Monday, 3 August 2009

Score Two More For Me!

It's not that I'm trying to be right. Honest. And I know I've screwed up a bunch of analysis here. Like I predicted that there'd be a major housecleaning during the 2008 elections as voters kicked to the curb the legislators who supported Paulson's massive financial industry bailout. I was wrong. Never underestimate the apathy and indifference of the American voter, I learned.

But here I am, Monday morning, spooning down my Honey Nut Cheerios and laughing through my tears. 'Cause my imagery from a few days ago turns out to be true, sadly:

This is the metaphor I keep thinking of for the U.S. government: He's a fat kid. A rich kid. You recognize him on the playground immediately and run over to him. Why? Because he's such a great guy? No, because change is always spilling out of his pockets. Or he's buying something ridiculous and you just can't believe it. "He paid Jim $40 for that dead cricket? He bought ten boogers off Lester for $10? I wonder what he'll give me for this dirty candy bar wrapper?"
This, from the Financial Times today:

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.
And the quote that makes taxpayers across the land wince:

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”
So you know what? The U.S. government really is the fat rich kid with too much money. Wall Street knows it can rip off little Richie Rich in perpetuity.

Oh and guess what? It turns out that a reason the major banks won't play with the Geithner plan (aka PPIP) is this (my March 25 entry):

5. You're doing this under the klieg lights, and it may not be pretty.

This is the Obama Administration Experiment to Save the U.S. Banking Industry. A lot of red-meat business journalists will pounce on the first published auction results, scrutinizing them to see what they tell us about the state of banks and their books. So far, you have been able to hide behind uncertainty and obfuscation. You say the asset is worth $80. Someone else says $37. Who can tell really, in these troubled times?
Klieg lights bad for devious banks. And if you thought -- hell, the banks don't care, they'll just be grateful for this bit of well-meaning assistance, and if the problem is just liquidity as they claim, why they'll be ever so profusely thanful for the ample liquidity Geithner's plan provides -- think again. Check out Mortgage Security News' Paul Muolo:

As the mortgage and banking industries debate whether the PPIP program will work and whether a similar effort over at the FDIC will ever see the light of day, Wells Fargo & Co. recently (and quietly) sold a $600 million portfolio of mostly nonperforming subprime loans. Or so we're told.
The problem is, they didn't get much money. At all. Here's the payload:

... Perhaps one reason the PPIP (Public-Private Investment Program and the Federal Deposit Insurance Corp.'s 'Legacy Loan' sale initiative (involving whole loans, presumably residential and commercial mortgages) hasn't caught fire is 'sunshine,' that is, the concept of disclosure. If bankers and investment bankers use these government programs that means all the messy details of their crappy investments might see the light of day, which could anger shareholders - and maybe even board members who might lean toward being "activists."

The nice thing about the private nonperforming loan market is that none of these messy details have to see the light of day, including the price paid. One banker told me that the 35 cents on the dollar that Arch Bay reportedly paid was twice what some hedge fund bidders were offering.
35 cents on the dollar? Ugh. Sounds pretty putrid. Like the kind of return you don't really want anyone to know about. Like the kind of transaction you want to conduct in the dark.

So, for the umpteenth time, it really wasn't a liquidity problem that the banks faced in getting a fair price for their toxic assets. And I bet they knew that. So that means they lied. You got that, America? Lied. L-I-E-D. That's why PPIP failed. They spent the early part of this year just fumblemucking around, waiting for massive fed backstops to kick in and float them to a semblance of good health.