M2M / PPIP - Please Pay Insane Prices

While the scenario you outlined regarding self-dealing is explicitly forbidden in the initial notes, interestingly enough, I attended a meeting this week of MANY participants-to-be in this plan and found out that ALL the banks are petitioning for rule changes primarily on this one element. Be it JV's, newly structured SIV's, rushed participation in new funds soliciting for PPIP inclusion or whatever, they all recognize that lobbing a dollar of their equity into "Nuco" has significant asymmetric effect on their multi-billion dollar "toxic" book. This is the game, however despicable it is, and the agents simply maximize their self-interests with the incentives afforded them. I also find it interesting that the legacy securities portion of this plan involved 5 intermediaries deemed "acceptable" to the government while the loan plan doesn't. My sense is the government recognizes that they will get much better participation on the securities side and can make a lot more money in this part while the loan plan will wind up disappointing.

thanks mjiam for the clarity. I try to keep it simple here, but yes, I was referring to the banks creating special purpose vehicles or entities in which they then go and participate. Im sure they will find a way around it to get involved and I dont see how the gov't can watchdog that with great efficiency.

mjiam - would you agree with this statement found on cumber.com regarding the securities side of the program versus the loan side?

"The loan program is open to anybody and has 85% financing. The securities program will be handled by 5 managers and they must each have 10bb of MBS under management. And, most of what are called “toxic assets” on balance sheets are securities not loans, so the latter program will by necessity be bigger and the discounts larger. So the best opportunities in this deal may well be only for the very institutions that are so often blamed for how we got here."

Well, we know one thing for sure. All these guys were probably buying and selling CDS among each other in a giant circle jerk. Now we, the taxpayers, get to pay for their gambling debts!

and to take that a step further, the AIG bailout made all those counterparties whole! fuckin crazy

To me its an enigma wrapped in a cluster$%^&#@! You have insolvent bank CEOs still gambling that these securitized assets have been marked down too much, despite the fact that the loans actually held on banks books (supposedly better underwritten) are going bad at rates set to exceed the early 90s...when the banking system was bust. Meanwhile buyers who have cash are sitting back waiting as they believe that assets will only get cheaper. The only real way to clear this logjam is to fire all the bank CEOs and let the junk trade at basees where new buyers can make a decent return despite higher savings rates, lower rents, lower consumer incomes, higher savings rates etc, etc. My guess is PPIP will fizzle or result in a bear market credit rally and only prolong and increase the ultimate pain....Japan style. They should be applying the same model to the banks as they are to GM and Chrysler if they want to give the power of capitalism a chance to work.

Noah,

The cronyism is just deafening and this is the kind of garbage that provides ballast for the populism that is no longer just percolating below the surface, but busting through the global seams (see wsj story on PPR ceo this am)..The only "change" we see is the terms on how the taxpayer is going to be further screwed by entrenched financial interests. As an aside, I'
m hearing that no banks plan on participating on the loan portion here because bid/asks are so wide so my guess is a few more carrots will be dangled (changing the rules like i mentioned in my previous post) in the coming months to encourage participation before they start with the sticks...

Noah, Jeff, et al:

The scam is this: banks created ABS/MBS and held a piece on their balance sheets. They marked the value of that piece up immediately after selling the balance of it to the market when times were good. So bank management got a huge bump up in PnL. They liked that, they wanted to get PAID off that bogus initial mark up.

So now we have bonds marked at 90 or 80 and the banks are squealing that the 30 bid for them is bogus. "It's not fair! These bonds are worth 80!" NOT TRUE, AMIGOS.

The banks have written down most of the initial bogus mark, plus a little 'real' decay in the bond cash flows. Ask the quants who structured these deals, they will tell you the truth. It's a huge, huge scam. The quants know the truth, subpenea the quants and they'll tell you the paper is total garbage for the most part.

Zero Hedge had a post on average mark prices for a sample of paper that might go to auction in the PPIP. Tyler concludes that the marks are bogus.

I wish somebody in power cared enough to stop this madness. Can somebody please subpenea 100 quants then give them immunity? It would be so refreshing to hear them tell us what's really going on.

Quite honestly, bank bondholders should take a haircut and stock holders should get wiped out. I read a fascinating piece written by a former IMF member bemoaning our catering to the banks much the same way emerging markets often cater to their principal GDP enablers. Totally hit on some very good points.

