Public-Private Investment Fund

If I understand the PPIF correctly…

$100 of ‘selected’ toxic assets would be auctioned for an expected $85. (Though current real worth is estimated at $30 at best)

FDIC underwrite $72. Leaving $13 to be financed by purchaser.

Treasury provide 50% of this residual $13 leaving the purchaser a total risk of $6.50 in every $100 nominal.

Even with the currently optimistic valuation of 30c in the Dollar for these assets, you’d have to bag a statistically unlikely set of ‘selected assets’ to come out anything but ahead.

This sounds like a really good deal (for the purchaser) and a real shafting for the US taxpayer who ultimately will finance the $93.5 in every $100 toxic that’s on the books.

Where do I queue (as a purchaser, not a US taxpayer…).

As I think this one through, with all deals that are 'too good to be true' who is most likely to want to, and be able to - even be encouraged to - snap up these bargains?

Well, I think it's going to be the people that usually make money come rain or shine, the good old banks and other financial institutions that got themselves into the poo poo (technical trader's term) in the first place.

I don't see anything stopping banks bidding for their own toxic debt (or each others on an agreed quid pro quo basis), keeping their current debt off-book while posting a very healthy, and very real profit on balance sheet.

All at taxpayers expense. Too sweet for words...

I'm not an accountant and I'm none too bright generally, so please, someone, where have I gone wrong here?

TheBramble said:

‘selected’

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This is where I would be wary. Will look into it though.

Well yes, a reasonable caution.

But even the bods who created these CDOs and CDO-squared and even more exotic convolutions of complex derivatives can’t untangle them now. The good (relatively) stuff is so tightly entangled with the genuinely bad and the simply borderline, even if they wanted to cherry-pick (what would the opposite of cherry-pick be?), they couldn’t.

You’re gonna get a mixed bag with the best/worst will in the world.

As I see it – it’s guaranteed (quite literally) profits with amazing leverage.

Of course the profits are virtually guaranteed. How else could anyone buy them when no one actually as a decent idea of their long term value. The guaranteed profits is the reward for being willing to get involved in kickstarting this thing. Any current guesstimates on value are useless as they reflect not default and actual loss ,but the fact that there is no market for them..LOL .Plenty have an opinion that they may be virtually worthless ,but I'd say that is more to do with theirown bias on how they see this credit blowout. My opinion would be that once they get trading in these going again with some people making profit we'll see so called value chased higher than the current pessimistic view. More importantly we will start to see more data that says what is the value and consequently what is the loss...no matter what that is just the removal/reduction of uncertainty of the issue will be a fillip as we finally know who is solvent and who is not.

Agree - this is a good deal for the private investors, bad for the taxpayer. If you think about it, the current problem is that the banks want a high price (otherwise they'd go bankrupt) but investors aren't willing to pay as much (since they think the assets are sh*t). The only way to get private investors invloved is to subsidize their (expected) losses with taxpayer cash.

You might be interested in reading some other people's analysis:

Zero Hedge: The Amazing TALF Bait And Switch
https://self-evident.org/?p=502

Public Pillage Investment Fund

US Taxpayers taking it up the a$$ with Enron style bait n switch

Still doesn't solve the problem which is:

Do you know what the cost of finance was in the 30's ? Do you know how that cost compares to the prevailing cost right now ? If you don't then that graph is simply misleading because the visual picture it is designed to paint is meaningless.
The US debt right now in terms of cost is low ..let me repeat that ,LOW ! So for example if you are financing 3 1/2 (350% GDP)times your annual earnings at 3% against 2 1/2 (250% GDP)times your annual earnings at 5% or 6% which position would you rather have ? The 10 year cost on US debt right now doesn't even have a cost ..that's right ,right now they are borrowing for free ...their problem actually doesn't kick in until they have transparently solved the problem and people take away their free money.
By then they should have been able to spread/monetarise the writedown not only across theirown taxpayers ,but right across the globe to anyone who holds US$ assets ,and you little Japanese and Chinese guys know who you are ..guess they will just have to consider it a discount for good export customers ..LOL

I think the argument that the Fed is implicitly making is broadly similar to the argument made before to support govt issuance of inflation-linked bonds. Basically, they're saying that the liquidity risk premium in these instruments is huge and that premium is pure liquidity, not a measure of loss expectation. The Fed's argument (and I agree with it) is that with unlimited balance sheet they're structurally happy to sell this liquidity option (i.e. buy the assets) all day long. This strategy, however, like any other trade, is not risk-free and the Fed is intending to do this trade in SIZE. If it goes wrong, it will be VERY VERY spectacular.

What do you mean by 'if it goes wrong'?

chump said:

Do you know what the cost of finance was in the 30's ? Do you know how that cost compares to the prevailing cost right now ? If you don't then that graph is simply misleading because the visual picture it is designed to paint is meaningless.
The US debt right now in terms of cost is low ..let me repeat that ,LOW ! So for example if you are financing 3 1/2 (350% GDP)times your annual earnings at 3% against 2 1/2 (250% GDP)times your annual earnings at 5% or 6% which position would you rather have ? The 10 year cost on US debt right now doesn't even have a cost ..that's right ,right now they are borrowing for free ...their problem actually doesn't kick in until they have transparently solved the problem and people take away their free money.
By then they should have been able to spread/monetarise the writedown not only across theirown taxpayers ,but right across the globe to anyone who holds US$ assets ,and you little Japanese and Chinese guys know who you are ..guess they will just have to consider it a discount for good export customers ..LOL

Click to expand...

I see 2 problems with your statement:

1. Real interest rates might be a different thing
2. For the Govt. it might be true, but the "real life" shows a different picture. Interest rates are SKY HIGH for companies and consumers.

Anyway, IMHO only a currency reform will untie the knot.

Cheers Carlos

TheBramble said:

What do you mean by 'if it goes wrong'?

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I mean if they're wrong about their 'liquidity premium' assumption. It's generally the same phenomenon as with any strategy which involves selling options/risk premium/insurance. If you're right and everything works according to plan, you're in the clear. However, if the sh1t hits the fan and the Fed has to pay out on all the options/liquidity backstops they've written, there will be some very unhappy taxpayers. Same with inflation, i.e. govt is happy to sell inflation risk premium, but if hyperinflation actually materializes, the govt will be screwed and will screw the taxpayer in turn.

BTW, IMHO, the same rationale underpins all the recent widely publicized trades Warren Buffett did.

That's what I thought you meant.

Marin, I genuinely believe even the man in the street is already quite convinced it's predestined to 'go wrong'. Nobody out of the loop imagines or expects these assets to ever be ‘worth’ more than they are now. They will, of course, on aggregate, but nobody thinks this way.

It's all sunk cost to the masses and they're so used to be ripped by their government they have already written off TARP completely in their minds. They know they’re going to get screwed for more taxes to cover the funds that were misappropriated away from the original destination into TARP.

The fact that some will make (substantial) profits from this scam – and it is a scam make no mistake – will not register, will not be made public and none of those profits will never be channelled back into the purse from which they were originally snatched.

That’s what I love about this – it is so extremely clever. It’s all being done in the open, in plain sight, largely, but with such complexity the average Joe hasn’t a hope of understanding what it’s really all about or what it means.

To imagine the Fed/FDIC aren’t fully prepared for this to go exactly the way those who really run the show have already decided it’s going to go is naïve.

DaxDestroyer said:

I see 2 problems with your statement:

1. Real interest rates might be a different thing
2. For the Govt. it might be true, but the "real life" shows a different picture. Interest rates are SKY HIGH for companies and consumers.

Anyway, IMHO only a currency reform will untie the knot.

Cheers Carlos

Click to expand...

No,not wrong,you just didn't take the next step. In essence this is part of an overall strategy by which outstanding debt and the cost of it is 'transferred' to the govt borrowing facility where the cost of financing is much lower .."transferred" in this case doesn't have to mean ownership so much as it means that the cost of the financing will be increasingly subject to the risk rating of the govt as opposed to the individual and corporate and the intention I am sure will be to lower the spread between those ratings.. ..that will be an intended outcome...whether it works or not is another matter.

chump said:

Do you know what the cost of finance was in the 30's ? Do you know how that cost compares to the prevailing cost right now ? If you don't then that graph is simply misleading because the visual picture it is designed to paint is meaningless.
The US debt right now in terms of cost is low ..let me repeat that ,LOW ! So for example if you are financing 3 1/2 (350% GDP)times your annual earnings at 3% against 2 1/2 (250% GDP)times your annual earnings at 5% or 6% which position would you rather have ? The 10 year cost on US debt right now doesn't even have a cost ..that's right ,right now they are borrowing for free ...their problem actually doesn't kick in until they have transparently solved the problem and people take away their free money.
By then they should have been able to spread/monetarise the writedown not only across theirown taxpayers ,but right across the globe to anyone who holds US$ assets ,and you little Japanese and Chinese guys know who you are ..guess they will just have to consider it a discount for good export customers ..LOL

Click to expand...

The low cost of financing is the same bull$hit that was used to rationalise the suckers who bought TMT stocks in the late 1990s on 100x sales and also the schmucks who were "persuaded" to borrow an insane 7-8x of their salary on some wildly overpriced shoebox.

The debt to GDP is a valid chart as demonstrated below.


In fact, I would suggest that GDP is overstated as it includes the parasitic FIRE (Finance, Insurance and Real Estate) Sector and there is the major problem that personal consumption makes up 70% of GDP. Non self-liquidating debt is a major issue compared to the 1930s.

Finally, when the creditors eventually realise that they are funding a ponzi pyramid scheme, you'll be very lucky if the 10 year interest rate isn't below 20%. Like a C rated bond.

I believe I asked a question. Can you consider the size of financing without considering the cost of that financing?
Rhetorical question really as it is obvious you cannot. However , instead of accepting that argument on you go with the typical bloggers rant cutting and pasting the same graphs that have been circulating in bloggers circles for the last years. My last word on this issue is, try thinking for yourself rather than absorbing the thoughts of others that seem to find 'symaptico' with your already established beliefs.
Can what the central banks are trying go wrong, yes . Will it ? Who actually knows..no one.However ,there are people out there like Krugman , Shedcrap et al spouting off with remarks that adamantly infer they know the future ..they know the illiquid market value of contracts will not be higher than their value established in that illiquid market...well my answer to all of that nonsense is if you really know please take all of my money and manage it and just pay me twice the value of any loss you make ...shouldn't be a problem for them should it as they clearly know the future price of something where I clearly do not. All I can do is keep an open mind on it.

Internet is a wonderful thing for disseminating information...the downside is opinions are also disseminated as though they were objective information when clearly they are not and that makes keeping an openmind very important if you want to be susceptible to the fact your opinion might end up being wrong.

DaxDestroyer said:

I see 2 problems with your statement:

1. Real interest rates might be a different thing
2. For the Govt. it might be true, but the "real life" shows a different picture. Interest rates are SKY HIGH for companies and consumers.

Anyway, IMHO only a currency reform will untie the knot.

Cheers Carlos

Click to expand...

By the way I agree with you on currency reform and real rates

What pssies me off is the dross I keep reading that paints the US and Uk as some sort of chief villains in all this mess.Let's be frank the Japs won't spend/invest domestically ,the Chinese can't yet do so in a way that keeps pace with their overall growth so most of their growth like Japan comes from exporting...BUT what happens when China grows at 12% and the US/UK/Europe grow at 2% ..what does it mean ..it means some pillocks are messing around with subsidies and pegging/interfering in currency and are sucking capital disproportionately away from lower growth areas hence why you end up with probably half the worlds reserves parked in China gathering dust...the only way the low growth areas can benefit in any meangful way is from lower inflation and you'll only get that sustainably from low cost of finance,low inflation.BUT that still won't work out at extremes as we have seen. Worlds out of balance.
China wants to be careful what it wishes for ...if I were Obama and got too much crap I'd get myopia at my international borders ...wind up the printing press , shut down the external moneyflow by controlling how much money can be used crossborder and then let's see where China/Japan etc go ...down the toilet comes to mind.

chump said:

I believe I asked a question. Can you consider the size of financing without considering the cost of that financing?
Rhetorical question really as it is obvious you cannot. However , instead of accepting that argument on you go with the typical bloggers rant cutting and pasting the same graphs that have been circulating in bloggers circles for the last years. My last word on this issue is, try thinking for yourself rather than absorbing the thoughts of others that seem to find 'symaptico' with your already established beliefs.
Can what the central banks are trying go wrong, yes . Will it ? Who actually knows..no one.However ,there are people out there like Krugman , Shedcrap et al spouting off with remarks that adamantly infer they know the future ..they know the illiquid market value of contracts will not be higher than their value established in that illiquid market...well my answer to all of that nonsense is if you really know please take all of my money and manage it and just pay me twice the value of any loss you make ...shouldn't be a problem for them should it as they clearly know the future price of something where I clearly do not. All I can do is keep an open mind on it.

Internet is a wonderful thing for disseminating information...the downside is opinions are also disseminated as though they were objective information when clearly they are not and that makes keeping an openmind very important if you want to be susceptible to the fact your opinion might end up being wrong.

Click to expand...

I did answer your rhetorical question in detail.

I refuted your rhetorical question giving two examples in respect of recent stock market and property market bubbles. Furthermore, I concluded by saying that creditors financing a ponzi pyramid scheme would bail out once they realise that the cost of financing ought to be at least 20% for the size of financing.

I also posted two charts. The chart illustrating the decline in the growth of GDP for every additional one currency unit of debt completely backed up the chart of Total Debt to GDP. Both charts refute your rhetorical question.

Do you really think debt can grow to infinity? If so, why?

Nobody knows the future. We are dealing in probabiliites, not certainties.

However, we do know what happened in previous debt financed asset bubbles. We also know about previous instances of very high inflation and of hyperinflation.

Indeed, the internet is a wonderful thing. The key skill is the ability to separate the wheat from the chaff.

"I did answer your rhetorical question in detail."

LOL...no you didn't. You reformulated it to fit an answer you wanted to post complete with examples of how past fears were realised to be true so the future must now be clearer..LOL
To answer my question you don't need graphs and you don't need to pore your way through financial history either. You just need to be able to do numbers. It is simple , does the cost of finance have a bearing on the ability of an entity to repay it's level of debt..that's it .That's the question. The obvious answer is yes and from those graphs you posted if you simply post one showing a debt level with no reference to the cost of servicing the debt then the graph is not very useful except perhaps as scare tool. The next question therefore is will it be possible to service the level of debt shown on that graph and that depends on how you intend to deal with that debt. You can indeed try to repay it in it's entirety ,or you may choose to mitigate that level of debt to match your ability to service it. Your ability to do that depends on your leaverage to do that ,but it helps if you have the worlds reserve currency in your pocket and your ability to mint more of it.

Now I don't know the outcome and I don't mind saying that,but likewise I really doubt anyone else knows either.
It does not take much by way of power of observation to see we have quite a number of people who by experience and qualification should be in a position to analyse the issues at hand. Likewise it is clear that those people have ,not just views of a different hue ,but views that are so disparate they don't belong on the same planet. Now when I see that what I know is we have people who are falling into the trap of arguing about something to which there is no immediate answer.Therefore when you cite probabilities you do not cite probabilities at all because they are implicitly unquantifiable. What you do and all you do is try to put into words your own beliefs and using words like "probability" is no more than a mechanism to try to give those words and belief some validity.

Statements about "debt to infinty" are simply red herrings that draw away from the question trying to support your beliefs. It isn't anywhere in the issue that debt goes to infinity is it ? No, it isn't. There is a specific level of debt which as % of GDP is at a record high ,can it be serviced given the level of cost of finance and the ability of the debtor to 'renegociate' ,or change the terms on the debt. That's the central question and we'll find out in the fullness of time the answer,but right now talking about the answer and probabilities is nonsense.

I have to say, now and again, a thread, quite at odds with the general level of mediocrity that passes for discourse on the site these days, suddenly appears that has content of such quality and provides such genuinely significant food for thought, and of such a high mental/intellectual nutrional level, that you not only read it., you read it more than once. And if you've any sense at all, you probably haul it away into Word or some such for deeper analysis, at leisure, away from the bright flashing emoticons and gaudy pixelated advertising on trading bulletin boards' answer to Piccadilly Circus.

Nice work gentlemen all. Makes me wonder why we aren't running the show rather than clowns that apparently represent us.