Results 1 to 24 of 24

Thread: US Making CASH NOW $$$ From Trouble Assets

  1. #1

    Default US Making CASH NOW $$$ From Trouble Assets

    August 26, 2010
    A Big Surprise: Troubled Assets Garner Rewards

    By ERIC DASH

    American taxpayers are already poised to make unexpected billions from rescuing the nation’s banks. Now, they could reap another sizable profit from a government program devised to purge troubled real estate assets from the financial system.

    The Obama administration made the so-called Public-Private Investment Program a centerpiece of its plan to help unlock the frozen credit markets in the spring of 2009, when a lack of buyers for complex mortgage securities threatened the health of the nation’s banks and put a drag on lending.

    Under the program, the government provided matching funds and ultracheap loans to investment firms like AllianceBernstein and Oaktree Capital that agreed to buy mortgage securities from banks and other financial institutions.

    Taxpayers stood to share in any of the profits, though the prospects of such a windfall were seen as secondary to the goal of unclogging the markets.

    Nine months into the program, the eight investment funds chosen by the Treasury Department have generated an estimated return of about 15.5 percent for taxpayers, according to an analysis of their results through the end of June by Linus Wilson, an assistant professor of finance at the University of Louisiana, Lafayette.

    Two of the investment funds — one operated by an Angelo, Gordon-GE Capital consortium and another by BlackRock — have gotten off to even stronger starts, posting returns of more than 20 percent.

    That translates into a paper profit of roughly $657 million for taxpayers. Some Wall Street analysts project that taxpayers could earn as much as $6.2 billion on these investments over the next nine years, from an investment of about $22 billion.

    To be sure, the funds’ standout performance can be attributed to a rally in the mortgage bond market that began late last year and may be hard to repeat.

    Still, it is a remarkable turnabout. When the administration announced the Public-Private Investment Program, critics lambasted it as yet another giveaway to private equity firms and other Wall Street money managers — a program so ill-conceived that one prominent economist, the Nobel laureate Joseph Stiglitz, characterized it at the time as a “robbery of the American people.”

    But the strong start of the funds has pushed aside many of those concerns.

    “We feel very good about the performance to date,” said David N. Miller, the Treasury Department’s chief investment officer who oversees its bailout-related holdings.

    The administration has not yet provided its own profit projections, and all proceeds will be used to pay down the nation’s ballooning debt. But any windfall, Mr. Miller suggested, would be icing on the cake for taxpayers.

    The program’s main benefit, he said, has been to help revive the market for complex mortgage bonds, whose trading ground to a halt a year and a half ago. That helped break the downward spiral of asset prices and paved the way for a wave of new bond deals, which lenders rely on to finance new mortgages.

    “We view that as accomplishing the mission,” Mr. Miller said.

    The scope of the government’s action was scaled back before it got started. In fact, the original purpose of the $700 billion federal bailout program, authorized by Congress during the tenure of Treasury Secretary Henry M. Paulson Jr., was to buy mortgage assets much more aggressively. Instead, that money was used to make direct investments in troubled banks.

    So, to restart the trading of mortgage assets, the incoming Treasury secretary, Timothy F. Geithner, announced the creation of a smaller Public-Private Investment Program. The administration hoped to establish market prices for the assets so that banks would not have to sell them at fire-sale prices, which would have threatened their solvency.

    As a side effect, though, the extraordinary government interventions in the banking system made necessary by the financial crisis have turned the United States government into one of the world’s biggest vulture investors.

    In addition to the $22 billion the Treasury Department has invested in the public-private program, the Federal Reserve has amassed about $69 billion of distressed loans and bonds from the 11th-hour rescues of Bear Stearns and the American International Group. That program appears poised to turn its own multibillion-dollar profit for taxpayers.

    Together the Treasury and Fed have allocated more than twice as much taxpayer money toward distressed real estate assets as the combined total the 10 largest private real estate investment funds have raised for such assets over the last decade, according to Prequin, a financial information provider.

    In normal market conditions, these funds are the lifeblood of real estate financing.

    All that money invested by the government is still tiny compared with the estimated $1.8 trillion worth of distressed residential and commercial mortgage-related securities that were eligible for sale when the investment funds drafted by the Public-Private Investment Program began their purchases last fall, according to a Barclays Capital research report. Those assets remain on the books of many Wall Street investment houses, insurers and banks.

    What the program has provided, though, is a big dose of confidence in the markets, assuring investors that there would be a steady stream of buyers for distressed securities.

