Today the New York Times provides us with some information on the latest plan for dealing with the banks and their bad assets.
Reference:
Toxic Asset Plan Foresees Big Subsidies for Investors
This article is by Edmund L. Andrews, Eric Dash and Graham Bowley.
This is the latest addition to Operation Obfuscation and Subterfuge. In much the same way as the AIG bailouts were used to funnel taxpayer money to banks while fleecing the taxpayers we get a glimpse into how the US Treasury and their partners in crime on Wall Street are going to fleece the taxpayers on the Public/Private Toxic Asset plan.
Over the fold we get to see the real deal.
First let's start off with two very helpful definitions.
Obfuscate
ob⋅fus⋅cate /ˈɒbfəˌskeɪt, ɒbˈfʌskeɪt/ [ob-fuh-skeyt, ob-fuhs-keyt]
–verb (used with object), cat⋅ed, cat⋅ing.
- to confuse, bewilder, or stupefy.
- to make obscure or unclear: to obfuscate a problem with extraneous information.
- to darken.
Related forms:
ob⋅fus⋅ca⋅tion, noun
ob⋅fus⋅ca⋅to⋅ry /ɒbˈfʌskəˌtɔri, -ˌtoʊri/, adjective
Synonyms:
1. muddle, perplex. 2. cloud.
Antonyms:
1. clarify.
Subterfuge
sub⋅ter⋅fuge /ˈsʌbtərˌfyudʒ/ [suhb-ter-fyooj]
–noun
an artifice or expedient used to evade a rule, escape a consequence, hide something, etc.
Synonyms:
deception, scheme, trick, dodge, ruse.
Okay with those definitions out of the way here is what we get out of the three pronged plan:
1.
[T]he Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
2.
[T]he Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
3.
[T]he Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.
With the first step we learn that the 85 percent government financing is in the form of a non-recourse loan. With a non-recourse loan it is the lender that is in the first loss position on the loan, the borrower has no personal liability at all and the only thing the government would get is the collateral at whatever its value is. So far the only the only one with skin in the game is the FDIC.
So, if you were wondering why the FDIC was going to need $500 billion well now you know. But the obfuscation and subterfuge that is at work here has to do with the fact that this mechanism is being used so that the US Treasury can bypass the TARP law.
SEC. 136. TEMPORARY INCREASE IN DEPOSIT AND SHARE INSURANCE COVERAGE.
(a) Federal Deposit Insurance Act; Temporary Increase in Deposit Insurance-
(1) INCREASED AMOUNT- Effective only during the period beginning on the date of enactment of this Act and ending on December 31, 2009, section 11(a)(1)(E) of the Federal Deposit Insurance Act (12 U.S.C. 1821(a)(1)(E)) shall apply with `$250,000' substituted for `$100,000'.
(2) TEMPORARY INCREASE NOT TO BE CONSIDERED FOR SETTING ASSESSMENTS- The temporary increase in the standard maximum deposit insurance amount made under paragraph (1) shall not be taken into account by the Board of Directors of the Corporation for purposes of setting assessments under section 7(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1817(b)(2)).
(3) BORROWING LIMITS TEMPORARILY LIFTED- During the period beginning on the date of enactment of this Act and ending on December 31, 2009, the Board of Directors of the Corporation may request from the Secretary, and the Secretary shall approve, a loan or loans in an amount or amounts necessary to carry out this subsection, without regard to the limitations on such borrowing under section 14(a) and 15(c) of the Federal Deposit Insurance Act (12 U.S.C. 1824(a), 1825(c)).
(b) Federal Credit Union Act; Temporary Increase in Share Insurance-
(1) INCREASED AMOUNT- Effective only during the period beginning on the date of enactment of this Act and ending on December 31, 2009, section 207(k)(5) of the Federal Credit Union Act (12 U.S.C. 1787(k)(5)) shall apply with `$250,000' substituted for `$100,000'.
(2) TEMPORARY INCREASE NOT TO BE CONSIDERED FOR SETTING INSURANCE PREMIUM CHARGES AND INSURANCE DEPOSIT ADJUSTMENTS- The temporary increase in the standard maximum share insurance amount made under paragraph (1) shall not be taken into account by the National Credit Union Administration Board for purposes of setting insurance premium charges and share insurance deposit adjustments under section 202(c)(2) of the Federal Credit Union Act (12 U.S.C. 1782(c)(2)).
(3) BORROWING LIMITS TEMPORARILY LIFTED- During the period beginning on the date of enactment of this Act and ending on December 31, 2009, the National Credit Union Administration Board may request from the Secretary, and the Secretary shall approve, a loan or loans in an amount or amounts necessary to carry out this subsection, without regard to the limitations on such borrowing under section 203(d)(1) of the Federal Credit Union Act (12 U.S.C. 1783(d)(1)).
You see, under TARP, the FDIC (and NCUA) could borrow unlimited funds to cover deposits from the US Treasury up until the end of 2009. So obviously the FDIC didn't need additional legislation to make sure its insurance fund had enough money to cover deposits if a big bank failed. And we now know for sure why the legislation was needed to get the FDIC $500 billion and that was because TARP was only talking about covering deposits.
