out of everything, the market has lost the ability to risk assess, instead trusting that mixing enough of the product together, that the shit would be small enough percentage that nobody would notice.
The Fed took a bunch of these crappy assets as collateral for inter-bank lending. Let’s sell those at auction and if there is a deficiency (collateral not enough to cover loan amount) have these banks pony up more acceptable assets
And that’s one of the reasons that banks are reluctant to sell. The going rate for the securities is less than they think they are worth.
And while the hamburger meat of the market might not look appetizing, it does still feed people. The question is whether the banks want to eat their own burgers. When the going rate is pennies on the dollar, your own shit sandwich starts looking significantly more appetizing.
I’m not going to argue the wisdom of creating these securities, or the wisdom of buying them, but I will argue that they continue to hold some value, even if it’s unclear what that value is.
The problem isn’t so much the lenders (the ones who actually made the loans) but the servicers and the investors who now own the loans. See the dirty little secret is that the company you make your mortgage payment to is nothing more than a glorified debt collector (the servicer). It is actually written into their contracts that they get a fee for modifying a loan, and another fee when they foreclose ( which as you can imagine, leads to some trouble). The investors still tend to think they can make money even with foreclosures and short sales (they can make magic money by writing off losses). The servicers tend to be the ones who buy the house at foreclosure, which they then figure they can turn around and sell (but ignoring the fact that. Neither they nor any of their competitors are lending any money). In short, they’re still playing games and we’re still boned
@Zifnab: In software that process is known as dogfooding, as in you have to eat your own dogfood (product) before you sell it to the public (I’m sure you are personally well aware of the concept, just propogating the meme). Banks should have to dogfood their own products. If their bonuses were paid directly out of the accounts that they sold, instead of from the collective known as” the company”, I’m sure they would be far pickier about what products they choose to sell.
Any securities lawyers in the room? I’m wondering if it’s possible to de-securitize some of these assets, to unwind the transactions.
ummm… was this just well timed sarcasm? or were you serious?(ha!) cause they followed your advice and I’d have to start cursing if I try to describe these @#$%ing @#$%%%%!!! … well, I’ll let karl tell it instead:
We’ll Scam You Until Forced To Stop
The banks just never do quit, do they?
July 8 (Bloomberg) — Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.
Let’s translate this into english for the less-financially-literate.
Through the magic of re-securitization (while extracting a few more basis points in a second set of fees for ourselves!) we will make this Baa2 (nearly junk) debt back into pristine “AAA” credit once again, according to the bought-and-paid for (again) ratings agencies, and then we will sell it to the same suckers that got ripped off the first time!
The sad part is that they will probably find people who are dumb enough to get screwed not once, but twice, even though the bank has managed to extract a second set of fees from the original credit margin in the deal.
Back to basics folks – when a set of loans are made the true risk-adjusted return is a fixed amount. Every person who touches the deal demands something for their trouble, as nobody works for free.
Therefore the more levels of indirection and complexity are layered on the lower the total return of the deal has to be, because the fees have to come out of the total income stream.
It cannot be any other way; you cannot create more value than was originally there (claims otherwise are equivalent to claiming to have discovered perpetual motion) and as such there is no possible way in aggregate for anyone except the bank that does the securitizing to benefit from securitization, and in fact everyone who owns that “stuff” is giving up some of what they could otherwise obtain by buying this crap.
P.T. Barnum was right.
sorry for transposing a whole blog post, but its totally relevant.
That’s false, because of the way these are cut up. These securities are set up in a “waterfall model”. AAA tranch gets payed before AA and so on. If a house is sold for less than it is worth (short sale or foreclosure), then anything less than an AAA is in danger of getting no money; the AAA has to get all of its money first. And even some AAAs are not really AAA, as they are standing in line behind others for payment.
Furthermore, some of these securities are highly leveraged (the mortgage collateral only backs up part of the security), so a little loss goes a long way in terms of making them worthless. The problem with leverage is that, while you can make a lot of money while things go up, it is very easy to lose everything when the market is going down.
doh! messed up the quoteboxes you should be able to tell from context tho. http://market-ticker.org/ is the source fyi.
