Indiana Oracle
The Truth is Hard to Find
My view is that PPIP is a naive creation. I am also no longer sure where Geithner is getting some of his ideas. Perhaps from that fossil Greenspan who is clearly complicit in this mess. I understand John Thain, booted from Merrill after having spen $1m to redo his "office"might be helping out as well. You be the judge.
This is an extract from the blog of Jim Delaney today, "If stupidity got us into this mess, why can't it get us out?" (Will Rogers), covering comments from Martin Feldstein, Chairman of the Council of Economic Advisors under President Reagan and Harvard professor and James Keller, former head of structured products at UBS on Geithner's PPIP (Public Private Investment Plan).
MF:
While conceding that PPIP is a good idea in principle he makes the following points:
1) Treasury must be willing to inject capital into the banks that sell assets as the prices the assets fetch could be a tad different than the price they are currently assigned on the banks books. (Imagine that!) The capital, Marty thinks, should be in the form of preferred shares or perpetual debt.
2) Banks now own $3TN of residential mortgages, $1.5TN of corporate real-estate loans and $1TN of consumer debt ($5.5TN in total) and he believes getting all of this off the books is going to take a wee bit more than the $0.5TN (9% of total assets) currently planned for the program so he suggests increasing the amount allocated. Hmm.
3)Reiterates his earlier solution (which I have also written about) of having the Government issue mortgage replacement loans. This is where Uncle Sam offers homeowners with negative equity; low interest recourse financing for 80% of the existing mortgage, wiping out the existing one. The benefits here are lower payments for the home owner and a 20% cushion to keep home equity positive even if prices fall a bit further reducing the likelihood of defaults; emphasizing that participants would be personally liable for the money, a big difference from current mortgages.
JK:
One of the principal aims of Geithner's plan is to provide a market where none exists, so that these securities can be valued and traded. But it is not true that nothing is trading because nobody knows what things are worth. Nothing is trading because too many people know what things are really worth.
As such Mr. Keller believes:
He adds that cheap financing and leverage also added much fuel to the fire and wonders why if, given the combo above, investors would act any differently this time around than they did last time and the specific act he is talking about is the overpaying for financial assets by investors.
If Stupidity Got Us into This Mess, Why Can't It Get Us Out? -- Seeking Alpha
This is an extract from the blog of Jim Delaney today, "If stupidity got us into this mess, why can't it get us out?" (Will Rogers), covering comments from Martin Feldstein, Chairman of the Council of Economic Advisors under President Reagan and Harvard professor and James Keller, former head of structured products at UBS on Geithner's PPIP (Public Private Investment Plan).
MF:
While conceding that PPIP is a good idea in principle he makes the following points:
1) Treasury must be willing to inject capital into the banks that sell assets as the prices the assets fetch could be a tad different than the price they are currently assigned on the banks books. (Imagine that!) The capital, Marty thinks, should be in the form of preferred shares or perpetual debt.
2) Banks now own $3TN of residential mortgages, $1.5TN of corporate real-estate loans and $1TN of consumer debt ($5.5TN in total) and he believes getting all of this off the books is going to take a wee bit more than the $0.5TN (9% of total assets) currently planned for the program so he suggests increasing the amount allocated. Hmm.
3)Reiterates his earlier solution (which I have also written about) of having the Government issue mortgage replacement loans. This is where Uncle Sam offers homeowners with negative equity; low interest recourse financing for 80% of the existing mortgage, wiping out the existing one. The benefits here are lower payments for the home owner and a 20% cushion to keep home equity positive even if prices fall a bit further reducing the likelihood of defaults; emphasizing that participants would be personally liable for the money, a big difference from current mortgages.
JK:
One of the principal aims of Geithner's plan is to provide a market where none exists, so that these securities can be valued and traded. But it is not true that nothing is trading because nobody knows what things are worth. Nothing is trading because too many people know what things are really worth.
As such Mr. Keller believes:
Banks don't want to sell to astute investors, who are bidding conservatively for something that may continue to fall in value. Banks want to sell to investors who will overpay for noneconomic reasons. and he thinks Geithner proposes to give them that chance.
The other issue James has is the structure of the deal itself as from his perspective, it looks a lot like a CDO (collateralized debt obligations) which, he says is the very structure that supposedly caused all the trouble.
He adds that cheap financing and leverage also added much fuel to the fire and wonders why if, given the combo above, investors would act any differently this time around than they did last time and the specific act he is talking about is the overpaying for financial assets by investors.
If Stupidity Got Us into This Mess, Why Can't It Get Us Out? -- Seeking Alpha