With the second step we learn that the government is playing a little obfuscation and subterfuge. While they say they match dollar for dollar what instead really happens is this:
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
Sweet deal. I mean really sweet. It is even better than the deal that a private equity firm called Lone Star Capital got when buying up a mortgage backed security from Merrill Lynch.
Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion
On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pretax in the third quarter of 2008.
On a pro forma basis, this sale will reduce Merrill Lynch's aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral — 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch's risk-weighted assets by approximately $29 billion.
Merrill Lynch will provide financing to the purchaser for approximately 75 percent of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.
Here we have Lone Star Capital buying an asset at 22 cents on the dollar. And Merrill Lynch was financing 75 percent of that. This means that Lone Star had to put in 5.5 cents on the dollar. Also, pay close attention to the fact that this was a recourse loan rather than a non-recourse loan. Do you think that the US Treasury could have driven a harder bargain than Lone Star Capital? I think they could have if what they were really doing was looking out for the best interests of the taxpayers.
As an aside, I put MBIA in bold in the above block quote because if you have been outraged by what has happened with AIG just wait until the government steps in on behalf of MBIA along with Ambac. Most of you probably haven't heard of them. You will, eventually, hear much more about them.
When we come to the third part we get to the expanded TALF program. This thing just got off the ground the other day and the Federal Reserve already announced their "first" expansion of that program.
* ABS backed by mortgage servicing advances
* ABS backed by loans or leases relating to business equipment
* ABS backed by leases of vehicle fleets
* ABS backed by floorplan loans
Mortgage servicing advances are loans extended by residential mortgage servicers to cover payments missed by homeowners. Accepting ABS backed by mortgage servicing advances should improve the servicers' ability to work with homeowners to prevent avoidable foreclosures.
Well, that sounds pretty good doesn't it. Helping out Main Street, or so it seems. What that actually does is guarantees that the investors on the other side of those mortgages gets paid every last dime. It is making sure that the investment in a mortgage backed security is totally risk-free. And you can guess that we are likely to suddenly see a plethora of available private money looking to provide "mortgage servicing advance" loans and then packaging them up and taking them to TALF. More than likely by the very same private investors in this new Public/Private mortgage backed security initiative.
Of course we were treated to the initial TALF rollout as covering things like student loans, credit card financing, auto loans, and other consumer credit. And we were treated to the "first" expansion of TALK the day after it started.
But that isn't true either. The first expansion announcement for TALF came way back on February 10th.
The expansion could increase the size of the TALF to as much as $1 trillion and could broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities.
Now there have already been rumblings that the government does intend to roll out this February 10th expansion in the near future. So if you are a non-bank private investment group holding onto mortgage backed securities you will be able to bring those to the table.
Sweet. So we get the bail the hedge funds and private equity groups out of their bad investments as well. The ever helpful US Treasury conveniently buries all of this in a chain of obfuscation and subterfuge because they already knew since September that the people on Main Street are quite riled up about this.
We are not yet done with the rest of the obfuscation and subterfuge either. There's more. So let's look at a couple of other things.
First up as the New York Times Reports:
Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.
Oh man, this one here is a gem. So much obfuscation in one sentence. The first thing that is a huge misconception amongst people (that the government is doing little to clear up) is that these mortgage backed securities (known as Deals in investor parlance) have a maturity of usually 5 years. FIVE years. The mortgages are, of course, longer term. But the mortgage backed securities aren't designed for that length of time. The reason is, of course, that the greatest profit in the form of interest is in the first 5 years.
After these securities mature (the deal ends in investor parlance) they take these loans and once again sell them into other mortgage backed securities with newer loans in them so as to try to blend older loans with newer loans to mitigate early defaults/foreclosures by having more mature loans in the bundle. Your mortgage, if you pay on it the entire 30 years will be part and parcel of at least 6 (and often many more) different mortgage backed securities over its lifetime.
So the real obfuscation and subterfuge here in the very first part (up to the first comma) is that they are conflating maturity of a mortgage with the maturity of a mortgage backed security. The second thing that is done here is to throw the taxpayer a bone - that at some point, maybe, there would be a profit.
The cold reality is that if there really were profitable acquisitions of these assets that could be made private equity firms and hedge funds would have bought all of this crap up already.
Which brings us to another piece of work. The New York Times tells us:
The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.
Yes. This looks awful familiar. Almost like we heard this somewhere before. Oh, that's right we already have this enshrined in law. Actually it was the TARP law passed back in October of 2008. Such a long time ago.
Sure, have an "auction". That way the taxpayer may be protected and get the best deal possible. Not. These so-called auctions will be run by the bidders in much the same way as there is no price collusion among the airlines. If you think that this is just speculation on my part - it is - but consider what was going on in the municipal bond market:
From NewsInferno.com Published: Friday, January 9th, 2009 we get this article - Municipal Bond Bid Rigging Investigation Underway
Today, The New York Times is reporting that various federal agencies and state attorneys general having been investigating possible collusion between banks and other companies that have helped state and local governments with municipal bond deals. Though the agencies involved - including the Securities and Exchange Commission and the Justice Department - would not release details of the probe to the Times, the paper’s report said a variety of evidence collected so far indicated companies did not engage in open competition for municipal bond business, "but secretly divided it among themselves". The results, The Times said, was added costs to taxpayers, and in some cases "exotic financial structures that blew up."
