Thursday, 16 April 2009

JPMorgan Flips Geithner the Bird

I’m surprised bloggers aren’t atwitter over this story that hints that Treasury Secretary Geithner's PPIP plan is starting to look DOA:
Speaking on the company's just-concluded conference call, JP Morgan (JPM) CEO Jamie Dimon downplayed the PPIP, saying the bank had nothing to sell into it, and that it certainly had no interest in partnering with the government as a buyer.

What's more, he said, he didn't consider the PPIP to be that big of a deal, suggesting that it's just one small piece of what Treasury is doing to prop up the system.

Earlier I suggested that U.S. banks were secretly terrified of the Geithner plan: it would expose how much they had overvalued their bad assets. Meanwhile, almost everyone else concluded the major banks should be gleeful, not glum. They argued that Geithner's plan to buy toxic bank assets through a public-private partnership (PPIP) would mean big subsidies for private investors, huge overpayments landing in the laps of the banks, and heavy losses for taxpayers.

But what if the banks (or investors) can’t game PPIP for easy profit, and further, what if the plan inherently doesn’t result in huge overpaying? Then you have to wonder if the banks sat back and thought, “Man, we are really screwed.” They had rejected the market offers on their assets, saying they were “fire sale” prices -- and Geithner among others appeared to buy into this fiction. But PPIP would expose the lie.

If you’re a major U.S. bank, you have to be smart at this point. How to reject PPIP? The smart tactician acts from a position of strength. Don’t denigrate the plan at its unveiling. You have to wait ... get stronger (or at least appear to) ... then attack and kill it.

First thing to do: Get those damn pesky mark-to-market accounting rules (that force asset values to be reconciled with current market prices) changed. Banks like them fine in bull markets, but they're a bitch when things go bear. And indeed, earlier this month:
FASB will now let companies use “significant judgment” to value assets when those assets are trading in inactive markets under distressed circumstances.

Also, the standards have been relaxed by which companies have to take impairment charges when they take losses on their investments, particularly in cases where they plan to hold those assets to maturity or where they don’t have to sell them quickly.
How does that help? Simon Johnson at Baseline Scenario ponders whether it could be cover for allowing the banks to ignore the results of the PPIP auctions:
For example, Bank A puts up a pool of loans for auction, but doesn’t like the winning bid and rejects it; Bank A doesn’t want to be forced to write down its loans to the amount of the winning bid. Or, alternatively, Bank B sells a security to a buyer, and Bank A holds the same security; Bank A doesn’t want to be forced to write down the security to the price of Bank B’s transaction.
I think the truth is simpler. If the banks are terrified about what the auctions will reveal, they want to stay well away in the first place. The more assets that change hands at auction, the harder it is for them to deny the value of what they have on their books, even allowing for “significant judgment.”

I think they needed the accounting changes, before first-quarter earnings, to disguise the true state of their health. Right now they need to look stronger than they actually are. Being able to fudge the asset values helps because the second thing to do to kill PPIP is:

Have a good earnings season. You need to score big, across the industry, while deflecting attention away from how much your great results stem from government intervention in the market. So far the banks are well on track: solid numbers from Wells Fargo, Goldman Sachs, JPMorgan.

Third thing: Someone has to go first and at least float the trial balloon that “we’re not going to sell into this PPIP; we don’t really need it.” Ideally someone respected who has weathered this crisis better than most. Enter Jamie Dimon of JPMorgan.

The other banks hang back, and if Dimon doesn’t get slapped down, they start to say, “Hey, you know, we don’t really have anything to sell into PPIP either -- we’re not really in bad shape after all.” It’s important to keep participation in PPIP low (or non-existent); if you don’t, it will be hard to escape a large-scale revaluation of assets, even with the recent weakening of accounting rules.

NOTE: I don’t mean to lay this out as a conspiracy -- I don’t think it is at all -- only that the banks are really smart, and if they’re looking to bury PPIP, their thinking would be much along these lines.

I’m going to stick my neck out here: PPIP will fail badly because the banks won't show up to play, unless the government forces them to.