Treasury Plan May Include Liquidations

Good Afternoon Folks

The news on Geithner's recovery plan is fast and furious today. There are three articles I want to share with you. The last article around the TALF will basically result in another huge payday for the pigmen and its going to make you sick.

Lets start with Bloomberg's and the Times updates around some of the details on the Treasury plan:

"Feb. 7 (Bloomberg) -- The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of the rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said.

The Treasury may increase its stake in lenders that are judged short of capital, the people said on condition of anonymity. Should extra taxpayer funds result in majority ownership by the government, officials would then decide whether to liquidate the institutions, place them into receivership or retire the companies’ assets over time, they said.

Officials are preparing to deploy billions of dollars more to help recapitalize the banks, after already investing in excess of $200 billion. In a second key feature of the plan, the Federal Reserve will likely expand what is now a $200 billion program to revive consumer loans, according to two people briefed on the talks. Details are still being discussed and could change."


New York Times Update:

"The banking plan will involve a close review of financial institutions, possibly including a so-called stress test to measure whether they have enough resources to weather a continued economic decline. It will also enable the government, when it provides a new round of investment, to convert the warrants for preferred stock it has already received from many institutions into common stock. The move, which essentially would swap debt for equity, would help relieve the balance sheets of those institutions, although it would also hurt other existing shareholders by diluting their common stock."

My Take:

At first glance a lot of this looks pretty good although the devil is in the details. The key thing that the government is doing here is it appears that each bank will have to go through what they are calling a "stress test". This test will be used to determine which banks should fail because they are beyond repair and which ones are worth saving. The banks that are healthy shouldn't be effected once they pass the test.

This is not nearly as Wall St friendly as I would have guessed. It sounds to me like the banks that are too big to fail run the risk of being placed into "receivership". This is a nice way of saying nationalization. The Fed is never going to use this word so we need to start reading between the lines.

Based on the Times article, it appears that if certain banks fail the test, they plan on taking the preferred shares of capital that they put into the banks via the TARP and converting them to common stock before adding additional capital. This will be highly dilutive to the banks share price. Some bank stock will plummet as a result of this move based on the dilution. Perhaps this is a way of punishing the banks for their fraudulent acts?

Bottom line here is there a lot of punishment thats going to be doled out by the government. Lets hope they back it up and these reports turn out to be true.

OK now its TALF time

Let me warn you now. This article is going to make you sick. This is from the Wall St. Journal.

"Hoping to jump-start the financial system, the Obama administration is considering turning to a new program run by the Federal Reserve that has been a challenge to launch and depends heavily on hedge funds.

The Term Asset-backed Securities Loan Facility, or TALF, was announced in November after investors stopped buying securities backed by consumer debt. Under the $200 billion program, the Fed will make loans to almost any U.S. firm that is willing to use the government financing to buy securities tied to credit-card, small-business, student and auto loans.

In essence, the government, which doesn't want to buy these securities itself, is lending money to professional investors so they can buy them. In some cases, the government itself is guaranteeing payment on the loans that back these securities.

To get this program going, the Fed has had to consider questions it hasn't dealt with before, such as whether it should do business with offshore accounts of a U.S. hedge fund, which it has found a way to do.

Because the Fed is so eager to attract participants, it has limited restrictions on which firms can participate.

Broader philosophical issues could arise if the program is expanded. The White House has promised more transparency in how its funds are used. But lending to hedge funds may be problematic because their operations are opaque. Moreover, the program depends on many of the practices that helped to fell Wall Street firms in the first place, such as leverage, structured-debt investments and a dependence on credit ratings.

Depending on the different types of collateral, investors will get roughly $100 of lending for every $5 to $16 of cash they put up to invest. The rate investors will have to pay will be set at one percentage point over interest rates based on London interbank offered rates.

The loans the Fed makes to investors are nonrecourse, meaning investors can't lose any more than the money they put upfront on the security. If a hedge fund defaults to the Fed, its collateral is the securities themselves. There also are no margin calls, meaning the Fed can't demand additional payments of cash from borrowers if the underlying securities fall in value."

Final Take:

Alrighty folks, this is pretty damn disgusting. In a nutshell, The Fed is going to allow hedge funds to leverage up at 20-1 and buy various securities with low interest rate loans. If you are a hedge fund this is a no brainer.

Here is how this game would work: A Hedge fund puts up $50 million and he gets $1 billion in troubled securities back in return. The only skin the hedge fund has in the game is his original investment. The Fed is backing everything except the original investment. These securities pay double digit returns but are dropping in value because consumers are defaulting.

However, the price doesn't really matter because you are all but guaranteed to make back your money plus a huge profit because of the double digit returns are paid back to you will be huge because you own so many assets with 20-1 leverage.

The Fed is guaranteeing the loans on anything above your original investment which in this example is $50 million. So if you make $100 million on the double digit returns based on the leverage before the securities drop enough in value to wipe out your original investment then who cares? You just made a 100% return on your capital!

Leave it to the pigmen to find a way to make money off of this debacle.

The bottom line here is the pigmen get rich, the banks get bad assets off of their books, and the Fed gets stuck guaranteeing the loans and is forced to take almost all of the losses at the taxpayer's expense.

WHEN ARE WE GOING TO GET OUT OWN TALF FOLKS? Why does the taxpayer constantly get shit on over and over and over. Why aren't they thinking of government programs that give the taxpayer an opportunity to make money?

This article made me sick! It will be interesting to see how the stock market digests all of the news on Monday.

Lets see what happens.