Marathon And SIFMA All Over Heads I Win, Tails You Lose

SIFMA's Tim Ryan runs like the plague from answering the question of whether he would invest in PPIP's garbage assets without the government's backstop. However, both he and Marathon's Bruce Richards are dying to use 14x riskless leverage in a wishful effort to restart securitization. David Faber: "Win win for you, no real downside, but you are ultimately going to be paying inflated prices for assets instead of true price discovery, what do you say to that." To which Bruce has a meandering explanation which concludes with: "Taxpayers do benefit, because we believe the returns on these assets are incredibly attractive."Bruce, if they are "incredibly attractive", why not just let taxpayers provide the last slab of equity and pocket all the upside - after all they are footing all the risk up until the critical top layer of the investment tranche? As you disclose in your presentation you are familiar with capital structure: perhaps you could answer that specific question for all of Zero Hedge's readers and all of your new potential investors.

And quite a few potential investors these would be: being the smallest of the PPIP participants (by a big margin at that, which begs the question: where is Och Ziff, where is Highbridge, where is MatlinPatterson, where is SAC, where is Silver Point... actually never mind on Silver Point... all these bigger and more successful funds did not apply for PPIP or did not get selected... Inquiring minds would love to know why) you have to raise about 10% of your total AUM. Not only that, but one imagines the traditional LPs who got skewered on the Marathon's recent forays into "liquidating trusts" can not be all that excited about dumping more cash, even with the promise of "incredibly attractive" returns dangling like a skewered worm on a fish lure.

Of course, none of this is to say anyone here is to blame: when the government tells you, and in fact encourages you, to grab taxpayer cash with both hands and virtually guarantees profits you would have to be a fool not to get involved. Especially since these securities, as Bruce pointed out so astutely were "issued at LIBOR + 25 and are now trading with yields in the teens." How could one possibly lose money on that: now that is an arbitrage one could sink their teeth into.




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Exposing The Utter Hypocrisy Of The FDIC, And How Andy Beal Is Making A Killing Off It

For all those who feel like punching their monitor or TV every time the administration says that the legacy loan program is fair and equitable at a transaction price in the 80-90 cent ballpark, we have some news for you (that will likely make the half life of said monitor or TV even shorter).

But first, there has been a lot of speculation about where banks have marked their commercial loan portfolios. Zero Hedge had previously discovered and disclosed interpretative data from Goldman, which concluded that the major banks were still stuck in a fairytale world where these loans were marked in the 90+ ballpark, a far, far cry from where comparable loans would clear in the market. Of course, FDIC's head Sheila Bair (who many WaMu shareholders lately do not feel too hot about) had some interpretative voodoo of her own, claiming the bid offer disconnect is purely due to a lack of liquidity and access to financing:

"It has been clear for some time that troubled loans and securities have depressed market perceptions of banks and impeded new lending. Difficult market conditions have complicated efforts to sell these troubled assets because potential buyers have not had access to financing. The Legacy Loans Program aligns the interests of the government with private investors to provide financing and market-based pricing, and is a critical step forward in the process of restoring clarity to the markets. While there are inherent challenges to implementing a program of this magnitude quickly, the framework announced today provides the foundation upon which the FDIC will begin to build immediately."

So it came as a big surprise that none other than the FDIC keeps a track of where commercial loans clear in its own internal auctions. In a relatively obscure part of the FDIC's website, there lies a little gem of disclosure, which exposes all the rhetoric by Sheila Bair and by other members of the administration as hypocrisy on steroids. We bring you: FDIC's closed loan sales database. Zero Hedge took the liberty of compiling some of the data for the benefit of our readers: we picked a data sort of all closed commercial loan auctions from January 1, 2009 to February 28, 2009, to see just at what level these would close. Of course, we highly recommend our readers recreate these results.
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The results: 43 commercial loan auctions, of which 39 were for exclusively performing (so not non-performing, or lower quality auctions, and by implication free cash generating), consisting of 331 total loans, representing $206 million in face value, ended up clearing for a $103 million price, a 49.3% discount, or a 50.7% clearing price! That's right, the FDIC itself clears performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions. One would assume the chairman of the very agency that conducts these loan auctions would be aware of them and would at least reference or mention these results in her numerous public appearances.



Curiously, the FDIC also discloses the winning bidders. The surprising recurring result: a little known (but deserving much greater attention) company known as Beal Bank (and its LNV Corporation subsidiary). In the first two months of the year alone, Beal Bank, and more specifically its owner Andy Beal, has won $73 million face value of auctions, for a price of $43 million- a clearing price of 59%. Another way of looking at it is that Beal accounts for 35% of all FDIC auctions.

Just who is Andy Beal, aside from a prolific and profitable poker-playing, college-dropout of course? A great question, which Forbes goes into great detail answering this weekend. We paraphrase the key points from Forbes:

Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else.

