Geithner Is LYING… This Investigation into Banks Is Proof
contrarianprofits.com
Apr 6th, 2009 | By Contrarian Profits | Category: Notes From the Investment Underground
Notes from the
Investment Underground
San Telmo, Buenos Aires, Argentina
April 6, 2009
Why the economy is still heading for a cliff… All the king’s horses and all the king’s men can’t put the banks back together again… The madness of Sheila Bair… The government lies over banks are paper thin… Infighting at the Treasury… Why Citi’s CEO should go… Banks plunge… “Fake dividend” strategy exposed… Can mark-to-model save them? Selling OTM calls against your financial stocks… What happened on March 9… And more!
*** You’re reading this newsletter because you don’t believe the cheerleaders in Washington and in the mainstream press. You know it’s safer to know the truth about the economy than to believe the hype and the lies and the false optimism. You know that real money-making ideas can’t be found on CNN and on Cramer’s “Mad Money.” You have an inkling that there’s something crooked about the trillions of tax dollars the government has handed to failed banks, failed insurers and failed automakers. But do you know how deep the rabbit hole really goes?
*** Zero Hedge has put together one of the best investigative pieces on banks’ bad loans that we’ve seen to date. And the information they’ve dug up means that no matter how many trillions of dollars more in debt the U.S. takes on to ‘fix’ the zombie banks, there is nothing at this point that can be done to change the final outcome. Let us explain.
*** The crux of the matter is that Treasury Secretary Geithner would have you believe that his “legacy loan” program is fair and equitable at a sale price of roughly 80-90 cents on the dollar for banks’ illiquid loans (toxic assets). But this is fantasy land stuff, just as it’s fantasy land stuff for the major banks to be marking their toxic assets in the 90+ region. According to data put together recently by Goldman Sachs, the average carrying value of commercial mortgage loans – you know, the ones about to implode with a deafening bang anytime soon – is 95%! This is clearly no where even close to where these loans would clear in the market.
*** Now, according to FDIC head Sheila Bair, the reason for this disconnect is the lack of available credit for financing the purchase of these loans in the market (not, by implication, the underlying performance of the loans themselves). “Difficult market conditions have complicated efforts to sell these troubled assets because potential buyers have not had access to financing,” is how she put it recently. The logic being that you ratchet up leverage by way tax dollars – the essence of the PPIP – and the problem of illiquidity will vanish. Or so goes the story…
*** The reality is very different. And serious kudos to Zero Hedge for digging this up. In reality, in its own commercial loan auctions, the FDIC is offloading these same toxic assets 49.3% discount, or a 50.7% clearing price. This from ZH:
Zero Hedge took the liberty of compiling some of the data for the benefit of our readers: we picked a data sort of all closed commercial loan auctions from January 1, 2009 to February 28, 2009, to see just at what level these would close. Of course, we highly recommend our readers recreate these results.
The results: 43 commercial loan auctions, of which 39 were for exclusively performing (so not non-performing, or lower quality auctions, and by implication free cash generating), consisting of 331 total loans, representing $206 million in face value, ended up clearing for a $103 million price, a 49.3% discount, or a 50.7% clearing price! That’s right, the FDIC itself clears performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions. One would assume the chairman of the very agency that conducts these loan auctions would be aware of them and would at least reference or mention these results in her numerous public appearances.
Let us repeat that for those too stupefied by the government’s lies to grasp it all at once. Commercial loans are clearing in the FDIC’s own auctions for 50 cents on the dollar. But banks have marked these loans to an average of 95 cents on the dollar. And the government is looking you in the eyes and telling you that an equitable transaction price for these loans – using your tax dollars as a guarantee – is somewhere in the region of 80 to 90 cents on the dollar. And this from a president who promised “change.” This seems like business as usual to us.
*** Incidentally, the bank responsible for buying up these loans from the FDIC (at a clearing price of 59%) is Beal Bank, which is headed up by prolific poker player Andy Beal. Beal doesn’t think much of Geithner’s PPIP. The problem, of course, is price. Beal echoes what we’ve been saying for weeks here at Notes: the nation’s banks are insolvent when you mark their dodgy loans at fair-market prices. This again from ZH:
He thinks the government is going to be “disappointed” by its various programs to revive lending. He says Treasury Secretary Timothy Geithner’s new plan to guarantee loans to buyers of toxic assets won’t lead to many sales because the problem isn’t liquidity but price. They are not low enough. Half the country’s banks – 4,000 in all – would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.
“Banks are on a prayer mission that somehow prices will come back and they won’t have to face reality,” Beal says. And that reality, according to Beal, is going to get a lot worse. “Unemployment is going over 10%, commercial real estate hasn’t even begun collapsing and corporate credit defaults are just getting started,” he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.
*** As Felix Salmon points out on his Reuters blog, one of the major obstacles to sensible policy decisions from Washington, and the Treasury in particular, is good old-fashioned infighting.
It’s worth remembering that all of this infighting came at the end of a famously disciplined administration which had had the best part of eight years to sort out any glitches and get everybody pulling in the same direction. Today, by contrast, most senior Treasury positions are still unfilled, the White House has a great deal of interest in the minutiae of economic policy, thanks to the presence there of Larry Summers and others, and in general Obama likes to encourage debate — which is another word for disagreement.
The lesson here, I think, is not to place too much faith in Treasury. No matter who’s in charge, there will always be a multitude of institutional constraints which prevent it from (a) putting in place what it considers to be the ideal policy, and (b) executing efficiently any policy which is put in place. And anything which goes for Treasury, of course, gets multiplied by an order of magnitude if you start looking at any efforts to achieve multilateral coordination.
*** Some decisions are being made at the Treasury, however. Today, Tim Geithner lets us know that he will oust the CEO’s of any institutions that need “exceptional” government assistance. On CBS’s “Face the Nation,” Geithner said:
If in the future, banks need exceptional assistance in order to get through this, then we will make sure that assistance comes. Again, not just to protect taxpayers but to make sure this is the kind of restructuring necessary to make them stronger. And where that requires a change in the management of the board, we will do that.
Let’s dig in a little bit and see what he really means.
If in the future, banks need exceptional assistance in order to get through this…
Notes comment: Now that all the rules have been changed and worst might be over with…
… then we will make sure that assistance comes. Again, not just to protect taxpayers but to make sure this is the kind of restructuring necessary to make them stronger.
Notes comment: It’s not always about protecting taxpayers, you know, now that over $12 trillion is on the line…
And where that requires a change in the management of the board, we will do that.
Notes comment: The government has already dismissed the CEOs of GM, Fannie Mae, Freddie Mac and AIG.
But isn’t the $300 billion promised to backstop Citigroup losses… plus the $52 billion injected into them (on two separate occasions)… plus the massive ownership stake the federal government took in the bank all considered “exceptional” government assistance?
Sure it is. But the government didn’t jettison Citi’s CEO because it wasn’t politically necessary.
There was a lot of controversy surrounding Freddie and Fannie. Congressional testimonies a few years ago showed that they were insolvent institutions. And ones that lobbied Congress extensively.
So the government fired the CEOs to cover for Congress.
Then there’s AIG, the first insurer to be taken over. That certainly caused uproar. Yet even more unpopular then an AIG takeover has to be taking over GM. Back in November – before a price tag was even set – only 38% of Americans supported a GM bailout.
So the government kicked out GM’s CEO. But if Tim Geithner is serious about his proposed mission, there is no CEO as incompetent as the one leading Citigroup.
The biggest bailout so far deserves a change at the top. Don’t you think? Let us know your thoughts by writing in to info@contrarianprofits.com |
