Late Night Happenings
A: Two pieces of news out later today that I think are more important than it appears at the moment. In my opinion anyway. Once we find out more and something official is released, I'll provide thoughts on it. For now, I'll leave emotion out of it and just report on the news and my gut reaction from a day trading point of view; considering where we are right now and where we came from.
Via Yves over at Naked Capitalism: Now It's Official: Public Private Partnership to Overpay for Toxic Bank Assets
Our suspicions have finally been confirmed. From Andy Lees at UBS:NOAH here. So, basically the price that will be paid for toxic assets will be somewhere in between current market bids and the much higher mark-to-model prices assigned by the institutions holding them. Shocker. Banks didnt want to hit the bid, so they stopped adjusting current market bids to assets held, or hid them in Level 3, and kept those higher valuations based on the previously proven flawed mark-to-model valuations. Debates raged on both sides - assign current bids to all the toxic assets and you have a big problem, assign model price and nothing will sell. Looks like a new market will be made in between - ain't life grand! Moving on to the next piece of news.
"The U.S. will give further details of the Geither public/private partnership plan to take bad assets off banks books, later this week a senior department official has said. The official said that the Treasury wants to put out enough information in the coming week so that the potential participants can better judge the proposal. It will also detail the timeframe in which it will become operational. So far the plan is expected to leverage both public and private capital to buy assets using government financing. The initial funding would be from what remains of the USD700bn financial rescue fund, but a “placeholder” provision in President Obama’s fiscal 2010 budget plan signals a possible request of around USD750bn in new funds. Neel Kashkari, the Treasury’s interim administrator for the USD700bn rescue fund told law makers last week that private investors are ready to invest in distressed mortgage assets if they can get financing. With no private financing available, they could only pay prices that are too low for banks to be willing to pay. The bad asset plan is expected to be structured along similar lines to the TALF, which is scheduled to launch this week, although the TALF will be restricted to funds investing in highly rated asset-backed securities."
Via Calculated Risk: FASB to Propose Changes to Mark-to-Market
The Financial Accounting Standards Board, pressured by lawmakers to change the fair-value rule blamed for worsening the financial crisis, proposed permitting companies to use “significant judgment” in valuing assets.NOAH here. Ok, you guys seeing what is going on here? Is everybody getting it? These two forces are linked. On one hand we have the mark-to-market order by the FASB and on the other we have the mark-to-model method used by comatose banking institutions. Something is about to change and it will come to both forces. Not only will we pay MORE than current bids (current market value) for these toxic assets, yet less than current asks, but the accounting standards board will relax mark-to-market rules via the 'permitting companies to use “significant judgment” in valuing assets' amendment.
Companies would be able to apply the revised rule to their first-quarter financial statements, FASB Chairman Robert Herz said today during a meeting at the U.S. accounting rulemaker’s Norwalk, Connecticut, headquarters. The board is set to vote on the proposal April 2, after a 15-day public comment period.
That means the remaining assets that were not traded, would NOT have to be marked down much further because of the institutions' judgment call in valuing it. That's quite a 1-2 punch don't you think. Lets keep emotions out of this until we hear the official announcement, but this to me seems like market moving news for equities; maybe not realized right now, but it will.
Will this do what it is designed to do? SPARK PRIVATE INVESTMENT & REVITALIZE THE SECONDARY MORTGAGE MARKET that has been frozen for a heck of a long time; about 15-17 months now I think.
Posted by iven
Mon Mar 16th, 2009 09:07 PM
Noah, News of FASB meetings was out last Monday, so some of this is already discounted into equities. So it could be that once the news is announced equities will rally, then fade lower the same day.
Posted by lars
Mon Mar 16th, 2009 09:19 PM
The more I read the financial news these days the more I have an inexplicable urge for Sushi. Moreover, I cannot shake the nagging feeling my gut is trying to tell me something.
Posted by cfranch
Mon Mar 16th, 2009 09:30 PM
I think this rallies the equities markets. The market sell off since the inauguration was largely due to the murkiness of the Treasury's plans. Markets love clarity. Seems we just got it.
Posted by jeff
Mon Mar 16th, 2009 09:32 PM
Noah,
Thus far there have been few takers for TALF as currently structured...yet the way it read it was an almost no lose deal. Everyone knows these assets are "toxic" and are ripening with age and a slowing economy. The government will keep sweetening the pot on TALF until they can get this poop moving. And as Bernanke told 60 Minutes, they will not let any large players be found to be capital deficient. So you have both ingredients at work here as you correctly point out. My investment gut tells me you can't un-scramble the egg and that while they may be able to tranform the toxic waste into recycled rose smelling donkey fazoo that guarantees someone a hefty profit. This on its own will not magically heal the banking system, restart the old securitization system as we knew it or get banks lending at anything but a careful and painstaking pace. it could cause some more short squeeze in equities though.
Posted by Noah
Mon Mar 16th, 2009 10:07 PM
yea I agree Jeff, nothing more than a short squeeze effect on equities; but hey, we talked last week about the likely rally. If anything because of where we are coming from. We were down 60% or so from highs, so you have to expect some rallying even on bad news, let alone good. People look to the stars (stocks) for a path, and every bear rally provides many hope. The bigger picture is fairly clear.
Thanks too iven, saw the articles on this about a week ago, but it seems we are getting close to official announcement. Certainly could be buy rumor, sell news event. Thanks. I have been a bit on sidelines past few weeks though, getting back in loop now.
Posted by faustus
Tue Mar 17th, 2009 08:03 AM
Agree with Iven, this is essentially old news to the extent that Geithner already had softly pledged over $1 trillion to revive the securitization markets (TALF).
What's interesting to watch is the ongoing negotiation between Geithner and the private sector. The private sector (hedge funds) hold all the cards here. All they need to do is wait - they're in no rush. In the meantime, Geithner will negotiate against himself until someone bites.
Geithner is playing poker against the banks, hedge funds, etc., and gets cleaned out every time. He's the guy at the table that everyone immediately identifies as the sucker. Problem is, he's playing with our money.