Those municipal bonds were auctioned too. Kind of gives you a warm feeling all over that the government will "auction" the mortgage backed securities doesn't it.
But now to the obfuscation and subterfuge. The government is bypassing the existing TARP law and ALL of its requirements. For instance, the executive compensation (a populist bone thrown to the public at large) but more importantly the Reporting Requirements.
According to SEC. 105. REPORTS in the TARP law.
(a) In General- Before the expiration of the 60-day period beginning on the date of the first exercise of the authority granted in section 101(a), or of the first exercise of the authority granted in section 102, whichever occurs first, and every 30-day period thereafter, the Secretary shall report to the appropriate committees of Congress, with respect to each such period--
(1) an overview of actions taken by the Secretary, including the considerations required by section 103 and the efforts under section 109;
(2) the actual obligation and expenditure of the funds provided for administrative expenses by section 118 during such period and the expected expenditure of such funds in the subsequent period; and
(3) a detailed financial statement with respect to the exercise of authority under this Act, including--
(A) all agreements made or renewed;
(B) all insurance contracts entered into pursuant to section 102;
(C) all transactions occurring during such period, including the types of parties involved;
(D) the nature of the assets purchased;
(E) all projected costs and liabilities;
(F) operating expenses, including compensation for financial agents;
(G) the valuation or pricing method used for each transaction; and
(H) a description of the vehicles established to exercise such authority.
(b) Tranche Reports to Congress-
(1) REPORTS- The Secretary shall provide to the appropriate committees of Congress, at the times specified in paragraph (2), a written report, including--
(A) a description of all of the transactions made during the reporting period;
(B) a description of the pricing mechanism for the transactions;
(C) a justification of the price paid for and other financial terms associated with the transactions;
(D) a description of the impact of the exercise of such authority on the financial system, supported, to the extent possible, by specific data;
(E) a description of challenges that remain in the financial system, including any benchmarks yet to be achieved; and
(F) an estimate of additional actions under the authority provided under this Act that may be necessary to address such challenges.
(2) TIMING- The report required by this subsection shall be submitted not later than 7 days after the date on which commitments to purchase troubled assets under the authorities provided in this Act first reach an aggregate of $50,000,000,000 and not later than 7 days after each $50,000,000,000 interval of such commitments is reached thereafter.
We aren't going to get any of that. Oh sure, we will certainly see announcements of private equity firms and hedge funds buying assets. But do you think they will disclose which mortgage backed security (deal) they actually purchased and provide a report detailing just what is inside that mortgage backed security? I doubt it. So we won't get to know what the bidders knew about before making their bids and just how god awful the mortgages within the mortgage backed security are actually performing.
I should also bring up another form of obfuscation and subterfuge that is going on as well. There is a myth that these mortgage backed securities are a "black box" and nobody knows what is in them to know how to value them. That isn't true. Some of it is publicly available across the web.
I will just refer you to a long, long comment - The "too complicated" roadblock - on the diary - Too Big to Fail. It's True. by sbwoodside.
Now, of course, not all reports on mortgage backed securities are available. Those held by private companies are not generally available except to their investors and the same is true for some of the mortgage backed securities held by the banks. But in that long comment you will find a breakdown of a Countrywide MBS (now Bank of America). It is something that the taxpayer would be proud to own.
Which brings me to the final part of the Operation Obfuscation and Subterfuge that is going on. It is another misconception that the government, banks, and media are doing their damnedest to avoid clearing up. And that is that the vast majority of the mortgage backed securities are NOT on the banks balance sheets at all.
That's right. Most of the mortgage backed securities are NOT on the bank's balance sheet. Citigroup has $1.2 trillion in assets that are NOT on their balance sheet at all. They are actually in separate legal entities - actually they are companies - and are not the bank and the bank isn't in jeopardy of going bankrupt if the MBS "company" goes bankrupt. The only ones in jeopardy are the investors in these mortgage backed securities if that separate "company" goes bankrupt. But the fun doesn't stop there.
These separate legal entities can be offshore in tax havens where, while they were profitable, the banks (and private holders of MBS) have avoided paying any income tax on those profits. Sweet, isn't it? But that is just one part. The other legal entities that are on shore are set up as Real Estate Investment Trusts under the tax code. What that means is that the MBS "company" pays NO taxes at all so long as it passes all profits to all members of the Trust.
This diary is already too long. But if I get a chance I will write a diary on the anatomy of how a Real Estate Investment Trust is actually structured and the various mechanisms that are employed to obtain tax free, risk free, investments.
If you folks that have ever read my comments before didn't understand why I have been against all of the bailouts of any kind since the beginning this diary provides but one example of the reasons why.
But for now you all should be extremely gratified, not just that this long-winded diary has come to an end, but that all of the yachts and mansions of the top one percent have once again been saved by the taxpayer. Well, if we let them get away with it.