The Geithner Put – The Public Private Investors Partnership Fund
Published on April 6, 2009
Published on April 6, 2009
The Geithner Put – PPIP Plan
I have been thinking about this for a while on how best to simplify and John Hussman did an excellent write-up to explain his thoughts, similar to mine, about this whole PPIF program. So without any modifications, let me share what what he thinks-
Last week saw a continuation of the impenetrably misguided policy response to this financial crisis, which seeks to address the downturn by encouraging more of what got us into this mess in the first place. The U.S. Treasury’s toxic assets plan, for instance, looks to “leverage” public funds (with the FDIC providing the “6-to-1 leverage”) in order to defend the bondholders of mismanaged financials who took excessive leverage. At the same time, the Treasury plans to limit the “competitive bidding” to a few hand-picked “managers” who will be encouraged to overpay thanks to put options granted at public expense. This is a recipe for the insolvency of the FDIC and an attempt to bail out bank bondholders using funds that have not even been allocated by Congress. The whole plan is a bureaucratic abuse of the FDIC’s balance sheet, which exists to protect ordinary depositors, not bank bondholders.
If you have not yet read the plan, I think you should. This is a plan that is being used as “panacea” that is probably going to solve all the issues(Download it here)
So what is the plan- Sample Investment Under the Legacy Loans Program
The internet is filled with comments from all the over the world. Famous economists have already expressed their opinions. I shall share my simple thoughts (rather questions). I hope this plan works, and works well to take us out from the crisis. Hence, I would love to be wrong.
The PPIF plan allows investors who want to bid on distressed assets to use Treasury matching funds plus FDIC “non-recourse loans” to lever up their investments. The combined leverage is about 12:1, so a hedge fund that wants to buy $100 worth of toxic assets would end up investing about $7 of its own money. What’s more, since the FDIC loan is non-recourse, it means that if the investment goes bad the hedge fund doesn’t have to pay back the loan. It only loses its original $7. What a beautiful deal; For investors, this is a great deal. If the investment does well, they make lots of money. If it tanks, they can only lose $7. I’ll take it.
However, thinking from the other side-
I have more questions than I have answers for. There is some good discussion by Rotorybomb including mathematical modeling. There are good Q&A as well. You may want to read it to acquaint yourself with what’s going on with the plan that is expected to solve the issue. He has done an excellent job to provide a crux.
I understand, the government is different from a business person and probably need to take steps which are contrary to pure business sense. The plans needs to be attractive enough to have private investors come on board. But at the end, risk is a risk. And risk should be compensated with appropriate rewards or vice versa. Lastly private sectors leveraging brought this crisis, now the de-leveraging is taking place. Now it is the government that is leveraging up. What will happen when the government de-leveraging starts? When and How?
I don’t know if this is beginning of a new trouble or an end to the trouble we are going through. Only time will tell. In the meanwhile, enjoy the rallies. Trade carefully and go long selectively and in incremental steps should you choose to go long.
Profitable trading, OP
Very informative and well written. I’m tempted to jump back into SKF post earnings season, as I don’t believe the trouble is over by any means. The game is rigged though, which makes me very wary to much of anything.
What are your thoughts on WFC earnings? The Street obviously took this as great news, but I am more than a little suspicious of this past quarter.
GOOG earnings this week. Should be interesting.
[…] weeks back I talked about The Geithner Put and raised my concerns about the plan. So finally, it’s official now that The U.S. […]