Friday, March 20, 2009

The New New Plan — Same As the Old Plan

Posted on WSJ MarketBeat by David Gaffen:

The newest plan to undo the legion of toxic junk sitting on the balance sheets of the major financial institutions is, well, the same old junky plan. First there was the M-LEC, a Citigroup-proffered, Paulson-pushed plan to junk all of the junk. It was followed by the TARP, the modified TARP, the completely changed TARP, the GARP (Geithner Asset Relief Program), and now this amalgam.

And it relies on the same formula as all of the other plans — somehow getting the nation’s big financial institutions to accept the idea of selling off all of the stuff they’re holding on their books at a value that doesn’t stink for them, but somehow also satisfies the private investors who would be expected to buy into this mess of junk.

So who gets left out in the cold? The taxpayer, natch. According to the Wall Street Journal’s report, mortgage-backed securities will be purchased through several investment funds, and the government will act as a co-investor, matching private investments on a dollar-for-dollar basis. For bad loans, the government could offer as much as 80% of the financing.

“What would be a better plan? Seize the insolvent banks, write down the assets to market levels, and make the banks’ bondholders pay for most of the losses by converting a percentage of the bonds to equity,” writes Henry Blodget on “Then sell off and/or re-privatize the banks, which will now be well-capitalized.”

Bailout Nation
Entity Amount (billions)
TARP $700
Citigroup $297*
AIG $170
Bank of America $138*
Fannie/Freddie $80
Homeowner Assistance $75
New Modified Public/Private Plan $75-$100
Total $1,610

* — Excludes TARP funding received

That means if there are $500 billion in bad loans to sell, the government will finance $400 billion of that, potentially. This initial plan will include contributions of about $75 billion to $100 billion in new capital, which will be added to the bill for all of the other various bailouts the government has put together in the last several months.

Very roughly, this means the government has earmarked about $1.8 trillion or so in money for various bailouts, beginning with the back-stopping of losses on Bear Stearns positions (done to facilitate J.P. Morgan’s takeover of the company) through this newest plan. It does not include most of the Federal Reserve’s to shore up various credit markets — as some of those are modified versions of normal open-market operations, though of course many are not.

Basically, though, what it means is that nothing — or very little — has changed. The clamor for taking the sinking institutions and putting them in receivership has not reached the inner workings of Washington, and some on Wall Street cling to the idea that this is not necessary, either. The consequence of such actions would mean debtholders would be given equity, and obviously take a massive loss on their positions. So be it — this result does not point to an end right now.

“As we’ve seen, every bailout has begotten bigger, more expensive and more dangerous bailouts,” says Barry Ritholtz, director of equity research at Fusion IQ.

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