© 2009 Jim Worth
Partners in a Toxic Plan
Read the pdf version

The Government, more specific the Treasury and FDIC, is at it again forcing the American taxpayer to become partners with private equity and hedge funds. But is this really a partnership?

Partnerships are generally a 50/50 commitment. Both parties put up 50% of the collateral and assume 50% of the risk, or possible losses. But this doesn’t even resemble a partnership. In fact it has the fetid smell of another bailout, a toxic plan in which the taxpayers, you and me, assume 90% of the risk.

Timothy Geithner, the new Secretary of the Treasury, unveiled his plan to relieve the banks of toxic assets, or more realistically, non-performing liabilities, from their balance sheets. This is a move to make the banks that are too big to fail, the ones that caused this financial crisis because they purchased these toxic assets in the first place, healthier—to free up capital so they can start lending again.

But wasn’t it lending, the over leveraging of America and the rest of the world, that caused the financial crisis in the first place? The world is on the path to a global depression and our government wants the banks to start lending again. And they expect us to take the lion’s share of the risk.

So why are we moving these toxic (illiquid) assets from the balance sheets of these behemoth, destructive, complicit banking entities? The very definition of illiquid is: assets not easily converted into cash. Which means, by definition, that we will be left holding the bag.

We’re told it’s a move to save the banking system, to prevent systemic failure that could cause the global collapse of the financial world. But haven’t we heard that before? Many times? Does anyone remember the story of the boy who cried wolf? Are they protecting our interests? Sheila Bair stated yesterday that the taxpayer could receive a nice return from the eventual recovery of the purchased assets. But in the short-term they are protecting the banks, Wall Street, and overpaid executives at the expense of you and I.

The government is again taking huge sums of taxpayer money to shore up a failing economy, another big band-aid which will serve only to slow the downward spiraling economy and continue to line the pockets of those that created this mess. Every program the government comes up with is either too-little-to-late or screws the American people.

Don’t be fooled by the move from calling them illiquid to toxic and now troubled assets. These assets are toxic, otherwise they wouldn’t need to move them from the bank’s balance sheets.

So why won’t this toxic program work? There are many reasons why it might fail, some of which have been discussed and some that may not have even been considered.

Despite what bank executives said in their statements of profitability last week, the banks are not healthy. Even if we remove the toxic assets the banks will struggle to regain profitability. Removing a trillion dollars worth of toxicity from their books when there may be as much as 60 trillion in bad bets in their portfolios will only serve to provide a few weeks of irrational exuberance before it becomes obvious that a trillion will not even come close to fixing the problems.

If the major banks, Citigroup, Bank of America, and JP Morgan Chase, have been profitable during the first two months of 2009 and are expecting a profit for the first quarter, why are we taking these assets off their balance sheets? If they’ve made a dramatic turnaround and are moving back into profitability then why do the taxpayers have to support such a risky plan that leaves their investment vulnerable while protecting the private investors from risk?

The program is being touted as win/win/win by some analysts, economists, fund managers, and congressmen. But if you really look at the provisions the risk to the taxpayer is abundantly clear. No one can, without equivocation, explain what is in these securitized packages that we are asked to purchase from the banks.

Without that knowledge the sticking point in the program may be the ‘real’ value of the toxic assets. It will be difficult to ascertain the ‘real’ value; banks will want to value the assets at a level that may be actually higher than they’re worth. The investors should be diligent in seeking the best value on investment which may not satisfy the banks. And, given the volatility of the market, the rapid decline in the value of the asset could leave the investor with an undervalued toxic asset by the time they purchase it.

Government has a history of not understanding the ‘real’ value of assets. And we’re not entirely sure that their desire to help the financial system would not jeopardize the taxpayer’s position. The Government would acquiesce to the bank’s perception of perceived value, leaving a numb taxpayer holding the bag.

And the hidden risk, one they are not talking about, is the rapidly declining economy due to increasing unemployment. We are slipping into a potential unemployment foreclosure market from one of bad-loan foreclosures. The major problem may be the 2009 overlap. Despite the increase in refinance activity there are still a large number of bad loans that are resetting this year for individuals that will not be able to refinance. The two foreclosure events may converge for at least six months and would be even more devastating to the housing market and the economy.

The mathematical model used to value the toxic assets assumes a low percentage of defaults based on a decelerating number of failures in the mortgage, commercial, and consumer products areas. An assumption that the worst is over.

And, consumer products: credit cards, auto loans, and personal loans, and commercial products: business loans, expansion and building projects, and inventory loans, have been defaulting at an accelerating rate and could increase dramatically if unemployment continues at the current rate.

The mortgage industry is currently in the eye of the storm. It is a soft lull in foreclosures that has been helped by moratoriums, distressed purchases, declining prices and hope in the coming mortgage assistance program which will help some homeowners.

But the March job losses (employment situation) reported on Friday, April 3rd could be in the 700,000 range. And last month’s could conceivably be revised up to 750,000 from its reported 651,000 lost jobs. With record numbers of job losses month after month the number of foreclosures in 2009 could be even more destructive than those in 2008.

Tomorrow’s jobless claims will be an important number in determining which way this economy is headed.

The model they use to determine the future rate of defaults could assume a 2% rate. What happens if defaults fall to only 4%, or 6%, or remain even at around the 7% range? Losses will be as great, if not greater than they have been over the past year.

If the recent auction for funding TALF is any indication of how this new program will be accepted, the new program is in deep Caca. The American people cannot take on another burden—one that will conceivably pass the cost onto our children and grandchildren.

The Public/Private Partnership program is toxic. The American people should demand that our representatives should not spend one more dime to help out the financial institutions that created this mess.

This article was written to address the Treasury’s plan, a Public/Private Partnership, called PPIP, to guarantee taxpayer's money to buy toxic assets from the banks to clean up their balance sheets. It was submitted to the New York Times on March 25th of 2008.

Buy “Final Audit,” the ‘mystriguing’ new mystery, available Now!
Back to: