Sunteți pe pagina 1din 3

Bank plan buys time, but that's all

A nearly painless, win-win solution for Wall Street and taxpayers? Don't believe it for a minute. But

the hoopla gives investors a chance to profit in the short term.

By Jon Markman MSN Money Stocks have zoomed around this month like hornets escaping from a broken hive, generating an exciting buzz and just a hint of danger. And the good news is that they've got a real shot at staying on the loose for as long as 45 to 60 days -- plenty of time to make us some money before they're rounded up and squished. Here's the situation, and a few ways to play it. Deteriorating U.S. and European home prices and unpaid mortgages, as you know by now, are the central curse of this entire bear market. These seemingly minor matters have spread like a bad flu through the entire global financial system and caused all manner of aches and fevers, from bankruptcy at big brokerages to galloping unemployment. Yet if the mortgage problem can be solved, then most of the other problems can also be contained. In six weeks the U.S. government, after much dithering and navel gazing, is going to do something concrete about those bad loans and the securities they've been packaged into. Treasury Secretary Timothy Geithner has announced a plan to join forces with handpicked private funds to buy up to $1 trillion worth of soured loans from struggling banks. The Treasury says it will kick in most of the money -- shagging some from taxpayers, and printing or borrowing the rest -- so long as the fund managers agree to do the dirty work of pricing and reselling the assets.


sounds like a "win-win-win," as one private-fund manager put it, because if it works in practice like


looks on paper, then banks will finally be able replace yucky old mortgage loans with fresh, green,

lendable money; fund managers will have new product to mark up and sell; pension funds will have new high-yield paper to satisfy their long-term obligations; and Geithner will earn some time off to get a tan and put some weight on his skeletal frame.

A cure-all for the banks -- for now The reason stocks may be buyable for a short while: No bad news will be counted heavily against bank stocks until this program gets under way, which means that the low set on March 6 is likely to endure for a while. For a time, no matter what potentially damaging economic data are in the news, analysts will say that this loan-removal surgery will fix the problems. This gives bulls two months to lift the Dow Jones Industrial Average ($INDU) 30% toward its 2008 average of around 10,000, which would be a typically strong rally within the context of a bear market, before hitting a wall.

Ah, but there are problems with this rosy scenario, as you may well imagine. First, five times the $1 trillion in bad mortgage-based loans and derivatives remains outstanding. And second, everyone knows win-wins are never available at the Wall Street casino. So the mere fact that this one is advertised as such is a gigantic red flag. Indeed, judging from my discussions with a lot of fixed-

income experts you won't see on television, there's a decent chance that the whole deal will blow up in about six weeks. To understand why, you need to realize that the U.S. financial system is not facing troubles that the world has never seen. Booms and busts of the credit cycle underlay much of Western economic history, as banks have repeatedly borrowed too much in good times and gone splat in bad times. The usual response is for governments to close the banks for a while, extinguish the bad loans, tell equity investors and some bondholders they're out of luck, print new money to make up for the missing credit, suppress peasants outraged about dilution of their cash, then wait a while and pretend it never happened. That process takes guts and time, and the Obama administration appears short on both. And besides, hey, we're modern and have more brains, tools and hope. Why not try something new?

Watching the BlackRock bids The new idea is for government to lock arms with supportive bankers and try to browbeat investors into pretending that the "toxic" loans really aren't so bad. To entice them to use rose-colored glasses instead of green eyeshades when examining the details of the deals they're considering, the Treasury is handing them massive amounts of taxpayer money and loans that never need to be paid back. Now here's where the proposal might run into trouble. The Treasury has drawn up the requirements for participating in the program in such a way that only a handful of large fund managers will apply. They need to have raised at least $500 million in the past, command a large sales force and already own at least $10 billion in distressed loans. There are probably only five to eight companies in this category, including Pimco, Western Asset Management, Wellington, Bridgewater and BlackRock (BLK, news, msgs). Of those, I'm told that only Bridgewater and BlackRock have had any real expertise in valuing the type of woeful derivative securities -- mostly residential-mortgage-backed securities packaged into collateralized debt obligations, or CDOs -- that banks are expected to make available for sale. And BlackRock is widely believed to have the very best mathematical model for doing so. So if five bids are made for a single pool of distressed residential-mortgage-backed CDOs, and other managers discover that their bids are much higher or much lower than BlackRock's, they are more than likely going to pull them. In this way, some experts are saying that the program is really the BlackRock full employment act.

