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Has the Gaming of the Public-Private Partnership Begun?

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It certainly looks as if Citigroup and Bank of America are using TARP funds, not to lend, which was one of the primary goals of the program, but to scoop up secondary market dreck assets to game the public private investment partnership.

And it fleeces the taxpayer a second way: the public has spent enough money on both banks so that in an economic sense, they ought to have been nationalized. Yet for reasons that are largely ideological and cosmetic (the banks’ debt would need to be consolidated were they owned 100% by Uncle Sam), they remain private. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money.

This sort of thing was predicted here and elsewhere. Welcome to yet more looting.

From the New York Post (hat tip reader Hendririx):

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post…

But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds.

Yields on such securities can be as high as 22 percent, one trader noted.

BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market….

While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.

Moreover, the MBS market has been so volatile during the economic crisis that a number of investors who already bet a bottom had been reached have gotten whacked as things continued to slide.

Around this same time last year some of the same distressed mortgage paper that Citi and BofA are currently snapping up was trading around 50 cents on the dollar, only to plummet to their current levels.

One source said that the banks’ purchases have helped to keep prices of these troubled securities higher than they would be otherwise.

Both banks have launched numerous measures to help stem mortgage foreclosures, and months ago outlined to the government their intention to invest in the secondary market to expand the flow of credit.

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70 comments

  1. Anonymous

    Its amazing how banks can spend more money on something than anyone else and then get a benefit out of it.

    But I paid 50 cents on the dollar, so it’s worth 50 cents on the dollar.

    It’s worth 50 cents on the dollar to someone who is using someone else’s money to buy it.

    It also has the interesting effect of making the rest of their crap look good.

    “I just paid 50 cents on the dollar for something just like that, so I am going to bring the mark up on everything else I own like it.”

    You can make money spending money, or so they say.

    I am going to go out tonight and buy another car just like mine for twice what it is worth, using my bailout money.

    Buying another car for twice as much does not make it worth twice as much.

    Selling it for twice as much is the hard part.

    Its only worth what you can SELL it for.

  2. ndk

    What galls me more than anything else is the uptake of the meme that nationalization would be more costly to the taxpayer than this PPIF plan. I don’t think that’s true.

    First, the PPIF abets — well, encourages and incentivizes, to be fair — looting. But let’s set that aside.

    Assume the honest and community-minded traders implement the plan as envisioned.

    To make a profit, they bid for assets priced for an attractive return. They will not purchase the overpriced or the truly toxic. Banks will be left with the bad assets, having sold their good assets cheap.

    If they’re really in such bad shape as to require all this help, they’ll require recapitalization through some other means. This recapitalization will be larger than it would have been without the PPIF, because they’ve given up potential profits to these third parties.

    Basically, the only hope for the taxpayer to benefit from the PPIF is that these investors are just bad enough at their jobs as to lose their own equity investment without taking the Treasury or FDIC out with them.

    Finally, this is all orthogonal to the real problems in the economy, so the sooner we can finish talking about the frigging banks and move on to solving the underlying issues, the better.

  3. Anonymous

    The ultimate chumps might again be Vikram Pandit and Ken Lewis.

    Goldman has probably convinced these two clownns that they will be able to sell MBS at 102% at the auctions and they should load up on them.

    GS, MS quitely unload.

  4. Anonymous

    Forgot to add, who needs a thrift industry to unload toxic waste when you have Ken Lewis and Vikram Pandit.

  5. Anonymous

    Illegal

    If Geithner’s plan intentionally allows radically overpriced bids due to collusion (see below), then the Fed’s and FDIC’s loans and guarantees are underwater from inception and seem like illegal gifts. People should write their Senators and Congressmen asking them to demand that Geithner, Bair, and Bernanke explain why the Fed's loans and the FDIC's guarantees under Geithner's PPIP aren't illegal gifts.

    It seems like extending underwater nonrecourse loans are gifts, and since Congress hasn't authorized the Fed and FDIC to give these gifts, they seem ILLEGAL.

    People working at small credit unions, funds, and banks should complain about not being allowed to participate in Geithner's plan.
    They should complain to the U.S. Senate Committee on Small Business & Entrepreneurship and the House Small Business Committee about Geithner's plan. On prior occassions Rep Manzullo has fought Treasury on behalf of small businesses. These committees aren’t beholded to the big buy side and sell side players.

    People at small banks, credit unions, or asset managers should also write in to Congress, Senate, Treasury, the Fed, and FDIC asking why the Fed, FDIC, and Treasury aren't breaking the law by rolling out the program without regulations. If the program were rolled out under regulations, the administrative procedure act would require a notice to the public, a period for the public to comment, and a public hearing. If the program were rolled out with regulations, the agencies would also have to do analysis on whether and how they impact small businesses.

