Pushback from the Market to Geithner III?
Geithner III is intended to create “price discovery”. But when you backstop the “buyer” from any downside while at the same time financing said buyer, then the “value” or price discovered becomes artificially inflated. Perhaps this is precisely why the plan is designed this way. Nonetheless, the solution is in and we can get on with it.
Dick Alford told The IRA: “The structure as described in the press is nothing more than the Fed, FDIC and Treasury providing some asset managers with calls on the upside–max loss equal to 3% of assets? When was the Fed or the FDIC authorized to sell or give away call options? I suppose that they will try to sell this as a non-recourse loan, but it isn’t. It is an option… The investors would in effect be left with sub-market financing and ownership of much of the upside potential. The implied rates of return to the private side are staggering, especially given the absence of any downside risk.”
Perhaps the market is thinking ahead? Wow, really? Let’s agree that subprime losses have peaked and are now in the rear-view mirror. That leaves residential losses, which are expected to peak this year. And next in line we have the real king of the jungle: commercial paper, which should see loss rates peak in 2010. In the case of the latter, if the administration can get this economy moving and credit markets open, perhaps these losses could be refinanced and pushed forward in the hopes that the economy will improve. Otherwise, this party is just getting started.
Just for fun, this is a great excerpt of Congresswoman Waters confronting Secretary Geithner in a deeply unfair match of intellectual wits:
Proprietary Traders Worldwide