Last night, I was reading all of the day’s postings on Clusterstock. There was a particularly scary entry on the housing market, coming additional mortgage defaults and the almost two trillion of additional losses the banks are facing as the defaults cascade down.
We are so screwed.
Montysano (All Hail Marx & Lennon)
As I noted up above, Nassim Taleb talks about deleveraging “$40T-$70T”, which is a figure that’s been bandied about as the value of the CDS market in the US.
Can any of you financial wizards explain how we got a CDS market that is worth several times the entire US real estate market? To my simple mind, that’s like me insuring my $100K house for $400K.
You’re exactly right. Since mark-to-market accounting has been suspended, financial institutions are no longer required to write these assets down to current (read: disastrous) market value at each quarter-end. Instead, they can carry them at face value indefinitely, under the assumption that the market will eventually “come back”.
Accordingly, the incentive is to keep them at face value rather than take a charge-off by selling, which would hit earnings. The joke is, they are holding onto the garbage and passing up the best chance at recovering some cash, because from an accounting perspective it looks better.
In short, they screw their own institution to keep earnings and share price up.
@Montysano (All Hail Marx & Lennon): i think one way you could look at it is you had your original 100k–someone insured that. then, someone insured that 100k, for another 100k because they made 3% on the transaction regardless of what happened. someone else then came along to buyer number 2 and said let’s cover your 100k for another 3%. and so on and so on. in theory it could keep going forever, or until the originating pool dries up, which is what happened.
Montysano (All Hail Marx & Lennon)
@sparky: Thanks, Sparky. That seems fiscally insane, which I guess is the point, eh?
You insured your $100K house at $100K. Then three of your neighbors each took out a $100K insurance policy on your house, with no ownership in the underlying asset. (Incredibly, this is the case in the CDS market – you could buy a CDS on a credit as a side-bet, even if you didn’t have any actual credit exposure. Hence, CDS exposure of many times the value of the underlying assets)
Then one of your neighbors sets a fire. Who could have seen it coming?
It is actually fairly easy to value these securities. The difficult part is trying to establish a value that is anywhere near what the banks consider fair (and pretty much everyone else would recognize as a complete fiction).
Montysano (All Hail Marx & Lennon)
And if I understand correctly, they may have purchased that insurance from a broker who (because the CDS market was unregulated) may have no ability to pay the notional value of the worst case scenario.
Correct. They most likely bought the CDS from AIG, who had convinced regulators that, unlike traditional insurance, credit default swaps should not have capital requirements. The rationale was that home prices could never fall across the country simultaneously.
So in the worst case scenario, as you said, they had no ability to pay.
Michael Lewis had a great piece on this in Vanity Fair. They truly had no idea what they were doing.
Montysano (All Hail Marx & Lennon)
So when Taleb speaks of “deleveraging” this huge amount of money, I’m guessing that no one knows how to do this, and in fact never anticipated needing to do so.
This has to be the greatest act of fiscal irresponsibility in history. And again…. someone in the Bush administration had to have seen this developing well in advance of Sept. 2008.
Of course, according to my brother-in-law, this was all the fault of the Community Reinvestment Act and ACORN. Also. IOW, poor brown people brought down the largest economy in the world.
Thanks for the explanation.
I have another question: why won’t financial reporters admit this? Why is Gretchen Morgenstern at the NYTimes writing articles about how mortgage lenders are acting “irrationally” by not allowing borrowers to stay in their homes? She’s not baffled. Why is she saying she is?
They’re not acting irrationally. They have a huge incentive to keep this musical chairs game going.
Christ. Just a little honesty…
Montysano (All Hail Marx &amp; Lennon)
So……. in deleveraging, would the ten people who bet on my house burning down have to be willing to walk away, forgoing their $100K of “insurance payout”, and writing off their “premiums” as a loss?
If they bought those policies through AIG, the taxpayer would be paying them off at 100%, like we did Goldman.
In deleveraging, yes, I suppose that’s what would have to happen. We need to acknowledge and write down these trillions in toxic assets, but there is no mechanism to force the hedge funds and financial institutions to reckon with and disclose these losses.