    By collusion, I mean that if BAC and C are allowed to bid for each other’s assets at 2xFMV with taxpayer money, they will. If PIMCO and BLK are allowed to bid for each other’s assets at 2xFMV with taxpayer money, they will. If any of these players are allowed to collude with funds that bid for their assets (insulating the buyer from loss and giving them a kickback from the overbid) resulting in bidding at 2xFMV, they will. It is telling that Geithner said collusion between buyers was verboten, but didn’t say that collusion between sellers and buyers was against the rules.

    I’ll believe Geithner’s plan isn’t to intentionally allow radical overbids through rampant collusion when he issues detailed rules prohibiting collusion, sets out severe penalties for collusion, and appoints an aggressive prosecutor to investigate and prosecute violators.

  6. Anonymous

    This is complete crap. As a guy that runs a $1.5 billion dollar endowment I am willing and able to buy AAA-reated CMBS and RMBS. That is until 2 days ago. I am now out of the market b/c I cannot account for government interference and the banks are trashing the acquisition strategy. One more example of government keeping real money out of the markets. Please, please, please…..stop the madness.

  7. Anonymous

    This is complete crap. As a guy that runs a $1.5 billion dollar endowment I am willing and able to buy AAA-reated CMBS and RMBS. That is until 2 days ago. I am now out of the market b/c I cannot account for government interference and the banks are trashing the acquisition strategy. One more example of government keeping real money out of the markets. Please, please, please…..stop the madness.

    ———

    Anon 9.01pm, you sound like you have juice. Use it. Try to investigate whether Geithner’s plan involves an illegal grant of funds by the Fed or FDIC. Congress will not stand up to Geithner unless there is a political constituency that lobbies for them to do it.

  8. alex black

    This administration appears to be creating enough rope to hang themselves. It won’t be good for racial relations in the US if the first African-American President is found…. you know….

  9. Anonymous

    Anon 9.01 here again. The problem is I can’t clear trades (sales) at the levels the banks sell. They have the benefit of “TALFing” their sales in to levered vehicles. So they push up their offers now and create a short-term run up and I can’t flip the assets even if I made short term gains b/c I can’t sell at the same bid level as banks due to their embedded financing advantages. In other words, the precious 5 asset managers don’t want to buy from me…they HAVE to buy from a bank under the Geithner plan. In this construct, why shouldn’t one just buy CMBX (I know there are tranche differences and some of those deals are really, really awful) since they are putting a temporary artificial floor under the market. After all, it will take 6 weeks to get the TALF details sorted out. That’s also just enough time for them to screw it all up.

    On the loan side of the new TALF, I highly doubt that plan ever gets off the ground. It’s a disaster and the holes in the program are absurd. Nobody but banks stand to make money from this.

  10. Jonathan

    “Nobody but banks stand to make money from this.”

    Call me jaded… but isn’t that the point?

  11. Anonymous

    Anon 9.01pm,

    Are you buying any TIPS for your endowment? I am thinking of buying some TIPS as a lazy way to retain a store of value regardless of whether we have continued deflation or sudden flash-over to inflation.

    o.jeff

  12. Anonymous

    @ Jonathan….that’s not at all the point. Well, it’s the pols point but it should not be. Why would private investors put capital in this plan when I know I am going to lose money? It’s absurd.

    @ Jeff….yes, we own a fair amount of TIPS. They have come back a lot in recent months. It was less than pleasant late last year b/c we own very little nominals. Frankly, we were wrong on inflation early and mid last year. We got out of the way of some of the error, but not all of it. I like the bet from here, the dilemma is these things can take much longer than expected. Serious inflation may be many years down the road if the govt can pepetuate the absurdity long enough. However, we aren’t selling them from here.

  13. Anonymous

    anon 9.01:

    I suggest you write to the U.S. Senate Committee on Small Business & Entrepreneurship and the House Small Business Committee. They have previously attacked treasury for putting out regulations that helped big banks and hurt small businesses, specifically small businesses facilitating like kind exchanges.

    I would think small investment businsses (buy side and sell side) face the same damages that you do from Geithner, Bair and Bernanke's plan.

    I also suggest you consider writing to other managers who are hurt by Geithner's plan. Unless the constituencies that Geithner is hurting speak out, Congress won't control his behavior.

    Also, I suggest you ask what legal authority the Fed and FDIC have to extend underwater guarantees and loans. Congress hates it if Treasury does things not authorized by Congress because it undercuts their influence.