    More than 100 investment firms applied to participate in the program and raised money from private investors. Even though only eight funds were chosen to receive government money, many of the others have nonetheless been dabbling in the market, helping to bid up prices.

    “That literally changed supply and demand,” said Wilbur L. Ross Jr., the veteran vulture investor who helps manage Invesco’s public-private fund.

    The Public-Private Investment Program has run into its share of problems. For example, a second component of the program — to be run by the Federal Deposit Insurance Corporation and intended to encourage the purchase of real estate loans rather than bonds — never got off the ground.

    Also, some of the early promises that ordinary investors would be able to “profit from the bailout” by owning stakes in public-private investment funds have failed to materialize. BlackRock, for example, failed to win regulatory approval to create a mutual fund for ordinary investors that would have largely invested in the firm’s public-private fund.

    Legg Mason and Nuveen Investments have offered consumers the chance to own smaller slivers of the program’s investments through the Mortgage Opportunity mutual funds they sell — although they have only modestly outperformed their peers.

    Government watchdogs have also raised concerns about the program. Neil M. Barofsky, the special inspector general assigned to monitor the use of bailout funds, faulted the Treasury Department by saying it had failed to establish “appropriate metrics and internal controls.”

    Fund managers brief federal officials at least monthly on their performance, but Mr. Barofsky concluded that expecting private firms to develop detailed policies and procedures “is not appropriate in light of the risk of conflicts of interest inherent” in the public-private investment program. His follow-up audit of the public-private fund managers is expected to be completed in September.

    Meanwhile skeptics like Professor Wilson question whether the government’s favorable financing terms were actually encouraging the fund managers in the program to make risky wagers without giving taxpayers a big enough piece of the upside.

    “The U.S. Treasury has given the asset managers incentives to swing for the fences,” Professor Wilson said. “The asset managers have hit some early home runs, yet we are still in the first inning of these investments.”

    Although the program’s eight investment funds have posted solid results so far, they have invested only about $16.2 billion, or just over 55 percent of the $29.2 billion of the total money they have raised, according to government data through June.

    The Treasury Department has put up roughly three-quarters of that total, matching dollar-for-dollar money put up by private investors while also providing an even bigger helping of debt financing at about 1.3 percent, well below normal interest rates.

    http://www.nytimes.com/2010/08/27/business/27toxic.html
    This is something of a surprise. The strategy always made sense, but seemed unlikely to actually produce a return.

    Though*I guess in the long run Bush actually wins the argument against the Joker in this video: http://www.youtube.com/watch?v=R1X6RQLZtoA

  2. #2
    Shit, I thought a spammer got through our defenses.
    The Rules
    Copper- behave toward others to elicit treatment you would like (the manipulative rule)
    Gold- treat others how you would like them to treat you (the self regard rule)
    Platinum - treat others the way they would like to be treated (the PC rule)

  3. #3
    Hey choobie, did you hear NPR yesterday evening? (They interviewed the central bankers who created the $1.8 TRILLION to buy these MBSs. Repeat: CREATED money out of thin air.)

  4. #4
    Quote Originally Posted by GGT View Post
    Hey choobie, did you hear NPR yesterday evening? (They interviewed the central bankers who created the $1.8 TRILLION to buy these MBSs. Repeat: CREATED money out of thin air.)
    I missed it. Did they explain HOW to create money? I only need to make a billion.
    The Rules
    Copper- behave toward others to elicit treatment you would like (the manipulative rule)
    Gold- treat others how you would like them to treat you (the self regard rule)
    Platinum - treat others the way they would like to be treated (the PC rule)

  5. #5
    Quote Originally Posted by EyeKhan View Post
    I missed it. Did they explain HOW to create money? I only need to make a billion.
    We'd all like to add a few zeros to our bank accounts, too!

    They literally just change numbers on their books, based on how much they think they need to spend. Then print paper to match the new money that flooded the economy. Turns out to be quite handy to have the "world's currency" AND its printing press. sshh don't tell the Chinese, we like to tell them to stop manipulating their currency.

    At the end they opined about inflation, and got a little silly (as in *giggle* maybe we'll get away with it --- if it stimulates the economy toward real growth making real new money) .




    http://www.npr.org/blogs/money/2010/...-1-25-trillion
    Last edited by GGT; 08-27-2010 at 07:39 PM.

  6. #6
    Essentially, but quantitative easing usually requires "buying" an actual asset to inject the money somewhere.