There are also questions over the quality of loans and securities the banks will put up for sale and the prices they will accept. There is already a very active market for these securities -- the government isn't starting from scratch -- but banks have been unwilling to let them go for what investors are willing to pay. If you assume most of these loans and securities started life being worth the equivalent of $100, most are now being carried on banks books at around $80. The government would be happy to buy them with its funny money at $80 as a sneaky way to recapitalize banks without nationalizing them, but real-money investors in recent months have been willing to pay only $25 to $35.

If all the loans were really bought at $35, experts tell me, most banks would have to take losses large enough to send them into bankruptcy. Not good. So using government-subsidized loans,

BlackRock and its peers appear willing to pay around $40 to $50, but they can't pay much more because they still need to mark them up and sell them to clients at pension funds who know full well that the loans are superrisky. Don't forget that underlying each CDO and loan are hundreds of real, live homeowners who might lose their jobs next month and stop paying their mortgages. The more investors pay, the longer they will need to wait for a good return. Presumably, the best securities will go first, so the most interesting juncture in this whole drama will come a few weeks after it starts, when fund managers balk at paying $50 and banks won't take the bids at $35. My guess is that if and when the auctions start to lock up, a lot of bank stocks are going to get hammered, and there will be renewed talk of nationalization.

Impatience at the elevator Playing this situation could be fairly simple, purely with speculative funds. Start with BlackRock. Its stock was at $132.55 a share at midweek and could get to $160 to $190 over the next six to nine months. Then consider private-equity company Fortress Investment (FIG, news, msgs), which could be another distressed-debt buyer. It was at $2.93 and could get to $6. Others to consider are Hartford Financial Services Group (HIG, news, msgs), Aflac (AFL, news, msgs) and banks that have a lot of these distressed assets, such as Bank of America (BAC, news, msgs). The leveraged exchange-traded fund that would double if all these are successful is Direxion Financial Bull 3x (FAS, news, msgs). Mind you, I still strongly believe, as mentioned several times this year, that in the end this won't work because appropriate prices won't be found on the vast majority of securities, and it will be politically unpalatable to pay top dollar because it will be seen as another giveaway to Wall Street. That means, ultimately, that most large banks will be dealt with the old-fashioned way: They'll be nationalized, which will wipe out shareholders, and their bonds will be put aside for a long time. So if you decide to play this as a buyer, think of it as a trade only, and don't overstay your welcome.

Satyajit Das, an Australia-based credit derivatives expert who has helped guide us through this mess for two years, told me this week that the new Geithner plan is really nothing more than another hyperactive American attempt at a quick fix. "U.S. policymakers are like a man standing in the lobby of a skyscraper jabbing at the elevator button," Das said. "No matter how many times he pushes, it's not going to get there any faster. There is no quick fix. The best thing to do now was the best thing to do a year ago: Keep it simple. Bite the bullet. Write all the loans down to zero. Don't create any new vehicles. Don't prolong the inevitable. Let the system heal. Give it time."

Fine print

To learn more about BlackRock, click here. To learn about Fortress, click here. To learn about Hartford, click

schools of thought for valuing fixed income: vector analysis and stochastic analysis. Start to learn more about them in this article or the

book "Distressed Debt Analysis." Two upcoming conferences will also offer information. Information is here and

Accrued Interest does a nice job of covering the fixed-income markets advantage on a daily basis, check out my subscription newsletter.

At the time of publication, Jon Markman didn't own or control shares of any company or fund mentioned in this column.

There are two

The blog

To learn more about how to turn the credit wars to your