  14. Jim T

    This is as bad if not worse then the AIg Bonuses!

    These fricken people on Wall Street are truly out of their minds and Obama and Co keep on playing right into their hands. It’s not enough they are getting
    “FREE MONEY” NOW THEY USE THAT MONEY TO RAPE AND PILLAGE EVEN MORE!

    The Rage is building with every fricken out landish deed. The day is going to come and “There Will Be Blood.” Mark my words that day is coming!

  15. doc holiday

    Bond Markets Don’t Buy the Rally
    If there really are signs of financial recovery, nobody told the bond market. Treasury Secretary Timothy Geithner's plan to rescue the financial system sent the S&P 500 soaring 7% on Monday alone, bringing its gains from March 6 to an impressive 19% through Wednesday. But credit markets have hardly budged.

    Bonds are pricing in unheard-of and devastating levels of default. Deutsche Bank recently calculated dollar investment-grade corporate bonds were pricing in a five-year default rate of 40% assuming average recovery rates. Even if one makes the unlikely assumption that bondholders recover nothing after default, prices suggest a 25% default rate over five years. The worst five-year investment-grade default rate since 1970 is just 2.4%. The average is 0.9%.

    On that basis corporate debt is almost absurdly cheap — and so a lot of investors are pumping money into the market. That this has failed to fuel a rally in the credit markets similar to that in equities should ring warning bells for stock-market investors. What is holding back the credit markets is a lack of demand for financial debt — a sure sign that all still isn't well in the banking system.

  16. Anonymous

    want to fix the economy
    -guarantee all deposits unlimited
    -let the weak banks failand their shareholders..shareholders lose all the time they know the risks.
    -recover as much money given to private institutions through asset sale
    -build a new nuclear power plant (non weapons grade) for every 500,000 in population..funded by government built by private, maintained by private..profit back to government for life.
    -eliminate income tax…institute VAT
    even in the depression farmers and laborers learned new trades. no use teaching professionals to build roads.
    at the end of this depression we could have abundant cheap clean energy a educated technical workforce and a simple taxation system…imagine the benefits that would spin off

  17. Anonymous

    anon 9.01 again…

    @ 9.39/8.50….What is the “gift” technicality you are referring to? I have a reasonable understanding of FDIC and Treasury, but I’m not an expert on the finer points of protocal or organizational procedures. Is there a technical point in their charter you believe is being violated? Trust me, I agree it is a massive give away to the banks, but unless it is a concrete breach of some sort I’m not sure anyone in govt really cares.

    As a side note, I’ve voiced my frustration to a number of buy-siders. The PIMCOs and BLKs of the world obviously do not care b/c they stand to make massive asset mgmt fees from this program. However, this program is held in very low regard by just about everyone else on the buy side I spoke to in the last 48 hours.

  18. Anonymous

    If it smells like a duck, talks like a duck and walks like a duck then it just might be a duck.

    These here ducks seems to me like the are pedaling maddly underwater in an attempt to rearrange all this mortgage and credit debt behind the scenes so it doesn’t blow up their derivative positions (that nobody knows what they are). I think they have been using the trillions “lent” and given to them in the past 6+ months to back themselves (Yes, ALL the investment banks, AIG and gawd only knows who else)out of their more stupid derivative positions on the taxpayers nickel or is that soon to be broken back.

    There is some real heavy collusion shit going on here and they don’t tell the rules to fools like me.

    Where is the RESET back to pre-fascism days button?

    psychohistorian

  19. Lucifer

    Why is anyone surprised? They do not know how to make money running a real useful business.

    They cannot imagine making money any other way.

  20. Cix

    Is there any way for retail investor to buy these “toxic assets”? I mean an ETF, or a Future contract.

  21. Anonymous

    anon 9.01:

    @ 9.39/8.50….What is the “gift” technicality you are referring to? I have a reasonable understanding of FDIC and Treasury, but I’m not an expert on the finer points of protocal or organizational procedures. Is there a technical point in their charter you believe is being violated? Trust me, I agree it is a massive give away to the banks, but unless it is a concrete breach of some sort I’m not sure anyone in govt really cares.

    —-

    The technicality is the constitution, which gives Congress sole power to appropriate funds under Article I, section 9, clause 1 (“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law”). Further, appropriated funds cannot be spent for any purpose not authorized by Congress. See United States v. MacCollom, 426 U.S. 317, 321 (1976).

