Tuesday, April 07, 2009

Will Citi, Goldman et al Game Geithner's Plan?

Doubtful (see scare potential at FT, picked up by many others). The analogy to Enron is not applicable because there are more players to this game. Enron could game California's energy market because they were the clear dominant player, and too few people were looking at it. Further, Enron was gaming the system so that those implementing the plan were making the money. Player A was making money for player A, as opposed to having player A make money for player B. Collusions, like secrets, are very hard to keep as the number of players goes from 1 to 5. Ever try to keep a great secret with 5 of your best friends in school?

Consider the scenario where the asset management arm of Citibank buys assets of JPMorgan, in an implicit quid-pro quo with JPMorgan's asset management group buying assets from Citibank. The criticism implies the asset management group is overpaying for these assets. The benefit of this collusion occurs at the Corporate Level, not to asset management, which expects to lose money. Thus, there would have to be discussions between the CEOs and their Asset Management chiefs on the 'plan' with emphasis than this plan must be seen in the 'bigger picture'. Supposedly, the Asset Management players would be promised some kind of future cushy job instead of bonus payment. Further, this strategy would be risky because the banks with the targeted assets are not the majority of only players lined up to bid on these securities. If they are overbidding, Treasury officials should see a clear pattern (winning bid disproportionately from a bank-owned asset manager), and one would have to hope Treasury is too stupid to figure it out (probability between zero and 1).

So, for the asset management group at Citi (or Goldman, or wherever), your grand conspiracy is crowded, convoluted, illegal, and uncertain. Would you play such a game?


Sameer said...

I have read a number of articles indicating that such a scheme is what the Treasury -wants- to happen. Therefore it would not be illegal. So, in an environment where gaming the PPIP isn't illegal, even encouraged, I don't see why firms wouldn't collude to game the PPIP.

Anonymous said...

you don't see why, but falken is living in a bubble and clinging to his past default rates refusing to accept reality because it's too big and he missed it since the beginning.

they will collude and overbid because it's their duty


Chris Marino said...

I hope you're right, but I'm deeply skeptical. Perhaps you can tell me why this simple strategy described throughout the blogosphere won't work:
Buy a ton of a bank's debt, over bid for their toxic assets with explicit intent of injecting capital so that their debt rises in price. Lost it on the asset, made it back, and more, on the debt.

These guys (banks) are already highly levered so I've got to think this is is possible, especially for someone as large as PIMCO.

Worse yet, the more that pursue this strategy, the better for them all. No collusion, no fraud. No defection risk, no credit risk even!

Eric Falkenstein said...

Somehow, I don't think the government would allow the banks to lose $10B on assets, make $100B via the savings on the toxic assets. You see how they almost passed a special tax merely because 22 guys at AIG were gaming the bailout. This would be more blatant. If I were a CEO I don't think this is a reasonable strategy, because in the event it 'works', you are effectively nationalized and shamed. Then again, I'm a reasonably decent person, and perhaps they have much more bad faith and trust in corporate lawyering to obfuscate the issue when it becomes apparent. I believe people act in their self interest and are imperfect, but I'm not that cynical.

Chris Marino said...

What is there not to allow? This is a perfectly legal strategy that accomplishes exactly what the program was designed to do: Get the assets of the books. Achieving that alone is going to move the price of the debt (whether or not I benefit from that movement). As an investor, I spot that as an opportunity and take advantage of it.

How is this really any different from any convertible arb strategy? Mispriced assets w/arbitrage oppty. Is that cynical?

With multiple PPIP bidders executing this same strategy, how can the govt (as a stakeholder in the PPIP entities) argue that asset prices aren't fair? Down the road when something blows up, oh well, that's life....

Eric said...

I guess I'm late to this.

There are 5 participants.

One is Pimco, the other is blackrock.

I wouldn't doubt if they throw another slot to Vanguard.

That leaves 2 for banks to "GAME"

To think if the list was all the banks selling them... I mean, Treasury thinks the public is stupid, but you couldn't pass that off.

One of the reasons for the delay might be that they are still trying to find 5 Non-Bank Firms, cause they are insisting that banks aren't on of them.

The level of paranoia on this is out of control.

That and if you lever up at bond at 3% 6X you get 12%, The 30 year bonds only have to last 10 years to pay off at Face Value.

At the 5-14% that is being reported. Some of them only have to last 2 years to pay off at Par.

What firm is going to Let that kind of opportunity go away.

the 6X leverage Severely overprices the Assets, But they can't mark them beyond face value.

But the silly thing was when BAC and C purchased some on the open market, unless the Yield on them was Crazy high.

There isn't enough money to buy up every CDO on the Planet(8 Trillion) so they are stuck with them..