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Monday, March 23, 2009


M-LEC 3.0: legacy loan program

the revised public-private super-SIV has a name -- call it PPIP. however, via ft alphaville and alea, following on some earlier comments on the previously leaked details, one has to wonder if it has a purpose anything like what many have supposed.

This is a “pingouins sur la banquise” problem, only the truly starving for capital will jump.

alphaville notes a "blog war" is shaping up. one can add john hempton to the list backing alea against the interpretation of paul krugman et al. alea is adamant that the incentive to use government balance sheet to overpay is minimal because the equity tranche -- however little of it is actually that of the private party involved -- is in the first-loss position. there is some question, however, as to the potential purchase of credit protection from the bank to create a sort of scam not dissimilar to that outlined by zero hedge regarding TALF 2.0.

with apologies to krugman, yves smith, simon johnson and others -- i find alea's analysis compelling. wild overpayment, to paraphrase myself, is much less likely than a continued wide bid-ask spread and locked market as the private end of the public-private partnership defends itself against losses.

the hazard of a swap transaction on the side between the private party and the bank alea calls a "fraudulent scam", "implausible" though not impossible.

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All I see is a bunch of bankers and hedgies holding a 100% stake in a worthless pile of crap. Now having the opportunity to buy each others worthless crap for 5%.

If it is all the same crap and you sell your 100% owned pile to someone else holding a 100% stake in another worthless pile it is in the best interest of both of them to buy the others for 5% and have Uncle Sam eat 95% of both piles of shit.

So much for solving our problem.

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i don't see much 'solution' here either, inp. shifting losses to the taxpayer is one way to help recapitalize banks, to be sure -- but the pricing method here does not look terribly conducive to paying top dollar.

if private parties which join up with treasury and then borrow 6x from FDIC can somehow work a side deal that remunerates them for any loss their stake would suffer -- they yes, i see a way for private parties to collude with the banks to overpay with government leverage and then walk. i'd be more assured if treasury were to specify the impossibility of such a game.

short of that, however, i don't see why private parties would risk much on higher pricing.

treasury seems to want to think that the restriciton is in the liquidity of the market -- if they provide the necessary balance sheet to leverage private parties, the thinking must go, bids will then return.

but given the probable real impairment -- not mark-to-market, but real cash flow impairment -- in these securities thanks to the defaults in the underlying loans, and the need for sizeable real returns to the investors after purchase, i just don't see how high-price bidding comes from this plan excepting that sort of collusion.

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