    I am not a banking lawyer, but I did not see a provision in the Federal Reserve Act authorizing the Fed to give money away, so it seems that it is illegal for the Fed to do that. In contrast, 12 USC 10A and B authorize the Fed to make certain loans, and 12 USC 1772 authorizes the Fed to receive unconditional gifts.

    If the Fed extends nonrecourse loans for amounts that exceed the value of the relevant collateral, that seems like a gift to the extent the loan is underwater. Consequently, it seems like the Fed’s action is illegal under U.S. Constitution, Article I, section 9, clause 1.

    I believe the FDIC also lacks statutory authority to make gifts, and so, if the FDIC makes gifts of guarantees on underwater nonrecourse loans, that also sounds illegal under U.S. Constitution, Article I, section 9, clause 1.

  22. Economic Darwinism

    I actually don’t mind Citi and BoA doing this kind of thing. They are doing what they’re suppose to do, i.e. make money within the confines of the law. There is no law as far as I know against buying up assets you expect to be able to sell at a higher price later. I would be disappointed if they DIDN’T game the system. If this is illegal, take them to court. If not, too bad. Deal with it. This is the new playing field Geithner created.

    What irritates me is that Geithner’s plan is so full of holes that it ALLOWS the banks to do this kind of thing. This is just the tip of the iceberg. More power to them. What do they expect? Banks to play nice?

    Stop playing games and nationalize these abominations. It is inevitable.

  23. Diego Mamani

    Let’s see an example. “Bank” has a mortgage-backed security (MBS) with original par (nominal) value of $100. In 2008 Bank “marked-to-market” and now values the MBS at $95 in its books. But we all know that this MBS is worth a lot less, maybe less than $60, but Bank won’t acknowledge reality.

    In 2009 we have the new Treasury plan, whereby “Peter” buys this MBS, for say, $90. That’s because the bank won’t take anything less. If it did, Bank would be shown to be insolvent and would be out of business.

    Peter puts only $6 out of pocket. Uncle Sam puts another $6, and the remainder $78 is a nonrecourse loan from Uncle Sam to Peter. (Total, $90).

    Then Peter turns around and sells the MBS to his pal “Paul” for $48. Paul pays $48 b/c he thinks the MBS is actually worth $58 as justified by what the homeowners will actually pay in monthly mortgage payments.

    Peter’s $6 investment is wiped out. So is the govt’s $6. And the $48 Peter gets from Paul goes to pay back the govt loan of $78. So now, Peter lost $6 but Uncle Sam lost $36 ($84-$48).

    Since Peter and Paul are buddies (co-conspirators), the latter can compensate Peter. Say, Paul gives Peter his $6 plus another $2 for his troubles. Paul pays $48 for something worth $58, but because he gave $8 to Peter, his profit is only $2. And the banks get fully $90 for paper that is worth actually $58.

    Summary:
    Peter puts in $6, makes $2 profit
    Paul puts in $48, makes $2 profit
    U.S. puts in $84, makes a $36 LOSS
    Bank had paper that was really worth $58 but got $90 for it, makes a $32 profit

    Yes, the Giethner plan is wholesale looting of the US Treasury. Us taxpayers foot the bill and will pay for it in a combination of higher inflation and higher taxes.

  24. Anonymous

    Last I checked, the Federal Reserve was not a government agency, so not bound by the constitutional limits described above.

    FDIC, yes… under its enabling act.

  25. Anonymous

    LET THE GAMES BEGIN!
    From a story in the New York Post (http://www.nypost.com/seven/03252009/business/double_dippers_161157.htm) we see C and BAC are buying up AAA-rated RMBS’, some of which securitize Alt-A and ARM mortgages, in the secondary market. Evidently, they are bidding up the prices, crowding out other buyers.
    This gives us a rare opportunity to peer into the mentality of the beast. It also gives us an early example of the unchecked moral hazard the Geithner Gambit will foster. Here we have two “too big to fail” banks who received billions of taxpayer money and debt guarantees loading up on MORE toxic assets in order to drive up market prices. Their intent is undoubtedly to then sell those assets to other “too big to fail” institutions (each other?) with government guarantees at close to reserve position prices. This way, not only can they unload their junk on the taxpayer and limit losses to their 7% equity stake plus writedowns, they can also make quite a profit unloading the assets they are now buying in a similar fashion. What could possibly go wrong? They will either profit, or the taxpayer will bail out yet another bad gamble.
    What will finally put an end to this charade? Certainly not the current administration or Congress. No, it will be the bond market, when it realizes that each time Mr. Bernanke offers to buy Treasuries at a premium, the Chinese, who have expressed a desire for a new reserve currency, are more than happy to sell into his open arms.
    John Thayer

  26. Anonymous

    Annon at 11:58 said:
    Last I checked, the Federal Reserve was not a government agency, so not bound by the constitutional limits described above.