It is amusing that Beal Bank, which is not large enough to qualify for the FDIC's zombie bank life-support program known as TLGP, is beating the FDIC at its own game, gobbling up assets (at fair market prices, which is what auction outcomes are by definition). Beal is such a non-mainstream individual that Project Zero will hold a honorary bunk in his favor, (he will have to decide who gets top with Chuck Bowsher) until such time as he decides to stand outside ZH headquarters for 24 hours to gain admission:

It's hard to imagine Beal fitting in at a bankers' convention. He walked into the Las Vegas Bellagio in 2001 and challenged the world's best poker players to games with $2 million pots--the highest stakes ever. Donning large sunglasses and earphones, Beal held his own against the poker stars, once winning $11 million in a single day, although he shrugs that he lost more than he won. At the track he'll drive one of his nine race cars (costing as much as $100,000 each) at 150 mph. On city streets he cruises in a huge Ford Excursion, the vehicle that has made him feel safe since a drunk driver punctured his lungs in 2000.

However, the main reason why Beal is prophetic beyond his years is the following:

He thinks the government is going to be "disappointed" by its various programs to revive lending. He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

It is a fitting conclusion that Beal himself is the winning bidder in FDIC's commercial loan auctions (which no other major bank with a $ trillion+ balance sheet has any interest in participating in - why is this if the loans are worth 90 cents as Citi et al have them market internally?), and thus the true market test of what all these toxic legacy loans are really worth. Zero Hedge wholeheartedly agrees with Beal that the CRE situation is headed for a cliff at 120 mph, and that no matter how much hypocritical posturing and rhetoric the administration spouts, or how many more trillions in debt the U.S. incurs to revive the financial zombie on the morgue dissection table, there is nothing at this point that can be done to change the final outcome.

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Is the FDIC About To Turn The Tables On The PPIP

After the PPIP seemed like a done deal with its legacy loan and legacy security purchasing aspects already virtually set in stone, the FDIC surreptitiously slipped this Request For Comments (RFC) on its website. Two of the proposed questions submitted by the FDIC bear particular attention:

10. Would it be preferable for the selling bank to take a note from the PPIF in exchange for the pool of loans and other assets that it sells? Alternatively, what would be the advantages and disadvantages of structuring the program so that the PPIF issues debt publicly in order to pay cash to the selling bank? Would a public issuance of debt by the PPIF limit its flexibility compared to the issuance of a note to a selling bank?

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2. Which asset categories should be eligible for sale through the LLP? Should the program initially focus only on legacy real estate assets or should any asset on bank balance sheets be eligible for sale? Are there specific portfolios where there would be more or less interest in selling through the LLP?

Assuming there is sufficient endorsing response on point 10, the PPIP, as currently structured may end up getting turned around on its head. Instead of providing outright guarantees to the non recourse loans that will be used to purchase legacy loans (thus benefitting "private" investors such as PIMCO), the FDIC may end up issuing FDIC-backed notes directly to the banks that are selling loans. The presumption is that by exchanging illiquid loans into FDIC guarantee debt, the selling banks would "strengthen their balance sheets." The FDIC notes would carry higher ratings and may also be eligible for use as collateral for Federal Reserve loan facilities (thus allowing these toxic assets to be used as leverage). In exchange for this principal risk, the banks would get an equity upside component themselves. According to Jim Wigand, FDIC deputy director for resolutions and receiverships, "One option is for the seller to retain an equity interest as a part of the consideration for the sale."

A logical push back to this proposal was voiced by Jones Day partner Chip MacDonald: “[Banks] may need the liquidity of those notes, and it’s not clear there will be a meaningful secondary market for them so banks could sell them for cash."

Furthermore, the potential abuses arising from conflicts of interest, as the banks would take positions on both sides of the transaction, could be dramatic, although likely to have little impact in the FDIC's ultimate decision which has long since lost any credibility of a fair and equitable arbiter.

Additionally, point 2 opens up the potential for banks to endorse the FDIC's support of virtually any security to be eligible for taxpayer subsidies: if this is not nationalization in anything but name, we would refer to our readers to point out how better to call it.

Of course, the parties most opposed to this would be the PIMROCKs of the world, who will thus be unable to participate via a cheap 12x leveraged equity position in the legacy loans.

Ultimately, this whole argument may be moot thanks to the FASB's earlier conversion of all
"assets" to Level 3 equivalency status, and thus the RFC may just be a way out for the FDIC to jettison the whole legacy loan program after receiving "too many divergent opinions."

Additionally points 14 and 17 (see below) are just amusing in their entirety, so I present them without comment.

The entire RFC is presented in its entirety below, and there is an April 10th deadline for comments. We encourage our non-braindead (yet) readers to submit what they really think about the legacy loan program directly to the FDIC.

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II. Request for Comment

The FDIC is requesting comment from interested parties on all aspects of the proposed LLP. In particular it has formulated the following questions for interested parties to consider:

1. Which asset categories should be eligible for sale through the LLP? Should the program initially focus only on legacy real estate assets or should any asset on bank balance sheets be eligible for sale? Are there specific portfolios where there would be more or less interest in selling through the LLP?

2. Should the initial investors be permitted to pledge, sell or transfer their interests in the PPIF? If so, how should the FDIC ensure that subsequent investors meet the program's criteria for investors?

