Detoxifying Bank Assets..but making the public eat toxic assets

Treasury Secretary Timothy Geithner has been working to shift all the toxic assets of banks to the public. His latest strategy is to give money to folks like PIMCO to buy up the toxic assets of financial institutions by using leverage with no risk, i.e. the money used to buy these assets would be guaranteed by the Treasury. The equity markets are rallying. The sad situation is that the crooked few who benefit are screwing the hardworking part of the public. As I have written before, this is a crisis of ethics, not one of finance or of confidence.

Bloomberg reports..
Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross. The plan may reward investors with 20 percent annual returns on “really ‘toxic’” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money. Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors.Geithner’s plan encourages investors to buy as much as $1 trillion of real-estate assets by using $75 billion to $100 billion provided by the Treasury and government loans. The goal of the Fed and the Treasury since September has been to cleanse banks of troubled assets. The Treasury would match the money asset managers raise to join them in public-private funds. The Federal Deposit Insurance Corp. would guarantee borrowing offered to funds buying loans, while the Treasury and Fed would offer financing to mortgage- securities buyers. The Fed loans may be made available to investors that are not part of the public-private funds.

***Staggering Beyond Belief***
The government and Fed have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s, Bloomberg data show.
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Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in an April 1 interview that the distribution of half of the profits to the investor “does bother me.” “But even beyond that, what bothers me even more is it’s taxpayer money,” Bachus said. “What you are doing is artificially inflating the price of those assets because at the present prices the financial institutions won’t sell them.” ‘Taxpayer Loses’ Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success. “The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.” Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.

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It is a sad state of affairs.
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Unlike Geithner’s plan for loans, the public-private funds for securities will be limited initially to only five managers, such as Pimco and BlackRock, already overseeing $10 billion of the assets targeted. That program will buy securities from holders of toxic assets other than banks. “There it’s probably going to work -- for five people,” said Dan Castro, chief risk officer at hedge fund Huxley Capital Management in New York. “You’re selecting a very small group of large guys and giving them all the advantages.” By providing loans, the government may allow investors to more than double their potential profits.If the Fed provides a five-year non-recourse loan and requires an investor to put up only 85 percent of the cost of the securities, then that investor could “walk away” when the loan expires and still have earned 25 percent returns, Lehman and Tcherkassova wrote. That assumes losses on the underlying loans don’t exceed 30 percent. That type of bond has risen more than 10 cents on the dollar since the plan was announced, according to Wheeler. The amount of leverage available under the Fed’s program hasn’t been announced. The FDIC program will offer as much as six times the money raised by the private-public funds from individuals and the Treasury.