    How can something created by the American government not be bound by the underlying constitution. It would seem (not a lawyer) that if not specifically stated so then it may be assumed.

    I would love to hear an opinion from someone more knowledgeable.

    psychohistorian

  27. Dave Raithel

    One would think that Citi’s/BankAm’s purchases of such securities is prima facie evidence that those securities are not “toxic”, and so, should be excluded from any PPIF benefits – but this only makes sense if words like “untradeable” or “unmarketable” mean what they mean.

    I’ll suppose, in the spirit of futility I seem to share with most the other commentors, that some kind of restriction on eligible PPIF purchases (say, oh, only what hasn’t changed hands in 90 days preceding Geithner’s announcement of the PPIF scheme? 6 months? 12 months? Or nothing traded after his announcement?)is as likely as nationalization by any other name at all.

    I mean really, if just talking about a plan makes things move, then just talk some more ….

  28. ndk

    How can something created by the American government not be bound by the underlying constitution. It would seem (not a lawyer) that if not specifically stated so then it may be assumed.

    They’re comfortable dodging FOIA, and there have been numerous other borderline incidents throughout this crisis. We’ve essentially got financial martial law imposed right now, so I don’t think compliance with either the letter or spirit of the law can be expected.

  29. Yves Smith

    The Federal Reserve Board is subject to FOIA., not member banks (or so the Fed asserts, I am not current on where the lawsuits stand) and the various lending programs sit on the banks’ balance sheets.

  30. Anonymous

    John Thayer – according to setser’s post about January TIC data Chinese were buyers for 12 billion of Treasuries.

    “Incidentally China is still buying Treasuries. It bought $12.2 billion in January, including $11.6b in short-term Treasury bills. It also is still selling Agencies — its Agency holdings fell by $3.1 b”

    http://blogs.cfr.org/setser/2009/03/16/todays-tic-data/

    but maybe that is stale and they are not adding at this point.

    doug

  31. Anonymous

    ndk said:
    “We’ve essentially got financial martial law imposed right now, so I don’t think compliance with either the letter or spirit of the law can be expected.”

    So what does that mean and what is the world suppose to think about that “reality” going forward?

    Thanks…psychohistorian

  32. ThreeFifty

    Will a 90-day rule have any effect? Even if BoA and Citi don’t sell these newly bought assets to PPIP-funded investors, wouldn’t this still be a smart buy?

    PPIP will either artificially inflate the value for these assets (krugman) or restore it back to where it needs to be (geithner). In either case, the value of these assets will be higher, at least for a duration, after PPIP gets going.

    Then, the BoA’s balance sheet will look better and they can show good profits from these transactions — because what they bought for 50 will sell for 85 in the “market”.

    Even if Geithner tells them “no you can’t sell these using my plan”, he can’t tell them “no you can’t mark these up”.

    Meanwhile whoever unloaded these assets are doing well too because C and BoA are overpaying as described in the article. Everybody wins!(*)

    (*) Well, except you know who. Starts with ta, ends with xpayer.

  33. Anonymous

    I am cross posting a comment from Mark Thoma’s blog of his cross posting of Yves posting….got that!

    Old Timer says…

    Classic. Geithner claims we need PPIP to remove toxic assets from bank’s balance sheets, Those would be the same toxic assets that bank’s just bought using taxpayer money. Taxpayers are now going to overpay for assets they already overpaid for once before. You simply cannot make this stuff up.

    psychohistorian

  34. Dave Raithel

    Three-Fifty: I see your points. I am hardly one to defend current policy. But like Economic Darwinism, I suppose banks are going to act like banks. Since they game, and more “extreme” measures are off the table, counter-gaming is the only option. So even if ‘overpaying for assets raises all balance sheets’, so to speak, somebody as smart as the gamers – meaning that it is their business – can imagine how to minimize what the Post article quoted in an above comment asserts: “Their intent is undoubtedly to then sell those assets to other “too big to fail” institutions (each other?) with government guarantees at close to reserve position prices.”

    It’s one bad thing to raise values of bad assets by throwing money at them, and another bad thing to concentrate more power in fewer hands while doing it, when the purpose (ostensibly) is to free up capital for the real economy.

    On the other hand, I’ll grant you that one cannot shine a turd.

  35. john

    I had to laugh,

    Of course the gaming of PPIP has begun! It began long before the details were ever leaked to you and I and the rest of Main Street America. I prefer to call it Geithner’s “Welfare Scheme for the Ultra-Rich.”