  7. #7
    You can spin it as US Making CASH NOW $$$ From Trouble Assets! But it's still something from nothing, monetizing debt, devaluing our dollar. Money Magic. Everyone should try it!

  8. #8
    Uhm, inflation expectations are still very low, even with QE and other measures. In fact, the fed inflation target of 2% is likely to be missed by being too low rather than being too high. Without QE we would have almost certainly seen deflation - hell, by the standard models the Fed uses we should be doing far more QE in order to mimic a negative interest rate.

    So... we're not devaluing the dollar currently. Most of the reason for this is that a lot of money on the books essentially disappeared overnight, and the fed just made a small part of it reappear. I'd say it's far healthier than unsanitized interference in currency markets, which is what China is essentially doing.

  9. #9
    From what I've read just today (!) Bernanke has basically said....much of what they central bank is doing they've never done before, in this manner, and it's a crap shot. (I liked his terms of disinflation and inherent uncertainty.) They want to "give the markets confidence" (read: we'll prop you up no matter what it takes). Sure enough, things went up before the closing bell.

    It's kind of fun to see who defends and supports the fed, the men behind the curtain, and the black helicopter money.

    I think they should start to charge the big banks interest on the money they park at the fed (they can call that 0% or negative interest if it sounds better) to get that money out there, lending to small businesses.

  10. #10
    Senior Member
    Join Date
    Jan 2010
    Location
    Amsterdam/Istanbul
    Posts
    12,312
    Is this real money made or just a re-valuation of the assets? If the latter, I would still be suspicious, seems to me that the FED still hasn't got that creating bubbles shouldn't be the core business of a central bank.
    Congratulations America

  11. #11
    As far as I know, our Treasury Dept and all government agencies consider this to be "real money". Even though it was created out of thin air, it has the full backing and guarantee from the United States as currency, good for any transaction. It's legal tender with a magical touch.

    I've been "suspicious" of our Federal Reserve for a while now. I was taught central bankers were our lender of last resort, and it was basically a group of academic bankers appointed by congress whose role was to advise on matters of full employment and monetary inflation. That's the simple school kid's take on things. I was too young in the 70s to understand what Volcker et al were doing, or what decoupling from the gold standard meant. I never paid much attention, to be honest, or heard about fiat currency until a few years ago.

  12. #12
    We can't rely on monetary policy alone. Monetary policy is primarily geared towards price stability (with some inflation) and ensuring the systemic and healthy flow of money.

    But money isn't going to do anything if everyone is too afraid to invest and spend it. We need regulatory and tax clarity. Private demand can't be "stimulated". The government needs to stop pretending that tax rates have no impact on investment. Massive new regulations can't be passed with the expectation that business will just slurp up the regulatory changes. And our political class can't make public enemies out of business and then complain that they aren't conducting enough business.

  13. #13
    Quote Originally Posted by Dreadnaught View Post
    We can't rely on monetary policy alone. Monetary policy is primarily geared towards price stability (with some inflation) and ensuring the systemic and healthy flow of money.

    But money isn't going to do anything if everyone is too afraid to invest and spend it. We need regulatory and tax clarity. Private demand can't be "stimulated". The government needs to stop pretending that tax rates have no impact on investment. Massive new regulations can't be passed with the expectation that business will just slurp up the regulatory changes. And our political class can't make public enemies out of business and then complain that they aren't conducting enough business.
    What you said means private demand can be stimulated, just as it was with the $8,000 home buyer tax credit or cash for clunkers. Small business could have gotten tax breaks and incentives, if congress hadn't gone on August vacation and let that bill sit, or catered to the top 2-3% income earners.

    Not sure what "massive" regulatory changes you think will paralyze business, but adapting to changes are always part of doing business.

  14. #14
    The tax buyer credit and cash for clunkers were, on the balance, huge wastes.

  15. #15
    Gotta agree with Dread on this one (though I might disagree with the 'private demand can't be stimulated' - I think AG most definitely can be stimulated, but it's frequently done incorrectly or insufficiently). The home buyer credit and cash for clunkers and other industry-specific tax breaks generally just front-loaded demand - e.g. it made people move up a purchase they'd already been thinking about by a few months. This means that as soon as the measure expired there was a huge dropoff in the demand to levels depressed below even 'normal' recession levels.