And Team Obama seems afraid that pursuing the matter will set off another panic. I honestly don’t know what the proper approach is, but it seems like we’re trying to build a recovery on a bubble that could deflate at any minute.
There are two boogie men in this equation: inflation and his cousin deflation. A lot of people are scared shitless of both of them happening right now (and concern is that which ever one happens, it will be of the “hyper” variety). Combine that with the sudden belief that capitalism does not allow people to fail (which is incredibly stupid, the entire system is based on some people failing and others succeeding), and investors believing that they are entitled not only to recoupment of their investment but some sort of profit (I honestly believe the underpants gnomes may be in charge of Wall Street), and you’ve got such a lovely little shit storm.
I’m thinking the only way out of this is going to involve a lot of pain and suffering. Not necessarily Great Depression-style pain and suffering, but a great deal, nonetheless. So, if it’s inevitable (and I think it is), then the question becomes two fold: first, how do we dampen the damage; and second, how do we position ourselves for the rebound without going crazy again?
ATTENTION JOHN COLE:
George Soros is over at the FDL book salon answering questions about his book, “The Crash of 2008…”
If you get your butt over there immediately, you can ask him where your virgins are!
The problem is that they aren’t securitized all that well.
A lot of this is rooted in the MLM/GetRichQuick scheme that is Mortgage Electronic Registration Systems.
Founded in the late 90s by a bunch of pasty white reported Republicans, by 2003, they’d stuck their ravenous claws into nearly every mortgage in the country and consolidated all foreclosure operations into a limited number of multistate licensed law firms in a few lucky, connected communities.
They turned out to be immense fuckups, and are well and truly emblematic of the lack of competence and integrity of conservatives in the Bush years. In violation of the statutes in pretty much every jurisdiction they operated, they deemed formal mortgage assignments to be unnecessary, and managed to lose an unacceptable percentage of notes and mortgage. In many states (KY and IN included for certain), they’ve lobbied a statute change that enables them to claim “lost note” while pretending one really did exist, all while everybody gets to guess at the terms of the lost note. Even when they can find the documents, they simply appoint employees of their foreclosing law firms as officers of MERS to create assignments at about the time the foreclosures occur. This is, of course, completely violative of ethical standards for lawyers and creates genuine problems on lien priorities.
Of course our current crop of judges is either connected to the conservative*spit* juggernaut in a way that would make a Hunduran judicial toady tumescent, or afraid of the conservatives, so getting real relief is difficult.
Given the state of recordkeeping at MERS, I doubt we’ll ever get to see these legitimately unwound.
@Bertie Wooster: And that is exactly correct. The reason why none of the follow-on turd programs from Timmah! have worked is because he and Bernie made it far easier for them to hold onto the assets than sell. So all these programs were essentially a no-go once they let mark-to-market accounting go by the wayside. I think that is also why they are having problems getting banks to renegotiate mortgage with individuals, but that’s just a guess.
I suppose the only upside in all this is that we’ve prevented more taxpayer money from going to these crappy programs that would have allowed a lot of funds to profit (with very little relative risk) on the back of the taxpayer.
I remember someone pointing out that a bank could have really gamed the system as well – send some money to a special-purpose entity (preferably from the money the taxpayers gave them), then have the SPE bid on the toxic assets from the bank. Have them overbid – pay too much for the assets. Now the banks have unloaded the assets to a shell company at a high price and financed the whole thing with taxpayer money – the 7-10% they put up (which was taxpayer money to begin with) plus the rest from the Fed!
Anybody read about this idea and can you tell my why it wouldn’t happen? After all, these fucknuts will stop at nothing to “externalize” their losses.
What I love best about what conservative lawyers did to the 240 year old state law mortgage recording and note/foreclosure process is that it violates nearly every tenet of conservative legal dogma.
Good God. They don’t have to produce the note! So much for our storied principles of The Sanctity of Contract.
They’re completely full of shit on their espoused doctrine. They’ll sell the whole thing for a campaign contribution. And they did.
The goddamn shame is that state legislatures let them.
So…am I still a left-wing doofus/Republican plant for posting “Dump. Geithner. Now.” back around February/March?