    Maybe “Geithner can not shine a turd”
    would be a better designation than PPIP!

  36. Anonymous

    I don’t get it, Yves. You say they’re trying to “game the public private investment partnership,” but you don’t explain how this will work. And the article you quote from doesn’t actually say anything about the Geithner plan, other than the loose peg in the first graf. So what, exactly, are you accusing Citigroup and BoA of doing?

  37. Don

    I hate to tell everybody this, but we own a large part of Citi, for example. We expect them to make us lots of money. We are shareholders. We want them to make lots of money. If they don’t try, they’ll be sued, by us.

    That’s what happened in TARP. It was a hybrid plan. Citi and the government don’t have the same interests. On the one hand, we’ve given Citi a social purpose goal for the money ( namely, lend at all costs ), while, on the other hand, as shareholders, we simply expect them to make us money, and forget about social goals. Which is it?

    Don the libertarian Democrat

  38. john bougearel

    @ Yves,

    “The Federal Reserve Board is subject to FOIA”

    If that be true, then how have they managed to dodge the bullet under the FOIA lobbed at them by Bloomberg a month ago?

    Bloomberg asked for info under the Freedom of Information Act, and the Fed denied that.

  39. john bougearel

    Don the Libertarian

    Pulease, give it up, taxpayers and shareholders expect them to lose lots of money, our money, and if they don’t lose alot of our money, we will be grateful.

    Please, do not forget your place, role and function in this crisis. You are bordering on being out of bounds.

    And with that, good night everyone.

  40. tom a taxpayer

    Diego, thanks for the clear illustration showing at least one of the potential scams set up by Geithner’s plan.
    Outrageous! Now Geithner with his Public-Private Investment Partnership, is concocting the same kind of financial Frankenstein monsters that the mad scientists on Wall Street created. Geithner and the U.S. Treasury are aiding and abetting the continuation of Ponzi scheme, bank fraud, and cover-up of bank losses.

    Oh what a tangled web we weave,
    When first we practise to deceive!
    Right, Mr. Geithner? As head of the NY Fed, Geithner worked with Wall Street buddies to weave deceptions about Bear Stearns, Lehman, AIG, etc all through this crisis. Now, as Treasury Secretary Geithner can you be expected to investigate and prosecute NY Fed Geithner? Of course not. No more than Treasury Secretary Hank “the mole” Paulson could be expected to investigate and prosecute Goldman Sachs CEO Paulson.
    Now Geithner, like Paulson, as U.S. Treasury Secretary can freely loot the U.S. Treasury. Paulson left his henchmen from Goldman Sachs in key Treasury jobs to “help” Geithner.

    Like the Obama administration, I have hope…I hope you, Mr. Geithner, and Hank “the mole” Paulson and the banksters and the Wall Street mobsters and your mortgage industry and federal co-conspirators will be arrested and prosecuted using Racketeer Influenced and Corrupt Organizations Act (RICO) for committing the greatest financial crimes in U.S. history.

  41. Anonymous

    I thought the fed released the aig counterparty/payout info because of a FOIA request.

    Are they offering up the info, but denying the FOIA? I have to admit I didn’t read the press release as well as I should have.

  42. Anarchus

    RE: “ndk said…
    What galls me more than anything else is the uptake of the meme that nationalization would be more costly to the taxpayer than this PPIF plan. I don’t think that’s true.”

    Of course you’re correct, but the point is to try to defuse the outrage by avoiding “nationalization” which polls horribly and also hide the fact that the cost is so incredibly high by spreading the cash costs over a number of years and importantly throwing as much of the cost as possible into the future by using contingent guarantees.

    Since the government only uses cash rather than accrual accounting, lots of bad decisions can be made to look less stupid.

    Putting crude numbers on the pig of a plan, if nationalization or FDIC seizure costs $1 trillion with most of the costs falling in year 1 and the new Geithner plan costs $1.6 trillion but only $400 billion falls in year 1 at $400B/yr for 4 years, then that’s a win in cash accounting land. You can call it a winner for two years and it’ll look like less cost than the trillion up front and by years 3 and 4 there’s no telling what fresh new debacles we’ll be fighting that’ll grab the headlines then.

  43. MyLessThanPrimeBeef

    Let me get this straight – the reaseon Uncle Sam hasn’t nationalized those banks is because if the government owns 100%, the debt would have to be consolidated?

