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PPIP is RIP - What a dead cat can't see a dead cat don't know

Politics / Credit Crisis Bailouts Apr 05, 2009 - 07:25 AM GMT

By: Andrew_Butter

Politics Best Financial Markets Analysis ArticleHere is a tip if you are thinking of buying bank stocks, (1) get hold of a photo of the CEO (2) show it to your dog (3) if the dog wags his tail then you can be sure the guy has a "trusting face", and (4) that's as a good a reason as any to buy a bank stock.

Forget about the audited "results", (1) they are garbage now, (2) they were garbage before (by definition - remember the auditors signed all those banks off as going concerns a year ago) and (3) they are set to be garbage from now on, nothing changed.

But that's just a sideshow so who cares? The system was broken, it still is, so what?

The big question for now is whether the US taxpayer is going to have to find another $ 1,000 billion (debt and equity) so that:

(1): The largely sate-controlled banking system calls off it's strike and goes back to doing it's job (which is making sensible loans to sensible people who need it to do business and can be relied on to pay the loans back (with interest)). And if you think there is an element of blackmail there well you are probably right, welcome to the joys of socialism, or crony capitalism (same difference).

(2) PIMCO will be made whole on the $100 billion or so of Citi, BOA etc bonds that it owns, (and presumably their mates also have exposure there), in return for losing no more than $10 billion on the PPIP between them.

(3) The US Government gets to pay about $1,000 billion for a load of toxic assets that might realistically be worth $800 to $900 billion next year or the year after.

OK the "hit" that the US taxpayer will most likely take on this deal will "only" be a couple of hundred billion or so, and of course that's peanuts compared to achieving objectives (1) and (2). Oh and sure they "might" make a profit, with the emphasis on "might".


(Apart from the fact that the US taxpayer might be getting a bit tired of investing in get-rich-quick schemes these days (particularly the ones where other people get rich and they lose everything)).

(1): Thanks to changes in mark-to-market (for good or for bad) banks won't have any reason to sell any toxic assets (except the really bad ones, and you don't want to buy any of those). Why can they do that? Because they can now write them up in their books as worth 80 cents on the dollar not 30 cents on the dollar.

So the Government won't have any (logical) reason to buy those "assets" because once the books are cooked the banks (most of them) are no longer technically insolvent.

(2): Bill Gross has said (presumably he got assurances on the $100 billion of bonds he owns first, and for his mates who presumably also hold similar bonds), that he and his mates are ready to put up $70 billion for the government's $930 billion and buy those assets at about 80 cents on the dollar.

That sounds like a transaction in the making. But if you can do it for $1,000 billion why not just do it for $100?

Just to "test the water" - buy $100 worth of toxic assets (PIMP-ROCK puts up $7 and the US Government puts up $93), and VOILA mark-to-market you have a TRANSACTION for the first time in six months. So all the toxic assets can be valued at 80 cents on the dollar, mark-to-market!

Which will mean that the capital adequacy of the banks under the old and especially the current rules will be sound. There is nothing really sleight of hand here - and if you think that's racketeering or market manipulation who cares, the governments been doing that off and on to the Gold market for years, and well socialist (and crony capitalist) governments do it all the time, so who cares?

So there you have it (1) assets more than liabilities so banks are not insolvent [√] (2) Capital adequacy in line with Basel II [√].

PROBLEM SOLVED: Total cost to US taxpayer = $93 less anticipated sale price; worst case $70 so total loss = $13, that's approximately $0.00001 cents per every American, they ought to be able to afford that.

That's the joy of the regulations that are currently in place for the US financial services industry, all you got to do is figure out a way to tick a couple of boxes, and you get your bonus.

Would it be a good idea to CHANGE the system? You bet. But hey, "we are kind of busy now".

The Achilles Heel of that Cunning Plan

The only thing wrong with that plan is that perhaps some black-leg banker might go out and sell a toxic asset for say $50 cents on the dollar, then the WHOLE market would have to be re-set, and there would be a problem again!

The solution to that possibility is of course simple, after doing that one $100 transaction, pass a law saying that it is illegal (under threat of the death sentence - lucky America still got that) to sell a toxic asset for less that 80 cents on the dollar, for a period of what two years, or so?


Banks do business at the "pleasure" of the Government, IF the Government says they have enough capital adequacy, THEN they have enough capital adequacy. Period.

The US government has and will have an implicit and often explicit ongoing liability to guarantee US banks against runs, so just live with it.

There is no logical reason to dole out another $1,000 billion of the taxpayers money to get rid of that liability before it actually occurs. Who knows it might be a lot less than that, it probably won't be more, and if it is well que sera sera .

But if a bank is technically insolvent (assets less than liabilities) EVEN after assets are assessed in the most generous fashion (mark-to-(internal)-model), then it MUST be closed down. Like Professor Roubini said six months ago, the really bad apples must be separated from the half-bad.


Now that's all squared away perhaps the Government can set it's mind to fixing the system that allowed a bunch of kids to borrow trillions of dollars and go gambling in a casino, where the deal was they got to keep half the profits if they won, and none of the liability if they lost; with very predictable consequences.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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