1) Though they didn’t use this language, I think The Economist hinted that the PPIP-gaming critics, including myself, are being a bit Glenn Beck Doom Bunker about their analysis. PPIP Doomsday Scenario XVII: Werewolf Congress! Ha! The Economist: “Given how absurdly bad those scenarios would be, and how the Treasury seems to be at least nominally interested in preventing them, I don’t know that it makes much sense to be accusing the government of bad dealings just yet.”
I’m rooting for Obama and his team. They have one of the hardest situations in the past half-century to deal with, and the stakes are very high – and I think they are up for the challenge. And up until recently, my thought was that these auctions wouldn’t clear, or not get enough money in order to make the banks solvent. However I am not hearing enough from the Treasury to be convinced yet that this isn’t a just a move to spin the assets around the banks once for a fee – and time is running out there.
I do think it is important for the critics to get their say early here, while the administration is still planning this out. If we are really going to go through with this at this scale we get one shot. There are a lot of ways, both overt and subtle, for the government to convey that they are serious about this not being gamed. I’d like to hear more of that from the key players – so far I have not heard much that is convincing me. The FDIC is really good at its job, but its job is not to be the SEC. It is not good at it. The SEC hasn’t been very good at being the SEC lately. Meanwhile digging every last drop of juice out of profit opportunities is exactly what Wall Street is good at – and we don’t want them having large incentives aiming their guns at the Treasury. As as the ever wise Interfluidity says:
It is worth noting that overcoming coordination problems so that diverse parties can collaborate on profitable ventures is precisely what the financial sector is supposed to be good at doing. Ideally, we would like the profitable ventures to be welfare-improving projects in the real economy, but there is little question that financial sector actors will gladly apply the same skillset to extracting transfers and rents when the opportunity presents itself. Attempts to regulate away intentional overbidding by cooperating parties will have to outwit some very clever professional deal makers.
2) Jeffrey Sachs:
Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.
Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank’s net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.
Good example, but as many people on the blogosphere are pointing out, Treasury is outlawing this: “A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund or any private investor that has committed 10% or more of the aggregate private capital raised by the Fund.” Whoops.
The definition of ricochet schedules or “megawatt laundering” provided in the Enron memos and (subsequently included in the Commission’ s Request for Admissions) is narrow in that it includes only one type of “ricochet” or “megawatt laundering”: i.e. exporting power from the PX to another entity, for a fee, in order to resell the same energy back into the ISO’s real time market. Under this scenario, if the energy was re-imported and resold back into the ISO market by a second entity, the ISO generally does not have the information to identify the schedules and transactions involved in such an arrangement.
Once you start thinking Enron…..man is it addictive.
So, A third party of ex-Citi executives, CitiJR, is given $6.50 by Citi to bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50. This isn’t allowed by the so-called rules. However…
A third party of ex-Citi executives, CitiJR, bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50. Now the FDIC is stuck holding a bunch of assets it didn’t want for $50. Why doesn’t CitiJR rebundle those loans into new loans and sell them back to Citi for the FDIC? Maybe they can get $53 dollars in return – A gift! There’s a slight fee CitiJR has to charge Citi though – $6.50.
A third party of ex-Citi executives, CitiJR, bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50. So goes price discovery. CitiJR looks to be doing poorly, but there’s a ton of human capital there that is worth a lot of money, so CitiJR is open to a bid for a takeover. Citi, now doing pretty well, shows up, offering to buy the firm outright for a price, let’s say of $6.50.
A third party of ex-Citi executives, CitiJR, bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50. CitiJR however, still has around $2.50 in working capital left over from this disaster at that point; Citi sells them some selected assets for that $2.50 that turns out, lo and behold, to be worth $9. Lose some, win some!
A third party of ex-Citi executives, CitiJR, bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50. Citi is very impressed with CitiJR’s keen analytical minds, and wants to bring them in to do some consulting work. They offer them a generous $0.50 per consultancy project, and they have 13 of them lined up to go.
A third party of ex-Citi executives, CitiJR, bid $80 for assets worth $50. Sure enough, two years later they lose their $6.50….
Honestly, those four took me 90 seconds. And I’m not even very good at that stuff – wait till the lawyers get involved. If you have your own, please leave them in the comments. Right now there’s offices full of the best minds of my generation, paid handsomely, who will all get hundreds of millions of dollars if they can figure this one out. And they are putting in the overtime…