    Why not then tell the CIA to set up a front company that will own 1%? How about a quasi-public entity, like Freddie Mac or Fannie Mae, to own just 0.0001%? Heck, I am sure some patriotic citizens will not mind owning a company that will be lent money by the governmet to buy 0.00000000000000000001% share, as long as it’s a non-recoursable loan, or some other fancy tricky way to make sure said patriotic citizens will not have to put one cent of their own money at risk. That shouldn’t be too difficult for a smart guy like Geithner.

  44. Yves Smith

    john b,

    What I wrote was clear, I suggest you familiarize yourself with the structure of the Federal Reserve system.

  45. FairEconomist

    A month ago… when Geithner crossed swords with Axelrod, winning the battle and losing the war.

    No, Geithner is winning the war. He doesn’t care about the Obama administration succeeding. He wants to get the banksters hundreds of billions they didn’t earn. Obama becoming politically tone-deaf in supporting Geithner’s proposals suits Geithner just fine.

  46. ndk

    Putting crude numbers on the pig of a plan, if nationalization or FDIC seizure costs $1 trillion with most of the costs falling in year 1 and the new Geithner plan costs $1.6 trillion but only $400 billion falls in year 1 at $400B/yr for 4 years, then that’s a win in cash accounting land. You can call it a winner for two years and it’ll look like less cost than the trillion up front and by years 3 and 4 there’s no telling what fresh new debacles we’ll be fighting that’ll grab the headlines then.

    And, of course, you’re correct too, Anarchus. I guess that returns us to the tired refrain of why the media, impoverished and endangered, is unwilling to bite the only hands left feeding it at this point.

    What a world…

  47. Swedish Lex

    So the gaming begins, with tax payer money risk capital on all sides. A couple of months from now, Congress will wake up and call it “outrageous” and step in with retroactive unconstitutional legislation that will distort things further.

    Continue digging the hole furhter at this rate and China will soon emerge on the other side.

  48. mmckinl

    And the QSPEs ?

    The Real AIG Scandal: How the Game Is Rigged at Wall Street’s Casino ~ By Lucy Komisar

    “Shouldn’t Congress, the Fed — which is overseeing AIG — and law enforcement agencies be investigating these SPEs and the money they received? Shouldn’t they investigate whether it was obtained illegally?
    What if there are trillions of dollars in the special purpose entities that have been hidden for the benefit of a powerful few? Should the U.S. taxpayer come to the aid of the largest U.S. banks and brokerages that created these fancy off-balance-sheet financial instruments without full disclosure to at least one government agency of the monies in SPE accounts? “

    http://www.alternet.org/workplace/133228/the_real_aig_scandal:_how_the_game_is_rigged_at_wall_street's_casino/?cID=1169983#c1169983

  49. Anonymous

    Yves: The Federal Reserve Board is subject to FOIA., not member banks (or so the Fed asserts, I am not current on where the lawsuits stand) and the various lending programs sit on the banks’ balance sheets.

    ——–

    Federal Reserve Member Banks are chartered under the Federal Reserve Act. However, the corporate doctrine of “ultra vires” makes actions by corporations that they are not authorized to take unlawful and void. 12 USC 4.4.7 only authorizes Federal Reserve Member Banks to take acts authorized under the Act, and the Act does not seem to authorize Member Banks to make gifts, through underwater nonrecourse loans or otherwise. Consequently, gifts by Member Banks seem unlawful and void. Assuming you want to view Member Banks as private corporations, and not government instrumentalities.

    Since the FDIC is a government instrumentality, its gifts seem illegal under the Constitution as spending of money not authorized by Congress.

  50. Anonymous

    Step 1 : establish new bank
    Step 2 : have the government put in between 49%-79% of the capital and do an IPO for the balance.
    Step3. : have the Fed provide a line of credit for upto 10 times the capital.
    Step 4.: hire lots of loan officers
    Step 5 Start making loans to credit worthy borrowers.
    Step 6: Repeat.
    Step 7: transfer deposits and good assets out of the banking units of Citibank, Bof A etc.
    Step8: kiss the casino stuff remaining good bye.
    Step 9: at some point in the future sell of the the government stake and recover much of the cost of the bailout.

    Is this nationalization?

  51. Kid Dynamite

    i cannot believe no one has asked this yet:

    “WHO IS SELLING THESE ASSETS AT 30c???”

    we’ve been told repeatedly for the last 18 months that there are no sellers at the price. The NY Post article identified hedgies and BAC/C as buyers… so who is selling them?

  52. Anonymous

    Doug,
    Thanks for the clarification, but I think that is as stale as week old French bread or the two week old fear of nationalization.
    John

  53. Anonymous

    Original comment: “But I paid 50 cents on the dollar, so it’s worth 50 cents on the dollar.