3. What is the appropriate percentage of government equity participation which will maximize returns for taxpayers while assuring integrity in the pricing by private investors? How would a higher investment percentage on the part of the government impact private investment in PPIFs? Should the amount of the government's investment depend on the type of portfolio?

4. Is there any reason that investors' identities should not be made publicly available?

5. How can the FDIC best encourage a broad and diverse range of investment participation? How can the FDIC best structure the valuation and bidding process to motivate sellers to bring assets to the PPIF?

6. What type of auction process facilitates the broadest investor participation? Should we require investors to bid on the entire equity stake of a PPIF, or should we allow investors to bid on partial stakes in a PPIF? If the latter, would a Dutch auction process or some other structure provide the best mechanism for bridging the potential gap between what investors might bid and recoverable value? If multiple investors are allowed to bid through a Dutch auction, or similar process, how should asset management control be determined?

7. What priorities (i.e., types of assets) should the FDIC consider in deciding which pools to set for the initial PPIF auctions?

8. What are the optimal size and characteristics of a pool for a PPIF?

9. What parameters of the note and its rate structure would be essential for a potential private capital investor to know at the time of the equity auction to provide equity?

10. Would it be preferable for the selling bank to take a note from the PPIF in exchange for the pool of loans and other assets that it sells? Alternatively, what would be the advantages and disadvantages of structuring the program so that the PPIF issues debt publicly in order to pay cash to the selling bank? Would a public issuance of debt by the PPIF limit its flexibility compared to the issuance of a note to a selling bank?

11. In return for its guarantee of the debt of the PPIF, the FDIC will be paid an annual fee based on the amount of debt outstanding. Should the guarantee fee be adjusted based on the risk characteristics of the underlying pool or other criteria?

12. Should the program include provisions under which the government would increase its participation in any investment returns that exceed a specified trigger level? If so, what would be the appropriate level and how should that participation be structured?

13. Should the program permit multiple selling banks to pool assets for sale? If so, what constraints should be applied to such pooling arrangements? How can the PPIF structure equitably accommodate participation by smaller institutions? Under what process would proceeds be allocated to selling banks if they pool assets?

14. What are the potential conflicts which could arise among LLP participants? What structural arrangements and safeguards should the FDIC put into place to address or mitigate those concerns?

15. What should the relative role of the government and private sector be in the selection and oversight of asset managers? How can the FDIC most effectively oversee asset management to protect the government's investment, while providing flexibility for working assets in a way which promotes profitability for both public and private investors?

16. How should on-going servicing requirements of underlying assets be sold to a PPIF and paid for? Should value be separately attributed to control of the servicing rights?

17. Should data used by the independent valuation consultant, as well as results of such consultant's analysis, be made available to potential bidders? Should it be made available to potential sellers prior to their decision to submit assets to bid?

Comments on the LLP may be submitted until April 10, 2009.

You may submit comments by any of the following methods:
E-mail: LLPComments@FDIC.gov. Include "Legacy Loans Program" in the subject line of the message.

Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. (EDT). Sphere: Related Content

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PPIP: The Long View

The below piece, courtesy of Gorelick Capital, nicely summarizes the bull view on PPIP. The reasoning by author Chris Skardon is likely shared by the markets, at least over the past week, when no good news was too little, and no bad news was possible. While ZH agrees in principle with the near-term benefits and has in fact discussed these in length, it is the PPIP in context that should be considered, and just what the ramifications of the context leading to over 10 trillion in incremental US debt are, will be topic for the next post...

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The Ridiculous Marks of Toxic Assets (part 2)

Following up on Tyler's earlier post, it's important to put the potential PPIP assets in perspective to the overall holdings of the banks.












Citi is clearly the most interested party in this whole thing, with a whopping 44% of its total assets tied up in legacy assets. As Citi is valuing these things at such a ridiculously high level, Citi stockholders are going to be closely watching the PPIP proceedings and how the players approach their bidding strategy. The benefit of the PPIP-leverage is it is likely to boost valuations higher than they would be without the PPIP leverage/backstops - it remains to be seen if that benefit will be substantial enough to stem the bloodloss at Citi.

Another interesting tidbit is that the weighted average ex-Citi is still at a pretty high 9%. If the valuations for these legacy assets drop from the 90-100 range to roughly half that (which doesn't seem wholly unreasonable) that's an instant 5% drop in assets across the entire financial industry.

The takeaway from this whole thing is that the PPIP program is wrought with conflicting interests, and every movement in valuations for deals is going to have a huge impact beyond the specific parties of that particular deal. Stay tuned...

Update: Institutional Risk points out the gap between Geithner/Bernanke's pricing of these legacy assets at around 80 cents/dollar and the market's pricing at between 20-40 cents/dollar. Further, it highlights the possibility of these following to 15 cents/dollar by Q3 - implying a 37.4% net asset markdown for Citi and a 7.65% net asset markdown across the entire financial industry. Sphere: Related Content

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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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The Full Public Private Investment Program

Enough has been said here about the Roe v Wade aspect of this plan.

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