Tuesday, March 24, 2009

The Ridiculous Marks Of Toxic Assets

The Treasury's arbitrary transaction price of 84 for the "pool of residential mortgages" seems to not have been all that arbitrary after all. In fact, as it may turn out, it was gloriously optimistic. A report by Goldman today on the PPIP caught my eye, with one chart in particular, indicating that bank are still marking the bulk of their "assets" at 90-95! Of particular note is Citi's delirious optimism on marks in its assorted asset classes, especially commercial mortgages.

A PPIP transaction at 70 is one thing, one at 95 is very much different, especially when the FMV is in the 30-40s, as the potential equity upside is very limited, while the downside is... well... much less so. Have not had much time to dig into this but present it for consideration and commentary. If banks have expectations for bid levels north of 90 on the bulk of TALF-mediated transactions, this could really end up being a lot of hot air, despite PIMROCK's enthusiastic endorsement of the proposal.

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33 comments:

Anthony said...

and never the two shall meet.

Anonymous Bar Patron said...

I hear Tyler Durden never sleeps.

Daniel Plainview said...

Well a massive LOL at those marks.

**Where are all the adults gone?**

Anonymous said...

"this could really end up being a lot of hot air"


Did you really expect anything different...

At least the market is buoyed, but wasn't that the porpoise?

fautroll said...

As befitting a financial commentator and/or analyst you are almost entirely too reasonable at times.

I appreciate that reasonableness. History and facts speak for themselves. In every banking crisis, both banks and regulators underestimate losses until the very last possible moment. If there are exceptions to this history, I am not aware of them.

The balance sheet adventuring by BHS is a calamity that will have inevitable consequences in this butt end of a thirty year biz cycle that ended in pure Minsky Ponzi finance. Of course their marks are optimistic. I would expect nothing else.

How much dithering and bullsh*t will the world have to endure before the light of day comes?

I give the BHCs a few more months of obfuscation and subsidy before inevitable receivership.

As for the equity markets. Well, you are terribly reasonable there as well, with your even lending the slightest bit of credence to BHC claims of profit in Q1. Get ready for the next downleg. Deflation is here, regardless of the impotent attempts at QE.

As even hoary old Greenspan pointed out in a previous and mini-me version of crisis, without "diversity of funding", without a functioning market for credit, the FED is essentially powerless to reflate. As you have well documented those credit markets are on a Dantesque journey through Hell right now. I'll see you at the seventh rung.

Thanks for all your work and your reasonable demeanor. Your work speaks for itself. Do keep digging.

Anonymous said...

T -- where do you find info about who has how much marked at what?

Tyler Durden said...

blue letter from lloyd b

Anonymous said...

In the first column, are those the carrying values of loans or CDO's? Or both.

Anonymous said...

Clusterstock has a post suggesting that Pimco and blockrock might intentionally overpay in order to protect their current bank holdings. Do you have any thouhgts on this possibility one way or another?

http://www.businessinsider.com/why-pimco-would-overpay-for-bank-assets-2009-3

Tyler Durden said...

wrote about it yesterday:
http://zerohedge.blogspot.com/2009/03/annotated-geithner-op-ed.html

jyoooo youuu dahh bombbb said...

if the values are still being held at "95" or worse what were all the write offs against?

Anonymous said...

What reason wouldn't they have to overpay? If I'm reading it right, the first 15% comes in, They split that 50/50, minus a little bit for the interest on the 85% (and that's if they don't borrow the 80% of the "Investment".

Then they get a CDS for the full 100% of face, or just even the 100% of the bid. If it fails after that, the loan is non-recourse, so they get paid off in full on the CDS, and the US Taxpayer gets stuck with the whole thing.

Meanwhile the banks get to still list 90-100% of face on the books and say "See, We told you we were fine.. "

Everyone's fine except the US Government.

Anonymous said...

What you fail to understand is that the total exposure has been conservatively estimated at roughly $100 Trillion but could go as high as $700 Trillion, if they can ever find the counterparties to some of the CDS trades in order to correctly estimate value.

The $1 Trillion estimated by Turbo Timmy is just the first drop in the bucket but gently bends our victims over and adds the correct amount of obfustication so we can fill that bucket when our visable spokespeople are busy baffling the public with bullsh*t.

Lets make some money boys!


Look at page 23:
http://www.occ.treas.gov/ftp/release/2008-152a.pdf

chrispycrunch said...

This was almost as tricky as when the home sales figures were announced...5%...nice...but 1/2 of it was foreclosure sales.

Anonymous said...

Great comment below on the seasonality of home sales.


http://www.ritholtz.com/blog/2009/03/annual-existing-home-sales-errata/

Anonymous said...

I dont think the banks are concerned about taking losses from these marks.

This is all tier 3, any cash they receive is tier 1. Spin that to the taxpayer and get back to business...

Jamie said...

So let me get this straight. They are bitching about having to MTM but they have not really done so? What's going to happen when pimrock offers 40Cents on the dollar to their MTM.

Anonymous said...

interesting youtube clip of how the banks might play this

http://www.youtube.com/watch?v=n-arbfLTCtI

Anonymous said...

Anonymous @ March 24, 2009 4:38 PM

"This is all tier 3, any cash they receive is tier 1. Spin that to the taxpayer and get back to business..."


You're the kind of evil I want working for me. Got a resume?

Anonymous said...

This is very misleading. read the footnote. its an average. not every single security is booked at 95-97c or whatever.

Obviously the 100% is unforgivable, but some stuff, when classified by zip, vintage, etc. actually is performing well (fitch says CMBS defaults are 120bps...thats 98% of commercials that are still performing).

In addition, these are all held to maturity. There's no way you can extroplate today's environment into perpetuity. That's just as nuts as thinking 100% is performing.

kfunck1 said...

cmbs = securities. chart = whole loans. Those are marked against loan loss provisions from other than temporary impairments, not marked to market. OTTI/provisions are backward looking by nature anyway. They might be able to get some securities that are being marked at fair value moving (I would suggest this is a small number now), but they won't get shit out of the whole loan (eg held to maturity and carried at historical cost, or mbs moved to htm for that matter). Give it a week. Once we start getting real news (Q1) and people realize this isn't going to amount to anything, we'll back on the pain train.

In Debt We Trust said...

What's good for GS is bad for the US.

Anonymous said...

Kf1...i was using cmbs as a proxy for wl's...in fact you could almost argue that cmbs are shittier than WL's as their underwriting discipline was totally nonexistent.

Anonymous said...

...thus WL's default rate vs cmbs on average is probably well below 120

kfunck1 said...

I see your point, but its not as if the underwriting on said whole loans was anything short of non-existent itself. At any rate, my point was that cmbs would be marked down 120 to fair value. You could argue that the whole loans are being properly provisioned for, but I find that next to impossible to believe. Difference of opinion I guess, neither us know the real answer (unfortunately).

Anonymous said...

You're forgetting that the gov. guaranteed $300B in Citi's assets. Citi can sell those assets at any price and it doesn't matter to them, because the gov. will reimburse them. In fact, it gives them an incentive to sell it as low as they can and make a back room deal to get a returned favor at some later date... say like selling that company an asset at some inflated price or something like that.

Doc Merlin said...

I think they are still worth about 90-95% (probably closer to 90%) over the long term for most of the assets. Right now they aren't and probably won't be for better part of this year, but that should change soon as inflation sets in again.

This of course doesn't apply to parts of California or to Detroit which are experiencing net emigration.

jIM t said...

I DON'T RECALL THE EXACT NUMBERS, BUT THE LAST ANNOUNCED DEALS BACK IN JULY - AUGUST 2008 THAT I RECALL THE NUMBERS WERE CLOSER TO 15 CENTS ON THE DOLLAR ON ONE DEAL.

WALL STREET SHUTTERED ON THAT NEWS, BUT THEN MERRILL CAME OUT BOASTING THEY GOT A WAPPING 27 CENTS ON THE DOLLAR FOR THEIR BUNDAL OF TOXIC CRAP. BUT THEN LATER WHEN THE TERMS CAME OUT, IT REALLY WASN'T REALLY THAT GOOD. THE BUYER ONLY PUT UP 15% AND MERRILL FINANCED THE BALANCE WITH A NON-RECOURSE LOAN AND REPAYMENTS WOULD ONLY BE FROM INCOME FROM THE TOXIC ASSERTS. (NO INCOME, NO PAYMENTS ON A NON-RECOURSE LOAN)

AFTER THAT THE MARKET COMPLETELY FROZE UP!

NOW 7 MONTHS LATER THE BANKS THINK THEIR TOXIC CRAP IS STILL AT 90 - 95 CENTS ON THE DOLLAR AND THE GOVERNMENT IS BEGGING INVESTORS TO BID 84 CENTS!

NOT ON YOUR LIFE OBAMA & GEITHER, THAT SHIT AT BEST EVEN WITH YOUR LOAN IS 27 - 30 CENTS ON THE DOLLAR.

NATIONALIZE THE FRICKEN BANKS AND LETS GET ON WITH IT. THIS IS BULLSHIT!

cap vandal said...

kfunck1 -- Bingo.

In general, whole loans aren't toxic. There is no reason to sell, except under forced liquidation. They aren't marked to market. The performing ones are booked close to par and the non performing loans are just a matter of salvage.

While the blogosphere is wringing its hands about embedded puts, etc. banks whole loan portfolios aren't for sale. No reason to sell.

They also aren't clogging up the credit system, since they were originated to hold.

The securitization market is something else, and the only smart thing to do is to buy new stuff per the original TALF. An example would be Harley loans which are stacking up on their books. They are decent credits but there is no current market.

NB..... Toxic doesn't relate to performance -- it either means opaque or it means nothing.

The Orwellian aspect of this is that the media has somehow confounded investment banking with commercial banking. This was deliberate since the IB's had to be bailed out, but they aren't necessary for recovery. All you need for securitization is a buyer, and it has to be the government for now. However, the legacy firms aren't needed.

Anonymous said...

thank you for that last comment.i much appreciate the additional imput (supplementing the main article above) from those contributors who have a good grasp and knowledge of the topic.Reading both the blogs AND the comments is an education which i find completey lacking in all msm or even forums on these topics.Thank you. i return every day.

kfunck1 said...

Whoa now, I said they weren't carried at fair value, that doesn't imply that they are therefore "non-toxic" or being properly provisioned for. That was the reason for the recent FAS 157 Guidance on OTTI. I think most people would argue that they are not provisioned for properly, and present an equally large issue as to those L3 securities. The dollar figure between the two is, um, gigantic.

Anonymous said...

What is your source? I can't find this Goldman chart anywhere else except via links to this post.

Anonymous said...

Awesome post!

Please understand: talk to structured product quants on the Street, they will explain that bonds held on bank balance sheets were marked UP eggregiously when they were first issued. Senior management wanted the PnL, they wanted to get PAID off those insane marks.

Fast-forward to today. Now we see bonds only slightly marked down. What's happened? Banks have only marked down that initial bogus PnL mark when the bonds were first issued. This does not apply to all bonds, of course, but to a substantial portion of bad debt out there it does.

THAT'S THE DIRTY SECRET. That's why Crittenden is moving to London. All the big insiders at banks know this, the quants will tell you. Subpenea the quants and they will talk. Geithner HAS to know what's going on, it happened on his watch at NY FED.

Christ, I feel like I'm talking to Bob Woodward in a basement parking garage in Washington, D.C., circa 1973.

Somebody's gotta get this info to the right people. Ask the right questions and Cuomo might see what a scam this is. Geithner's plan is the biggest scam. FOLLOW THE MONEY, GIVE THE QUANTS IMMUNITY, THEY'LL EXPLAIN IT ALL.