Monday, March 23, 2009

Ask not how you can manipulate markets... but how your country can manipulate markets for you.

Ask not how you can manipulate markets...
but how your country can manipulate markets for you.

The Treasury 'boys' are at it again. There is a lot to this plan from Timmy G (not to be confused with the smooth jazz sounds and elevator music from Kenny-G) and the structures are complicated but in the end, like in the Band's song, "The Weight," says, it puts the load right on me, the tax payer. And on you, of course...

How else could it work? As Billy Withers said, Nothing from nothin' leaves nothin'.

Nothing up my sleeve!
Like any magician there is a lot of misdirection here. One of the misdirective points is to tell us that investors could loose all their money! Tell that to home 'owners' who put 20% down and have seen a 20% price drop wipe them out. As Kris Kristofferson wrote, when you got nothin' you got nothin' to lose. So now, these 'hand picked' investors are coming into a plan with more government support than the troops get in Iraq. Meanwhile, home 'owners' are left dangling. Where's the risk?

Presto change-o: more misdirection
The plan, on closer inspection, looks a lot like the failed Fannie-Freddie model. Interest costs lowered by low interest loans (for F&F it was low rates via government guarantees), losses limited by making loans non-recourse (more guarantees), leverage provided to enhance returns. I thought leverage was going to be bad in this brave new world? Taking 'government' as an explicit investor, along-side the private folk is to aid confidence and also providing funding and to do it without question. So, in the end, private sector investors gets the benefits of leverage without the downside. If the fund goes bust the investor can walk away with only a capital loss the rest of the asset losses (the remaining 92%!) goes to the government. This reminds us that the government provides 92% percent of the funding and gets 50% of the upside. Why, you ask? Since it only 'matches' private sector 'capital' with its own 'capital' it looks like the government is splitting the profits 50/50. That's even more magician's misdirection. Remember that means that the government has 92% of the risk and gets 8% of the profit. That is the reality. Still like the sound of that plan?

There are other 'modules' to this program as well. But you get the idea how this works...

On balance the program will not restart markets. No one else outside of the sweet dealers (the Real Sweet sixteen?) could afford to pay those prices. The Fed/Treasury/FDIC otherwise known as 'government' is creating a special side market. Don't expect its prices to catch on until the economy does better. That is, until it is no longer needed.

If you thought AIG was a bad deal, it only resulted in less that $150mln in bonus payouts, for non performers. This plan will generate BILLIONS for private sector participants who are taking less risk that it seems.

OH, Timmy, you put the weight right on me...


So critics say what would YOU do Bob?
...You cynical critic.

Here it is, and it's so simple.

Get rid of mark to market rules. Do that and the stress on current market value evaporates. Banks no longer need to mark to a price everyone thinks is wrong. Does this have risk? Yes. Every plan has a cost, the question is, "what cost do you wish to pay?" You could relax M-to-M with more rules and oversight creating a process for taking securities off M-to-M. In the end it would be a lot cheaper and would not require the Treasury to pick special investors to make special huge profits. And, on that subject I have another question, are these investors different than the sellers? Will some folk be selling to themselves? My plan is far, far superior to this one.

I want to take the distortion off the market. The Timmy G plan wants to create another new synthetic distorted market. How could any economist like that? Some respect for markets this government is showing. Jimmy the markets open with guarantees and subsidized rates and when things go wrong break the tax code and tax all the 'undeserved' bonus getters (AIG). These are not steps in the right direction for an ostensible market-based economy.

Ask not how you can manipulate markets but how your country can manipulate markets for you.

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