    The big issue is that the private sector is deleveraging pretty quickly, and it's unlikely they will stop until debt levels have dropped quite a bit or the job market improves significantly (probably a combination of both). Similarly, businesses are sitting in pretty big piles of cash, mostly because they're afraid that expansion plans now will fall on their face given the fairly pessimistic growth forecasts and consumer confidence levels. Thus, it is clear that monetary stimulus alone will not significantly improve matters (assuming such stimulus happens in a vacuum and doesn't carry its own psychological attachments).

  16. #16
    Those tax credits might have been "front-loaded" but it did have a multiplier effect, for everyone in the chain of houses and cars. (Realtors, appraisors, underwriters, etc) And it was pointed out in other threads that certain businesses are doing very well, depending on the sector. There was talk of small business credit for each new employee hired, not sure what became of that.

    What's odd is watching what the Fed does and the immediate reaction on Wall Street. Fundamentals and technicals are making their own new normals, but I think most of it's a mind game, and there's a lot of disconnect and disparity in the behaviors.

  17. #17
    Eh, plain 'ol money in people's pockets would have a much better multiplier.

  18. #18
    Senior Member
    Join Date
    Jan 2010
    Location
    Amsterdam/Istanbul
    Posts
    12,312
    If you look at the FT today the impression should be that at least the private investor has become very wary of the existing business model.

    I know I have, I am seriously considering to simply pay off the remainder of my mortgage next month, not because it will give me a better return (actually it will cost me a little bit of money compared to not paying it offm since the interest on the mortgage is marginally lower than on my savings account). It will however shield me somewhat from possible further disruptions.

    And of course it feels good to have no liens whatsoever on your property.
    Congratulations America

  19. #19
    Quote Originally Posted by wiggin View Post
    Eh, plain 'ol money in people's pockets would have a much better multiplier.
    Gosh, I almost forgot the "tax rebate" some of us got a couple of years ago, as part of the stimulus. Lots of people ran out to spend that whole Treasury check, but I banked most of mine, which wasn't what they'd intended.

  20. #20
    Many/most people bank those checks or use them to pay down debt. This is a widely observed phenomenon.

    Also, remember some of these things are a tax credit so people do have to pay it back eventually. I have to start paying back my tax credit with this next tax cycle I believe.

  21. #21
    Quote Originally Posted by Dreadnaught View Post
    Many/most people bank those checks or use them to pay down debt. This is a widely observed phenomenon.

    Also, remember some of these things are a tax credit so people do have to pay it back eventually. I have to start paying back my tax credit with this next tax cycle I believe.
    OK. So what's your point? You didn't know it was a delayed payment, and wouldn't have bought your apartment without it?

  22. #22
    Quote Originally Posted by Hazir View Post
    If you look at the FT today the impression should be that at least the private investor has become very wary of the existing business model.

    I know I have, I am seriously considering to simply pay off the remainder of my mortgage next month, not because it will give me a better return (actually it will cost me a little bit of money compared to not paying it offm since the interest on the mortgage is marginally lower than on my savings account). It will however shield me somewhat from possible further disruptions.

    And of course it feels good to have no liens whatsoever on your property.
    I've been grappling with this option for a long time now. I've asked a couple of people whose opinion I trust, but even they can't help me get off the fence. It's a pretty confusing world when defensive starts to look pro-active.


  23. #23
    Quote Originally Posted by GGT View Post
    OK. So what's your point? You didn't know it was a delayed payment, and wouldn't have bought your apartment without it?
    My point is that a tax credits are like zero interest loans to people to do specific things. It doesn't encourage them to make lasting spending decisions, and if it does they still have to pay the money back.

    In my case, I didn't know the tax credit existed and I sure as hell wouldn't have made the decision based on a random $8000 loan/giveaway. It was a pleasant surprise when I got it and I've enjoyed putting it in a savings account to accrue interest before I have to pay it back in increments.

  24. #24
    Quote Originally Posted by Hazir View Post
    If you look at the FT today the impression should be that at least the private investor has become very wary of the existing business model.

    I know I have, I am seriously considering to simply pay off the remainder of my mortgage next month, not because it will give me a better return (actually it will cost me a little bit of money compared to not paying it offm since the interest on the mortgage is marginally lower than on my savings account). It will however shield me somewhat from possible further disruptions.

    And of course it feels good to have no liens whatsoever on your property.
    You are definitely living in another world. In the US, it makes no sense to do that. A mortgage is 4-5%, and much of that can be written off from your taxes. Putting money in the bank risk-free will net you maybe 2% max.

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •