The notorious Public Private Investment Partnership, aka “Son of MLEC,” was supposed to be up and running as of early May but its debut has instead been pushed off to July. The need to sort out some details is the official reason for the delay, but the Financial Times’ Gillian Tett says that the banks themselves are not so keen about the program.
As we said with every iteration of the idea (MLEC, TARP version 1.0, now the PPIP), it seeks to finesse, in an opaque and frankly dishonest way, the fact that banks are unwilling to sell the toxic dreck on their balance sheets for anything below their “marked” value, which is above market (put it this way, if it were at market, there would be no reason for the program, they’d just dump the stuff and be done with it).
And even selling the nuclear waste at marked value does not do a lot for them. As various observers ranging from Alan Greenspan, Meredith Whitney, and Nouriel Roubini have noted, the stress tests to the contrary, the banks are certain to be back to the well for more equity. If nothing else, fearsome commercial real estate losses are in the offing, and housing has not yet bottomed either. All a sale at “booked” value does is increase liquidity of their balance sheet. They need more equity, either via selling the garbage at a profit, retained earnings, or selling stock.
Let us face it, no amount of leverage is going to induce a rational investor to put up even a teeny amount of equity to pay an above market price. Who wants an embedded loss? And all the claims contrary-wise, the overwhelming majority of this stuff trades. It is not that there are no markets for these assets, as the banksters and their minions at Treasury would like us to believe; they just don’t like the prices.
As Tett tell us:
If you listen to some senior US bankers, it is easy to feel pretty doubtful that the PPIP can really fly. The key sticking point is price. The PPIP plan will work if banks take part to sell assets. But right now, no banker wants to participate in an auction that produces asset prices lower than those on bank books. After all, if that were to happen, banks would face pressure to make more writedowns – which they can ill afford.
The Treasury and FDIC hope to avoid this scenario by encouraging asset managers to place high bids for the bank assets, by offering non-recourse leverage of up to five times (or far higher than non-recourse leverage available in the market). Some politicians hate that, since the details of the deals mooted so far appear to leave taxpayers with little embedded upside.
That political scrutiny, in turn, makes asset managers nervous. As a result, it is still unclear whether enough asset managers will produce bids that are high enough to make the banks happy with an auction price.
So some large banks are – unsurprisingly – adopting a policy of quiet footdragging. A senior official at one large bank observed this week that his group would participate in a pilot scheme, as a gesture of goodwill. But after that token gesture, this bank will probably stop.
And while the government wants to set a minimum lot size of $1bn, this bank is lobbying for a figure nearer $250m to limit the auction to a few choice (token) assets
Yves here. This was an outcome we had anticipated, that it anything traded, it would be the best of the dreck, where the bid-offer spread was lowest, Back to the article:
Unsurprisingly, this banker – like others – concludes that he is “not optimistic” about PPIP, not least because the urgent pressure to sell assets is receding as banks raise capital.
That view may not be entirely representative: another bank tells me it is preparing to get properly involved (not least because it has the financial strength to have written many assets down). Government officials running the PPIP scheme insist there is strong overall interest from potential buyers and sellers. They also point out that it need not matter if the scheme ends up being limited in size. After all, what PPIP is trying to do (like Talf and much else) is reignite market activity, not replace it. Think of it as a chunk of firelighter on a pile of wet wood. Thus, the sheer act of talking about PPIP – and then staging a few sales – may be enough to kickstart a private sector trading toxic assets again. Or so the hope in Washington goes. “Success is what happens to the market overall,” says one.
I guess no one told these guys these markets are functioning. And the really werido stuff (that was never designed to be traded) is so on-off that single assets trading here and there do not a market make. They are so heterogeneous that isolated liquidation do not have implications for other holdings. But surprisingly, the normal savvy Tett buys into the party line on this point.