Economics

Do Bad Banks Offer Defective Toasters?

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Here's a bank that won't be too big to fail: the Public-Private Investment Program (PPIP), which is expected to be unveiled Wednesday. The PPIP, once dubbed the "bad bank" (on the principle that it would buy up so-called toxic assets from large financial institutions that were receiving Troubled Asset Relief Plan funding), has lost limbs and pined with scurvy during its long passage. If it arrives tomorrow, PPIP will be a much smaller vessel, displacing a mere $50 billion rather than the $1 trillion originally foreseen.

Charlie Gasparino reports that nine firms will participate in the program, including one run by vulture investor Wilbur Ross and a joint venture between GE Capital (which may want to sell off a few toxic assets of its own and then buy them back) and private investor Angelo, Gordon & Co.

New "King" of Wall Street Larry Fink, the lightning rod supergenius* who did so much to make this golden age of mortgage-backed-securities possible, may also participate through his BlackRock investment management firm.

Will there be any good buys out there? As long as some critical mass of borrowers continue to service their debt (and even in this degenerate land that's still true of the majority of borrowers), the same mix of assets that would sink, say Mirae Bank, could theoretically pay off for experienced buyers of troubled assets. With a $50 billion public backstop on losses, this seems to fit the "heads I win tails I break even" setup favored by Rep. Barney Frank (D-Mass.).

Caveat: It's not really clear whether the PPIP will be buying debt instruments.

Even at these prices, PPIP does not seem to have tempted weather-controlling madman George Soros into participating. Seeking Alpha's Tom Lindmark says the small-enough-to-fail banks will continue to bleed until they die, so the whole program should scrapped, scuttled and scuppered.

* I'd like to take only a half-sarcasm point here, since I do think mortgage-backed securities were an impressive financial invention that will, in time, return to viability (if they haven't already in some markets).

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  1. I really don’t get how the average Obama worshiping leftist who pines for national healthcare and soak the rich taxes can sit around saying “lets give all these evil, greedy capitalists a bunch of money!” I would think they would be outraged by such a program as this, but no.

  2. I, too, think the mortgage-backed security (MBS) is one of the greatest inventions of mankind, at least in the last 25 years, and possibly longer. That individual or individuals who had the pure, unadulterated genius to invent the MBS is my hero, a positively great American. I say let’s continue securization. Car loan-backed securities, cell phone plan-backed securities, student loan-backed securities, toll road-backed securities.

    Anyone else have any other debts they think can be securitized?

  3. This is the largest racket ever. The buddies of government are getting the backing to sell the risk they took to government and buy less/no risk with the same return back. MBS are incredible instruments like all derivatives, the concept is sound and more than viable. Many of the problems came with the same dipshits I decried in other posts. The academics gave finance Black Scholes and the tards in finance ran off and applied it to everything with absolute certainty. All the time not having a clue what the hell they are doing. Mathematicians and economists standing in the background telling them the model is sound. No one took the 10 minutes to say, “hey doesn’t BS just look at the smaller parts or individual action in a market?” The people who didn’t understand the process put absolute faith in it, those that did understand the process didn’t take the time to inform the people using it and basing wealth off of it. A lot of people understood just enough to make money and not the whole thing. BS is a decent tool for options. It is not a good tool for long prediction MBS like CMOs and CDOs the risks that mount as time lengthens are ignored by BS. Along with a narrow almost minuscule view of the market to describe the whole.

    All math and no observing mixed with greed and money makes for a huge fucking mess.

    You can securitize anything if you can predict the risk and return. The estimates, and traunching are what are tricky not the items being combine.

  4. So, the people participating in the “bad bank” and reaping the benefit of taxpayer leverage are some of the same people who created this mess?

    Oh, this’ll turn out well. . . .

    I do think mortgage-backed securities were an impressive financial invention that will, in time, return to viability (if they haven’t already in some markets).

    The original MBSs (which I, ahem, worked on as a junior lawyer) were perfectly good securities, as they were backed only by good loans and could not contain more than a few loans from toxic jurisdictions (CA, AZ, etc.).

  5. RC, I have a question about the composition of a standard MBS: It’s supposed to be 80% Aaa, 11% Aa, 4% B, 3% Baa, and 2% equity.

    But what do they mean when they refer to “senior investors” who get “paid first” out of the Aaa tranche, “mezzanine” investors who get the riskier stuff, etc. If you’re buying the bond, aren’t you buying the whole basket of risky and less risky debts? I know it’s not a mutual fund, but what exactly is it if the underlying assets are subdivisible in this way?

  6. But what do they mean when they refer to “senior investors” who get “paid first” out of the Aaa tranche, “mezzanine” investors who get the riskier stuff, etc. If you’re buying the bond, aren’t you buying the whole basket of risky and less risky debts?

    Strictly speaking, MBS bondholders don’t own the underlying pool of assets at all, but rather rights to the income generated by that entire pool of assets.

    Bonds are issued from each tranche. What the AAA bond holders are buying is the first claim on the stream of income from the pool of mortgages.

    If the pool underperforms, the holders of bonds from the junior tranches take the hit, but the senior bondholders still get the revenue necessary to pay their bonds (so long as there is still enough revenue from the pool as a whole to do so).

    Oversimplified example:

    Say the mortgage pool is projected to generate $3mm/year in revenue, and has three tranches, each junior to the other, each entitled to up to $1mm/year. (In reality, there is also a highly speculative “residual” bond that soaks up any excess gains/losses, but leave that aside). If the mortgage pool generates $3mm/year, each tranche gets paid in full. If it generates $2.5mm/year, the senior tranches get paid in full and the junior tranche gets only $500K that year.

  7. Well, time will tell how effective the PPIP will really be.

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