Friday, April 3, 2009

Why Public-Private Investment Program(P-PIP) Will be a Failure?

Giving the 1 to 6 leverage to private sector to buy toxic assets may sound good to some people ,but here is the other side the coin:

If Geithner's plan fails, it will probably be for one these reasons.
1) The stress test reveals that the bank's assets are truly worthless, which makes banks nationalization unavoidable,but I doubt it democrats are going to do that!
2) Changing the Mark-to-marketing accounting rolls will cause banks to price these toxic assets very high, in which case the private sector would back out,and the P-PIP falls apart.
3)congress forced FASB to relax the "Mark To Market" accounting rules. It will allow banks to value their assets any thing they wish for. In this case why should Bankers want to sell their toxic assets in the first place? that makes P-PIP useless.
4)On the other hand buying these assets require banks to write-down and realizing huge lost, in my opinion they are not going to do that unless FDIC forces them to do so!
5) The only possible buyers of these toxic assets will be some Wall St’s vouchers. Obviously they are not willing to pay the price that banks would ask for therefore there will not be many sellers or buyers in the market place.
6)The other possibility is that the high leverage could cause the private sector to price these toxic assets much higher than they would do if there was not no generous offer from government. In this situation they are going to waist taxpayers money, and give it to the Wall Street fat cats. Unfortunately the #3 & #6 are most likely going to happen, and if democrats allow banks to bet on each other toxic assets that would be a sad day for America.

Geithner & Bernanke are dancing around and killing the precious time, instead of facing the real issue. We don’t have any other options besides braking apart Zombie banks and wiping out their shareholders.
This plan just excites some average investors to jump in early and give big institutions the opportunity to sell to these rallies.

Here is an example how the Public-Private Investment Program is designed :
Imagine XYZ is a big hedge founds and they have $5 billion capital to buy toxic assets.
They find a bank who valued its assets $100 billion, they bit these assets for $70 billion, let's think the banker is agreed to sell them for $70 billion. You may ask where the rest of $65 billion comes from?
Here how it works:
The XYZ hedge founds will get $5 billion from treasury.
FDIC will loan the hedge found $60 billion.
the bottom line is the XYZ would over pay the toxic assets that in real market would not worth ore than $30-25 billion. Bankers would be happy to get rid of their toxic assets that no one would be crazy enough to pay such a high price (70 cents on a dollar).

In the end if things would not work as Geithner wishes, the taxpayers are on the hook, and if everything works out; we will give away huge chunk of profit(50%) to the private sector.These assets have lost their value for a reason, our government is not smarter than market. If market values something 25 cent per dollar; it worth 25 cents not higher.
The housing bubble stated due to easy credit and too much leverage, it seems Democrats did not learn their listen and they are doing it again. By giving too much leverage to private sector; they are going to manufacture a temporary market for these toxic assets. If bankers are going to sell their assets to private sector, they are not going to get $1 for $1 therefore they have to accept huge lost.

FABS is going to relax the Mark-to-market accounting rules, that would cause banker to value their toxic assets any thing they wish (Mark-to-model) or as I call it "Mark to fantasy". Transferring toxic assets from on hand to other hand will not solve the problem. Note that Bear Stearns collapsed because they valued their assets base on Mark-to-model; therefore they did not feel they need to raise capital!
Is History Going to Repeat Itself???