I think no one is saying why Ben is doing what he's trying to do. Ben knows Congress won't let him do the things that should be done. He's smart enough to know not to nationalize banks (Congress would rather perpetuate what got us into this mess than suffer through the cure.) Look at how they pressured the FASB. It was a "lose your job or do it our way." I'm more upset with the politics than what he's doing. I think you guys are angry at the wrong folks.

Paul McCulley of PIMCO said it best "We've got to aim for the 2nd or 3rd best strategy to avoid being forced into the 6th or 7th best strategy."

meek - link to imf piece?

here it is:

"The Quiet Coup"

http://www.theatlantic.com/doc/200905/imf-advice

great read.

Meek - that is so funny. I printed this article out and I have it in my workbag. I meant to read it at my last open house on Sunday at 152 E 94th, and I ended up getting 16 people in and had no time to sit and read it. I forgot about it and when I went to that link I recognized the main picture on top.

Gonna read tonight. Thanks.

I admit I haven't been following the M2M developments too closely, but wouldn't a change in the M2M accounting be an immediate write-up windfall to the banks and actually make it unnecessary for the banks to pursue write-ups by gaming the PPIP?

Noah, They can't do what needs to be done not because it the normal simple web of closely tied people or special interests. The problem is who will get hurt if they fix the banks the way they need to be fixed (bankruptcy, nationalization, etc.). So the answer is to follow the money.

We know the stock will be worthless, but in fact no one (not a stockholder) cares about them. In fact, most have already been essentially wiped out. That leaves the bondholders and the banks lending customers.

The lending customers is a real and serious issue. Is there enough lending capacity left over to support those lenders at the PNC's and TD's of the world? Or will they just pick and choose the best of the customers? Then you will see a new string of bankruptcies among small and mid-size companies, not exactly something anyone wants, but also not something I think anyone is focusing on.

The others that get hurt are the bondholders. But who are these? Even if you say they are a PIMCO, who has money in Pimco? The answer (that matters) is all the defined benefit pensions plans (read: public workers and unions) who are already hit. These plans contractually will have to get funded, and by various taxpayers (often this is a constitutional issue in each state). Why not a convoluted and hidden way to get it all done by Fed taxpayers that will also have the benefit of hiding who the actual beneficiaries are?

After all, 3-4 years from now when someone totals it up, what happens in the political environment to the beneficiaries of that largess when it comes out? The bankers are willing to fall on the sword and take the blame since they will also be taking all the cash.

Deepthroat kept saying.. "follow the money". I mean if a bunch of shmos like us can see what a joke this is becoming, you don't think everyone involved doesn't too?

As you look around the country, all the areas that have dropped heavily in price have pick up in volume the past few months. Areas such as Florida, Arizona, Southern California and Nevada, are the areas that didn't go up as much and have not come down as much are not seeing the same higher volume. The combination of price, interest rates and now mortgage availability seem to be making the difference.
In many parts of the country the market volume has picked up. In Florida which is one of the hardest hit, volume is now up for 5 months in some areas. The same goes for Southern California, Nevada and many other areas. Bergen County has not been hit as hard as these areas and did not go up as much as they did. Bergen was lucky not to be that speculative of an area. The bottom has been forming in my opinion, although it is taking time, there is a lot of money coming back into the market from the federal government in many forms. It will really start to be felt in the next month or so.

It is a combination of a few things for Manhattan.
1. NYC is very high in price. It had a major run up and was the last to peak.
2. The Dollar is still low.
3. Treasury yields are low.
4. Stocks were under pressure and most ran away.
5. All income issues are either very risky with high yields or very low yields with less risk.
However, even low risk has become questionable.
6. Real estate may go lower but won't disappear as paper assets may.
7. Florida and the other hard hit areas, Southern California, Nevada and so on are rock in and rolling in volume increases.
8. We the U.S. is still the safest place on earth!
Real estate, with all the capital that has been coming in is in for a big turn around.
I have been blogging it for 3 months or more that this is the bottom!
Richard

Do you guys really think the stimulus will help? I have serious doubts and I know it will raise the deficit. I was looking the other day at this website
http://www.recessioninfocenter.com
and it was talking about previous recessions. I think we should acknowledge the cylicality of economy...

Wow, awesome real estate blog. Bookmarked, thanks