SLABBED Daily – April 6 (blow-out sequel to bail-out)

Congressional Oversight Panel to Call for Wiping Out Shareholders, Ouster of Top Brass at TARP Recipients from naked capitalism is a Monday morning wake-up call:

This is going to get interesting. The head of the Congressional Oversight Panel, Elizabeth Warren, is expected to issue a report this week calling on the Treasury to get much tougher with the big recipients of TARP funds. And if the report in the Guardian is right, the recommendations have been softened a tad so as not to be too hard on Treasury Secretary Timothy Geithner.

Elizabeth Warren, chief watchdog of America’s $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration’s approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government’s Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be “wiped out”. “It is crucial for these things to happen,” she said. “Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade.” She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are “dangers inherent” in the approach taken by treasury secretary Tim Geithner, who she says has offered “open-ended subsidies” to some of the world’s biggest financial institutions without adequately weighing potential pitfalls. “We want to ensure that the treasury gives the public an alternative approach,” she said, adding that she was worried that banks would not recover while they were being fed subsidies. “When are they going to say, enough?” she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. “The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous…

“Three things had to happen,” Warren said. “Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out.”

Warren may not want to be too hard on Geithner; but, others aren’t holding back.

Zero Hedge ponders the new CBO estimate of the net cost of TARP transactions: If it took a mere couple of months for projected TARP costs to double for taxpayers, ZH can’t wait to see what the final cost will be as calculated by the CBO will be in another 9-12 months.

Since January, CBO has raised its estimate of the net cost (on a present-value basis) of the transactions covered by the TARP by $152 billion for 2009 and by $15 billion for 2010. Those revisions stem from three factors—changes in financial market conditions, new transactions, and a small shift in the anticipated timing of disbursements. Since CBO’s previous estimate was completed, market yields on securities issued by the firms that have received TARP funds have increased, thereby boosting the estimated subsidy cost of the Treasury’s purchases of preferred stock, asset guarantees, and loans to automakers. Also, the Treasury announced additional deals with Bank of America and American International Group (AIG) as well as participation of up to $50 billion in the Administration’s foreclosure mitigation plan, all of which involve subsidy rates that are higher than the averages in the previous baseline.

If you’re feeling our collective goose is cooked, be sure to check out what happened to the lobsters in Woody Allen’s Tails of Manhatten.

Assuming you can stomach a little more on a Monday, top those lobsters off with Apples and Truffles: PPIP is Financially Flawed, Intellectually Dishonest.

Economists and market participants are coming to the realization that Treasury Secretary Timothy Geithner’s “Public Private Investment Partnership” or “PPIP” is potentially a giveaway for some of the largest dealers and asset managers on Wall Street, and thereby tests the rule of law.

In bare bones form, the PPIP is the purchase of toxic assets by the government and the simultaneous sale by the government of a five year call option on half the principle amount to the private players, this for a 3% premium (or half of the total implied option value of 6%).

This is also known as the private “equity” stake. But all of the detail of the PPIP — the non-recourse loans, guarantees by the FDIC, the funding by the Fed and the auction — are mere devices, canards that obscure the true structure and purpose of the PPIP, namely doing nothing in ever more complex ways.

To that point, consider a question: Is this “new” plan an improvement over the original TARP which failed because of the absence of any mechanism (in the absence of a market) to determine a fair price for the toxic assets? To us, the answer is no. And along with Geithner, we must hold Larry Summers responsible for approving this inaction, this very expensive non-solution.

The plan as presented simply replaces the current problem with a more complex, subsidized shell game meant to hide the same problem. It fails in the key goal of setting cash market prices for the underlying assets for which there is no current liquid market. But this problem is as nothing compared to the task of setting a price on a call option on assets for which there is no current market, observable price or price history on which to estimate the either historical or implied volatility…

That, as they say, is a sufficiency for me; so, I’ll pass this plate on to Russell and Sop!

7 thoughts on “SLABBED Daily – April 6 (blow-out sequel to bail-out)”

  1. Shell game is right. It’s hard not to see the numbers and money being printed from the presses at warp speed and think that our goose isn’t cooked. I don’t know why Wall Street is so happy of late.

    I read this and I this morning I saw this artice:
    FDIC Watch: Agency

  2. An excellent collection of links from w111y in the comments featuring Elizabeth Warren:

    ‘The coming collapse of the middle class’ or ‘higher risks, lower rewards, and a shrinking safety net’
    http://www.youtube.com/watch?v=akVL7QY0S8A

    conversations with history:
    http://www.youtube.com/watch?v=S1Uk-DwUvJw
    – her parents lived through the depression and it shaped her upbringing.

    the COP has a youtube channel:
    http://www.youtube.com/user/oversightpanel

    the COP’s website:
    http://cop.senate.gov/
    and… go to their blog and guess who’s on the blog roll 😉

    wikipedia:
    http://en.wikipedia.org/wiki/Elizabeth_Warren

  3. I’m not an economist, but I’m pretty sure the whole capitalist system is supposed to reward efficiency and punish inefficiency by allowing consumers and investors to seek value in competitive markets. The government’s job is keep the markets honest.
    So far TARP has rewarded inefficiency and dishonesty and shielded the inefficient and dishonest from transparency and market competition.
    You can’t save the system by rewarding failed companies. Anyone who really believes in market capitalism should know that it will only work if you let the failed companies lose money so that money can go to the more efficient companies.

  4. But, Brian, important people with important friends ran failed companies.

    Congressman Taylor needs to share his “hell no” button with the President.

Leave a Reply

Your email address will not be published. Required fields are marked *