Tuesday, March 24, 2009
Beggars Can be Choosers!!! The Real Meat-Eaters...Stocks
Several years ago, I heard a story. Hunters were giving deer meet to homeless people as a good will gesture around the holidays. The thought was that everyone would appreciate a warm meal and a bit of protein. Food is food right? As it turns out, some of the homeless people refused to eat deer meat citing that they could not Bambi... Conventional wisdom suggests that if you are hungry enough, you will eat anything.
I bring up this story because it is a classic example of beggars being choosers. It is an eerily similar story to the plan to purchase toxic assets from banks. The U.S. government, along with private equity investors are seeking to purchase toxic assets from banks. This plan is designed to clear the banks of their toxic assets once and for all so the United States can start to work out of the current financial abyss. After all, the banks have toxic assets that are eating up balance sheets.
In a recent interview with Market Watch chief editor, he suggests that many bank are unwilling to part with their toxic assets unless they are paid market value. According to banks, and their mark to market accounting formulas, the "toxic assets" are worth more than the what the government, or private equity partnerships are wiling to pay for them. In essence, if the banks let these toxic assets go for anything less than the estimated value, there will be a black hole on their that could well swallow up the nearest planet.
Therefore, further discussion of Geithner's plan was practically dead. The euphoria we witnessed on Wall Street Monday was nothing more than half-witted jubilation. The truth is that the trillion dollars that was pledged to purchase the toxic assets will not cover the losses that banks currently have on their books anyway. And the banks want something else(namely more money) for paper that has little to no value. In other words, the homeless are turning their backs on the food that is on the table, because they prefer something else.
The Real Meat Eaters
One must admire the banks for their persistence if not their out-right arrogance on the the latest proposal to purchase toxic assets. I give the banks 50/50 odds that their assets will sell at if not extremely close to the value to the original purchase value. If that is done, then the bad bank plan will cost taxpayers closer to 4 trillion dollars. That will be the day to own gold and silver.
A second plan suggests that changes in current accounting rules (the same things that were used for Enron) allow toxic assets to be held in investment vehicles that are off the regular books. As is Enron, the losses can be shifted from vehicle to vehicle. All that banks really need are enough liquidity to keep them floating. This is where the original TARP funds come into play. Although, one could make a strong argument that AIG bailouts have been nothing more than a supplement to big banks as well.
The last and possibly most disturbing aspect of this financial shell game was floated by fellow blogger Ax at bigbigbet. According to several stories, the government and hedge funds are never intended to make any money from the toxic assets. The hedge funds will pay close to top dollar with 93.3% government (as in taxpayer money). Once the toxic assets are digested and teh toxic portion disposed of, the valuable part of the assets will be sold bank to the banks.
One thing is for certain. Even though Chris Dodd and Barney Frank have egg all over their faces in these deals... both are still calling shots. Maybe it is just not time to pull the plug on these birds yet. But if things go south, rest-assured both of these characters are looking more like fall guys.
The market has never sen a turn-around like this before undera new President except for November of 1929... While I do believe Obama brings a high degree of intelligence and charisma to the office, I am certain that if he is caught off guard by numbers... or if trading partners demand a move to a new reserve currency, his rosy relationship with the media can turn.
FAZ is at a 52 week low and is worth consideration.
Posted by at 4:39 PM