Monday, March 23, 2009

The Public-Public-Public-Public-Public-Public-Public-Public-Public-Public-Public-Public-Private Investment Partnership

Timothy Geithner's plan to get money to the banks was released today. One of the guiding principles is:
Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.

But when you get into the details, you find the plan is for 50/50 public/private equity supported by 6:1 leveraged borrowing from the public sector. That means 12 dollars of public money goes in for every 1 dollar of private money, making this the PPPPPPPPPPPPPIP of the title. So, does Geithner actually believe that this is making the most of taxpayer resources? I have to grant that he seems to believe CDO's of mezzanine subprime MBS tranches are "undervalued", which is even less plausible. Foolish or dishonest? You decide.

In the "Legacy Securities Program" Geithner continues to promise he'll develop a plan - someday.

Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assetsBorrowers will need to meet eligibility criteria.

Yes, Geithner has known that we have a lot of bad loans since at least the fall of Bear Stearns a year ago. Yes, he has been involved in multiple negotiations trying to save companies loaded with bad debt over the past year. Yes, he has supposedly been working hard on this for at least 4 months.

No, that quote is not from the Onion.

Friday, March 20, 2009

The right amount of quantititative easing.

Krugman has a post up expressing approval of the Fed's announced intent to buy 1 trillion in long-term bonds. I'm all for quantitative easing (I wonder what Orwellian instinct causes them to avoid the proper phrase "printing money") but not on this scale. M1 is only about 1.6 billion (and was less that 1.4 last summer) so this is about a 60% increase in the money supply, coming on the heels of some significant printing in Q3-Q4 2008. Crudely, you'd expect about 60% inflation from this and that's far too much. As Krugman points out, the prices of these bonds will drop as the economy recovers and interest rates decrease. So even if the Fed pulls back as hard as it can in a year or so we're still left with about a 15% increase and I very much doubt the Fed will pull back even that hard as IMO that would throw us into a depression.

I think a better guide would be to print enough money, excuse me, "quantitatively ease" enough, to keep the leading indicators moderately positive. That should be enough to get us out of recession without risking the worst inflationary shock since the Constitution was written.

Friday, March 6, 2009

Tranche warfare, in earnest.

I have seen some discussions about how differing interests of differing tranches could potentially lead to some pathological results, but here's a real example : Carrington Investment Partners LP vs. American Home Mortgage Servicing.

Carrington bought some junior tranches that apparently have the right to control disposal of REOs in the pool (there are legal fights now over whether they do). As long as the REOs aren't sold, the junior tranche gets its scheduled payment. Once the REO is sold, the proceeds are dived starting from the seniormost tranche, which in this case will leave Carrington's tranches in the cold.

So Carrington is trying to force the servicer to keep the REOs, unsold, presumably until they rot into uselessness. Sure that screws over the senior tranches, nearby homeowners, and the economy as a whole, but hey! a hedge fund has to make a buck! Go free market!