Tuesday, March 31, 2009

Bad Program for Bad Assets

The Geithner Plan Will Kill US Banks Profitability

It seems that a lot of people are saying that private investors will overpay for bank assets because of the non-recourse loans. What they forget is that Lone Star purchased Merryl Lynch 'super senior' AAA CDOs last year for $6.7b, the notional amount of the CDO was $30.6B, it was carried on the books of merryl at $11.1b, Lone only paid a little over half of carrying value and they only put $1.675b down and the rest $5b was financed with a non-recourse loan.
Yet Lone Star got a heck of a deal(their risk aversion demanded good terms) as their down side is $1.675b and the upside is in theory $30.6B, the only recourse Merryl has is the asset itself. I understand some folks will say its the FDIC/Fed who will foot the bill instead of the bank like in the MER transaction but from a buyers(bid setters) perspective who foots the bill almost doesnt matter as a long its not them.

The private sector is very risk averse right now and they want bargains or they wont buy it, no cheap put will turn scared investors into gamblers. That Lone Star deal was done before Lehman went bankrupt, the Geithner bad asset plan will kill the banks, if they hit thoses bids they will be left far less profitable and less solvent. Private common equity offerings wont popup all over the place like Geithner hopes, he will have to provide the equity capital or nationalize the banks and wipeout the debt to 'create' capital


  1. we are all screwed!

  2. The Lone Star deal was an arms length transaction with a desperate seller who didn't know how to value the bonds, but just wanted to get them of the sheets to improve optics. The PPIP is a scam which will be gamed by banks to purchase each other's toxic assets with tax payer's money. The current purchasers, unlike Lone Star, will be looking out for the seller's interest as well as their own. I think it is naive to believe otherwise.