M2M / PPIP - Please Pay Insane Prices

Posted by urbandigs

Wed Apr 1st, 2009 04:08 PM

A: Why not let it stand for that? Stocks are rallying ahead of the FASB 'mark-to-market' decision that will be made tomorrow. Equity investors are thinking that with relaxed rules and the PPIP plan, even if trades occur below current marks, it may not affect banks' balance sheets too greatly. The latest treasury PPIP, public-private investment program, is flawed because it allows a homerun for banks that are holding toxic assets to participate and buy their own toxic assets + bondholders of these troubled banks to participate to protect their larger investments from going sour. As Mish accurately points out, this plan does not increase lending, offer a fair market for valuing these assets, help the troubled homeowner meet debt obligations, or protect taxpayer interests. Lets discuss.

According to WebCPA, "FASB Caves on Mark-to-Market":

The Financial Accounting Standards Board has bowed to pressure from lawmakers and banking interests and put forward a proposal to relax fair value standards.

The board has formally scheduled a vote for Thursday on the proposed revisions to the standards, but the outcome seems to be a foregone conclusion at this point. Financial institutions want the ability to avoid further steep write-downs on impaired assets such as mortgage-backed securities and the exotic but hard-to-sell financial instruments clogging their balance sheets.

Investors have good reason to be worried about the financial statements the banks will be issuing as a result of the changes. Banks will be able to start keeping the “other than temporary impairments” on their troubled assets out of net income and reclaim billions of dollars they had previously written down.
It seems the market & banks will get what they want to help cushion the blow to balance sheets as price discovery continues and equities react positively. Perhaps we may even get markups. My thoughts? Just another temporary fix for the markets that further clouds transparency and makes it harder for investors to know exactly what the assets on the books of a company are worth. If a company is to be liquidated, how will anybody know the real value of the assets held?

By changing mark-to-market, you can allow banks to value illiquid securities using models that may paint a very misleading picture. Kevin Drum notes:
"...allowing banks to value assets using models that can be tweaked so egregiously that they bear only the vaguest relation to reality. That's how IndyMac could claim it was "well capitalized" right up until the day it was taken over and shown to be a shell of its claimed self."
But stocks are down, banks are hurting, and people want CHANGE! Unreal how easily the powers that be can be pushed. On to the PPIP.

The latest Geithner plan is the PPIP, so called public-private investment program that is a HUGE incentive for banks holding toxic assets. First let's break down the gist of the plan. The plan involves a 1-1 government match of private capital that is then levered up by the FDIC 6:1, to buy toxic assets at marks way higher than current bids. The FDIC loan is a non-recourse loan, meaning if the toxic asset purchased at inflated levels turns out to really be worth much less, well, the taxpayer is out of luck.

Those with a vested interest in cleansing their own toxic assets or protecting their bonds in a mismanaged company, will have GREAT interest in this regardless if the new investment pans out - the goal is to save bigger losses elsewhere. The taxpayer does not fit into either of these categories.

I referenced a Steve Waldman quote a week ago, on how the plan to rescue these banks from nationalization is a big saving grace for those holding billions of corporate bonds in these troubled institutions:
Steve Waldman - "Under Geithner's plan, PIMROCK's $10B permits a $10B equity investment from the Treasury. Then the FDIC levers the whole thing up, providing $6 of debt for every one dollar of equity. So, $140B of bad loans are lifted from J.P. Citi of America, nearly $90B of which is sheer overpayment to the bank.

Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they've received assurances that if we can get the nation out of the financial pickle it's in, there will be no haircuts on those bonds. "Shaking hands with the government" means that nothing ever has to be put in writing.


This PPIP concept helps get rid of the toxic stuff at more reasonable prices than the current bid, at the taxpayer expense and using FDIC leverage, while minimizing the risk to the private investor. The banks come out healthier and the bondholders are one step closer to be saved. Therefore, its a no brainer for those holding the toxic assets to participate as a private investor, get the government match, and then get the FDIC leverage to pay a higher than market price for these assets to get them off the books of the same players that are participating! Amazing what a little creativity can do right?

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