Geithner's Gift To Pimco

By: Mike Shedlock | Thu, Apr 2, 2009
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Geithner's Heist America Plan is receiving words of self-serving praise from Pimco's Bill Gross. Indeed, Geithner's Non-Recourse Gift Keeps on Giving to Bill Gross.

Treasury Secretary Timothy Geithner's plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.'s Bill Gross.

The plan may reward investors with 20 percent annual returns on "really toxic" mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with "non-recourse" government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can't use borrowed money.

"This is perhaps the first win/win/win policy to be put on the table," Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.

Geithner's plan may already be working. Top-rated commercial-mortgage bonds rose 5.6 percent since March 20 to about 79 cents on the dollar on average, according to Merrill Lynch & Co. indexes. The most-senior class of benchmark 2005 securities backed by fixed-rate Alt-A home loans, or those ranked between prime and subprime, increased about 12 percent to 54 cents as of March 31, according to Deutsche Bank AG.

Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in an April 1 interview that the distribution of half of the profits to the investor "does bother me."

"But even beyond that, what bothers me even more is it's taxpayer money," Bachus said. "What you are doing is artificially inflating the price of those assets because at the present prices the financial institutions won't sell them."

'Taxpayer Loses'

Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner's plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.

"The Geithner plan works only if and when the taxpayer loses big time," Stiglitz wrote in the New York Times this week. "With the government absorbing the losses, the market doesn't care if the banks are 'cheating' them by selling their lousiest assets, because the government bears the cost."

Krugman wrote in the Times last month that "Obama is squandering his credibility" with the plan.

'We intend to participate and do our part to serve clients as well as promote economic recovery,' Pimco's Gross said in the e-mail.

I seldom agree with Krugman but Obama is indeed "squandering his credibility". And Stiglitz certainly nails it with "The Geithner plan works only if and when the taxpayer loses big time."

Thus we must be careful to evaluate what Gross means when he says "This is perhaps the first win/win/win policy to be put on the table."

Previously I proclaimed Geithner's Plan Can Succeed. However, "success" must be defined in terms of the plan's goals.

The Plan: Dump $500 billion of toxic assets on to unsuspecting taxpayers via a public-private partnership in which 93% of the losses are born by the taxpayer so that bondholders are made whole.

Yesterday, More Ugly Details Emerge On "Geithner's Heist America Plan"

The whole scheme is not really a bidding process at all but rather backroom political dealing by the "Good Ole Boys" on how to split the pie.

Pie Splitting Rules

1) Bail out the banks at taxpayer expense
2) Do so at the least possible cost to the major bondholders (not the taxpayer)

The more players (hedge funds, etc.) one ads to the backroom poker game, the harder it is to accomplish rule number 2. This explains Geithner's steep rules for entry into the club.

Exclusive Invitation Only Club

And it's not just the small players excluded from the poker game.

I have it from a reliable source "They are excluding large (over $25 billion) hedge funds, who would have the sophistication and resources to look under the Kimono and declare with vicious authority that the emperor has no clothes."

They are very emphatically not letting in big boys who had not previously been foolish enough invest in this crap. They only want big boys with a vested interest in propping up bank bondholders.

The only way into the "club" is to have demonstrated prior foolishness in a major way, somewhere along the line.

Pimco Needs A New Name

'We intend to participate and do our part to serve clients as well as promote economic recovery,' Pimco's Gross said in the e-mail.

I think Pimco needs a name change. Does PimpCo work?



Mike Shedlock

Author: Mike Shedlock

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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit to learn more about wealth management for investors seeking strong performance with low volatility.

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