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Word to the wise: Vultures don't do favors

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March 26, 2009 – Comments (7) | RELATED TICKERS: V , UL , TR

I came across a great Marketwatch article yesterday that echoes what Florida has been saying in his blog posts over the past couple of days.  The title of the piece says it all:

Word to the wise: Vultures don't do favors.

For those of you who missed it, the article contains an important quote from a Sunday Fox News (yuck) interview with one of Obama's economic advisors, Christina Romer:  "What we're talking about now are private firms that are kind of doing us a favor, right, coming into this market to help us buy these toxic assets off banks' balance sheets...We need them -- you know, we've got a limited amount of money that the government has to go in here, so we need to partner."

No wonder the administration changed its tune about the AIG bonuses so quickly.  Getting everyone all riled up with some good old fashioned populist rhetoric is all well and good until it derails your plans to get banks out of the mess that they have gotten themselves into.

The article goes on to question whether the new toxic asset plan will be effective saying "While the government subsidies that are part of the Geithner plan may entice some vultures -- er, investors -- to buy some toxic assets, it hardly seems likely that they will buy all of them, or even enough of them to achieve the plan's objective, which is to stabilize the financial system." 

Many people believe that the toxic asset plan in its current form is not nearly large enough to solve banks' problems.  "Brad DeLong, a colleague of Romer's in the University of California economics department, notes that the $500 billion plan is not sufficient to take care of what he estimates to be $4 trillion in bad assets"

Furthermore as I said in a post yesterday morning, just because there are investors out there who are willing to pay banks a few pennies for the garbage that they have on the books does not mean that banks will actually be willing to sell these things for such low prices.  It is quite likely that many banks have these toxic assets valued on their books at prices which are much higher than what many of the bids from the vultures will come in at.  If banks sell the trash at these prices, it could potentially erode their capital base and they would need yet another capital infusion from someone, likely Uncle Sam.

Here's how many envision the toxic asset plan actually working:

Vultures will swoop in and scoop up the best of the assets that banks are willing to seel on the U.S. taxpayer's dime and leave all of the other junk, much of which may literally be worth absolutely nothing, that either they don't want or that banks are unwilling to mark down enough for fear of what will happen to their balance sheets on banks books.  If this is how things play out, we aren't in much better shape than before this plan was implemented.

For whatever reason, perhaps it is fear after seeing the carnage that the Lehman bankruptcy caused, the government refuses to let financial companies in general and banks specifically go bankrupt.  If I as an American taxpayer am going to have to have to continue to pay for this misuse of funds, I might as well profit from it.  I have been picking up small positions in the bonds of the banks that the government is propping up.  I'm not nuts and I can easily see where this whole mess could completely blow up, so I am spreading out my bets and not putting too much money in any single bank or banks in general, but profiting a little from this absurd situation makes the medicine go down a little easier.

Deej

7 Comments – Post Your Own

#1) On March 26, 2009 at 7:54 AM, kaskoosek (92.46) wrote:

Great picture

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#2) On March 26, 2009 at 10:22 AM, weg915 (< 20) wrote:

Arrrgh.

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#3) On March 26, 2009 at 11:06 AM, motleyanimal (93.53) wrote:

Yummy. I was just thinking to myself: "How about some carrion for breakfast?"

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#4) On March 26, 2009 at 1:12 PM, Eudemonic (68.68) wrote:

If those vultures were to fly with their loot, would that be considered carrion luggage?

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#5) On March 26, 2009 at 5:29 PM, floridabuilder2 (99.34) wrote:

private equity today expects a 3x return on an investment... which means $1 in $3 out...  I know that sounds like 2x, but Wall Street calls it 3x... 

in any event do you know how low you have to purchase an asset to get a 3x?  That is why the gov't is loaning the money because leverage means less equity down and 3x is much much easier to achieve

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#6) On March 26, 2009 at 6:35 PM, bostoncelitcs (59.34) wrote:

Anyone buying "common" shares of stock through a "brokerage house" are at the lowest end of the foooood chain.  "Preferred" shares are sold to only insiders!

Work hard. Pay your bills.  Save your money.

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#7) On March 26, 2009 at 7:33 PM, QualityPicks (54.81) wrote:

Well, 500 billion is not enough? who cares? Government will make it 5 trillion 500 billion at a time.

An while voltures will not pay decent prices for the assets even with the leverage and guarantees, the banks will buy them from themselves at inflated prices transferring all the losses to the taxpayers. Banks can make a killing and get out of trouble with the Geithner plan, no wonder their stocks are skyrocketing.

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