Another way to say this is that by financing a large part of the purchase with a non-recourse loan, the government is in effect giving investors a put option to sweeten the deal.
….She also noted that the program does not put the FDIC’s dwindling deposit insurance fund at risk. Rather, the fund — which backs deposits at FDIC-insured banks — will be bolstered through the debt guarantee fees that the FDIC collects through the program.
Are you trying to be absurd?
Why is the FDIC getting a line of credit from Treasury rather than the private banks which funds it?
thx ;_)
Hope that helps.
“Sorry but I am bit of a maniac for details and I think it matters to get that stuff right, FDIC is not funded by taxpayers, never has been and I haven’t seen any change in the law (so far…) that suggests that it will be.”
Then, you are simply being intellectually dishonest.
for the legality issue, what is at risk are fund voted by congress for the purpose of buying troubled assets, that was the original purpose of the program.
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No. If Geithner’s plan intentionally allows radically overpriced bids, then the Fed’s and FDIC’s money is at risk. If BAC and C are allowed to bid for each other’s assets at 2xFMV with taxpayer money, they will. If PIMCO and BLK are allowed to bid for each other’s assets at 2xFMV with taxpayer money, they will. If any of these players are allowed to collude with funds that bid for their assets resulting in bidding at 2xFMV, they will. It is telling that Geithner said collusion between buyers was verboten, but didn’t say that collusion between sellers and buyers was against the rules.
I’ll believe Geithner’s plan isn’t to intentionally allow radical overbids through rampant collusion when he issues detailed rules prohibiting collusion, sets out severe penalties for collusion, and appoints an aggressive prosecutor to investigate and prosecute violators.
If Geithner does allow radical overbids, then the FDIC and Fed are in substance giving underwater loans and guarantees that seem like illegal gifts.
abc:
it may be biased ( and I agree it is ) but it’s still funded by the industry, the losses hitting the non-recourse part are a bailout of the industry by the industry.
for the legality issue, what is at risk are fund voted by congress for the purpose of buying troubled assets, that was the original purpose of the program.
http://en.wikipedia.org/wiki/Troubled_Assets_Relief_Program
FDIC is funded by the industry, not by appropriations from congress or taxpayers, they are seeking an increased credit backstop line from treasury that if drawn will be repaid by fees on the industry.
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FDIC’s funding is biased against the small banks. The purportedly too big to fail banks aren’t charged for their off balance sheet exposure, and aren’t charged adequately for the ABS and other risky assets they hold.
Re FDIC’s funding and Geithner’s PPIP auction plan, small banks, credit unions, and asset managers should write in to Treasury, the Fed, and FDIC asking why they aren’t required to introduce the program with proposed regulations giving a period for public comment and a public hearing under the Administrative Procedure Act. And also, why they aren’t required to do analysis of the impact of their actions on small businesses under the Small Business Act.
They should also complain to the U.S. Senate Committee on Small Business & Entrepreneurship and the House Small Business Committee about the Fed’s, Treasury’s, and FDIC’s actions. On prior occassions Rep Manzullo has fought Treasury on behalf of small businesses. These committees aren’t beholded to the big buy side and sell side players.
But big picture, I still don’t understand why Geithner’s plan to have the Fed extend underwater non-recourse loans the FDIC to give underwater guarantees don’t amount to illlegal gifts of public funds. I do not understand what statutory authority they have to take these actions. If they don’t have authority, the Senate and Congress would have a hold card to bounce Geithner, Bernanke, and Bair.
Erich:
FDIC is funded by the industry, not by appropriations from congress or taxpayers, they are seeking an increased credit backstop line from treasury that if drawn will be repaid by fees on the industry.
Sorry but I am bit of a maniac for details and I think it matters to get that stuff right, FDIC is not funded by taxpayers, never has been and I haven’t seen any change in the law (so far…) that suggests that it will be.
Alas, the non recourse mortgages are contractual agreements entered into by both parties. Such is capitalism.
“Yes, they are bad, and the “non recourse loans to buy the non recourse home mortgages” aren’t any better ”
My apologies, I heard you refer to defaulting homeowners as whiners and did not realize you had also referred to Wall Street as whiners. At least you are not being intellecutally dishonest as are so many others!
Your comment about the FDIC being funded by banks is amusing, they are seeking what a $500 billion bailout from the Treasury currently, right?
“That non recourse home mortgages are bad?”
Yes, they are bad, and the “non recourse loans to buy the non recourse home mortgages” aren’t any better ( but they aren’t free ), they just would not be needed in the first place if people had an incentive topay their bills. the u.k. had a huge housing bubble and the level of foreclosures is mininuscule compared to the u.s., same for spain, ireland, etc.. all countries with recourse mortgage.
“fact is, none of this is would be necessary if people paid their bills, period”
What does this even mean? That non recourse home mortgages are bad? While tax money being spent to provide non recourse loans to buy the non recourse home mortgages are good?
Wall Street’s hypocrisy is the greatest lesson of this economy.
fact is, none of this is would be necessary if people paid their bills, period.
not bailout nation, crooked nation fits better.
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Funny, bring back the debtors prison and all that right?
Anyway, bailing out bondholders is not necessary. In fact, it is easy as pie to extinguish their bonds in part or full in exchange for issuing equity to them. It is illegal and unethical for Geithner to give the banks, bondholders or anyone else money not authorized by Congress. If he does this, he better get immunity from criminal prosecution. It is illegal. And if the powers that be decide to make him, Bernanke, and Bair fall guys, they could be prosecuted for giving away money illegally.
fact is, none of this is would be necessary if people paid their bills, period
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The obverse is also true:
‘fact is, none of this would be necessary if everyone stopped paying their bills [and we just started over from scratch]“
jck,
I’m not a fan of propping up failing institutions, without the kinds of restructuring that make sense.
The best of all worlds would be if Geithner plan found the private equity in an debt-for-equity swap with the major, senor debt-holders of the institutions involved.
The idea that the debt-holders of major banks are ‘untouchable’ because of the market information failures that surrounded the disorderly Lehman bankruptcy is abhorrent. The public’s funds are there to protect depositors, not silly debtholders or foolish owners (equity buyers).
-RJ
abc:
fact is, none of this is would be necessary if people paid their bills, period.
not bailout nation, crooked nation fits better.
(i hope you have a sense of humor…)
it is the whining taxpayers who don’t pay their bills who are looting the public.
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It is a strange world where the Treasury, the Federal Reserve and the FDIC can illegally assume private debts, and taxpayers that object are called “looters”. In banana republic, when dictators rack up illegal debt, they are considered “odious” debt and there are legal arguments subsequent regimes are not required to pay them.
It is a dangerous path for Geithner to pursue illegal action. One can only wonder what sort of illegal actions people might take in response.
it is the whining taxpayers who don’t pay their bills who are looting the public.
“Well technically, the FDIC does not provide loans, it provides a guarantee ( for a fee), the funds will have to be raised in the market.”
Guarantees expected to be paid out are in substance loans. Undercollateralized non-recourse loans by the Fed and FDIC are illegal, unless Congress gives them authority to make them.
The other aspect of illegal kickbacks that institutional bondholders of banks have a massive incentive to overbid for bad paper because a 3% loss on their PIP investment is less than the haircut they’d face if Eugeme Fama’s plan were applied to all insolvent banks.
The wealthy and the transactional class that supports them (like jck) are looting the public.
Amicus:
Yep, it would be cheaper via bankruptcy as long as you ignore the costs of the collateral damages. Barclays bought pieces of lehman that way, good for them but not good for the rest of us and I don’t think we need a repeat.
SA:
“As others have pointed out, FDIC has no statutory authority to provide non-recourse loans to asset purchasers..”
Well technically, the FDIC does not provide loans, it provides a guarantee ( for a fee), the funds will have to be raised in the market.
jck,
I agree, not a free lunch, not a subsidy, just a lot riskier for taxpayers than … acquiring the assets via bankruptcy (unless you believe that nationalization or bankruptcy have bigger risks…).
The impact of non-recourse financing could be estimated by the FDIC. FDIC’s would not a market-price, but the difference between the two is probably small compared to the overall price variance of these likely pools.
The bid price should reflect any credit protection generated by the limited downside of non-recourse financing. Whether it will, or not, depends on the quality and number of the bidders, I guess.
As others have pointed out, FDIC has no statutory authority to provide non-recourse loans to asset purchasers, and there is the little matter of the FDIC fund going broke without a special assessment (according to none other than Bair herself). Without huge funding for FDIC and a change to its statutes, the Geithner plan is fairy dust. Let’s see what Congress is actually prepared to do before getting too happy, if in fact this plan has any chance of working for bad assets with distant cash flows and years of negative carry. A $1 trillion line of credit so that FDIC, which knows absolutely nothing about these products, can make non-recourse loans? We’ll see.
Anyway, I’m just a dopey guy who did some finance work and I’m dumb enough to think that the only way to `rid the system’ of a bad assets is to let it fall to the price at which someone thinks it’s a good asset — without creating a new bad loan that the purchaser can walk away from.
After nearly 2 years of seeing investors being sold out by the margin clerk, finally they have a plan that isn’t going to self-immolate simply because of marks to market. Mortgage paper that I’ve seen is currently absurdly cheap, but can be owned only in cash accounts because, on margin, an untoward market event gets you sold out by your clearing broker irrespective of the investment merits of the paper. And there have been more than a few untoward market events in the recent past.
It’s incredible that this dynamic isn’t understood, and the mindless discussion of mark to market that ignores the real world effects of cascading margin calls that brings about a self-reinforcing instability.
And the reason the loans will be radically undercollateralized is that banks will bid on their own assets, collude with other banks to cross-purchase each other’s assets, or collude with hedge funds in a kickback scheme.
Geithner is proposing illegal bailouts. Geithner is proposing that the Fed and FDIC give grants in the form of undercollateralized loans. Congress has not given the Fed or FDIC legal or budgetary authority to make grants.
Geithner’s bailout financing is just as illegal as Oliver North’s freedom fighter financing in Central America. If Geithner, Bernanke, and Bair follow through with this plan, they should go to jail, just like Oliver North did.
The Attorney General will have a duty to prosecute Geithner and Bernanke or resign.
What’s it mean when I get the spam protection question wrong. TWICE?
To paraphrase, it is only money and it isn’t hers. Taxpayers are providing non-recourse loans backed by suspect collateral. Not only that, 80% of the ‘protection’ comes from the Treausry (i.e the taxpayer).
The taxpayer has 80% of an equity tranche and 100% of a subordinate tranche and this woman thinks that there is no risk.
It would be cheaper to give Ken Lewis another $500 billion and be done with it.
Bair is just foolish…yeah we are going to recapitalize the 0 fund with debt guiarantee funds to insolvant banks which will in the course of a century back the 6 trillion of deposits. Welcome to the world of the sureal.