    It’s worth 50 cents on the dollar to someone who is using someone else’s money to buy it.

    It also has the interesting effect of making the rest of their crap look good.

    “I just paid 50 cents on the dollar for something just like that, so I am going to bring the mark up on everything else I own like it.”

    The one problem with that is someday, Citi and BofA are going to want to sell these, and who other than the government would be dumb enough to pay this current subsidized price?

    I’m a bit cynical on the whole situation, this was on purpose, and I think everyone that needed to know knew that Citi and BofA would do this and it was part of the so-called recovery plan.

  54. Anonymous

    I’m sorry to say I don’t understand the outrage.

    This stuff isn’t just gonna disappear. An object of any recovery plan, nationalizing or otherwise, is to get this junk moving and discover prices for it.

    That’s what’s happening now, no?

    What’s the problem?

  55. Luke Lea

    Yves,

    Aren’t there ways to prevent this sort of gaming? For example Geithner and company might restrict their plan to securities purchased before such-and-such a date. Also, if the banks purchase additional toxic assets, won’t this indicate what the market price is? Just wondering.

  56. Anonymous

    Just remember what you sow, you reap…there is no way around this. It may take time but it does come around. If we don’t stop this fraud, it will be our countries demise…

  57. El Bobo

    For people confused at outrage that BAC and C are gaming the system:

    It’s because the too big to fail banks are the ones setting the new rules through Geithner.

    It’s not like Geithner is going into his office by himself and coming out with these new rules and telling the banks to just deal with it, LOL.

  58. curlydan

    It would be nice if the ACLU would get off their butts and take up a few of these legality issues.

    Or if not the ACLU (since these aren’t civil liberties), how about an AFRU (American Finacial Rights Union). I’d give an organization dedicated to challenging the legality of the Geithner plan a quick $100 and more if it started doing something. My investment might actually pay off.

  59. JD153

    The subsidies themselves are outrageous, but in two short days we’ve seen numerous strategies posted indicating how easy it will be for both sides to game the Geithner solution.

    Back in October we were all terrified by the chaos that would emerge if we let another ‘Lehman’ fail. Well, its now six months later and we are no closer to resolution.

    How long would it have taken after a few major financial bankruptcies and reorganizations for the re-emergence of functioning credit markets?

  60. john bougearel

    Yves,

    Most disconcerting about these aggressive purchases of risky alt-A and option ARM securities by Citi and BAC slightly more than 30 cents on the dollar is that in less than two months they can sell them back out to Geithner’s PPIP at roughly 90 cents on the dollar. The banksters will almost double their money on this investment, and it is virtually guaranteed as long as Geithner’s fraudulent and artificial price-fixing scheme is legalized.

    My guess is the fix is already in or the banksters would not have aggressively stepped up their purchases of dreck this month!

    This is why Geithner’s artificial price-fixing scheme is so despicably criminal. Geithner’s price-fixing scheme is almost entirely funded (97%) by us the taxpayers.

    Where is the US Attorney General on this issue? Why is he not stepping up to the plate to do his civic duty as a public servant to protect American taxpayers? Could he be intentionally silent on this issue or asleep at the wheel on account of the fact that he was just appointed by Barack Obama?

    Eric H. Holder Jr. was sworn in as the 82nd Attorney General of the United States on February 3, 2009 by Vice-President Joe Biden. President Barack Obama announced his intention to nominate Mr. Holder on December 1, 2008.

  61. Walt French

    Has Naked Capitalism’s readership all gone soft in the head?

    Here we have a single article, from a paper not known (to me) as being on the leading edge of financial reporting (but OTOH, known to me for putting out political posture masquerading as news), citing a single anonymous Wall Street source.

    And on this, the conspiracy theories are proven. ?!?

    I am not saying that this is not the sort of thing that banksters would do, merely repeating Sagan’s “extraordinary claims demand extraordinary evidence.” This meme fails the quality-of-evidence test, and badly.

    We have no opportunity to question the the “WS source” or his motives. And nobody on this link has mentioned the history of the news source as an often hugely-biased organization with a huge axe to grind.

    I’m no fan of the bailout plan but I’m amazed how gullible so many posters are here. Being so willing to attribute illegal activity, based on non-evidence suggests something much more one’s world-view than about one’s ability to coldly examine evidence.

  62. Yves Smith

    Walt,

    If you followed this blog, the Post HAS broken stories on hedge fund losses that were very juicy, much later confirmed by the MSM. They have VERY good moles at some of the big players.

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