Charlie Rose interviews Timothy Geithner

[kent nickell]

I share some of Paul Krugman's concerns over the upcoming plan to deal with banks toxic assets (an overview is given in the Geithner interview and I also thought he was being too rosy).

I do think Geithner understands the problems but doesn't want to go full force with nationalization and that this is just a continuation of the quantitative easing policies. His main focus is to get the banks functioning again and trying to involve some private equity. I do think this is an uphill battle because he is essentially trying to re-leverage the banks in the face of stong de-leveraging pressures. And the risk of paying too much for underlying assets such as real estate hoping that they will bounce back rather than admitting to realistic losses is at best a temporizing move that could lead to worse problems down the road.

If the prices paid are reasonable and this helps stabilize markets somewhat by buying time it may be another useful tool to get things moving again. Geithner definitely understands that the excesses of the past have to be a thing of the past but he is trying to unlock the system.....



http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

March 21, 2009,

Despair over financial policy
Paul Krugman

The Geithner plan has now been leaked in detail. It?s exactly the plan that was widely analyzed ? and found wanting ? a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there?s nothing fundamentally wrong with the financial system ? that what we?re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad ? I mean misunderstood ? assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it?s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating ? deliberately! ? the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn?t, that?s someone else?s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didn?t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won?t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Update: Calculated Risk and Yves Smith have similar reactions.



--



Very good Charlie Rose interview with Treasury Secretary Timothy Geithner

He definitely sees the world economy as in an acute situation and is working aggressively with the main goal of fixing the financial system for the overall long-term good of the US taxpayer. Long difficult road ahead but I hope he keeps his job as he seems to have a good grasp of the problem and good guidelines for getting it solved although he may be trying to paint a little bit too rosy of a picture and will probably have to deal with bigger problems than he is publicly admitting to...


------

Analysis : CharlieRose.com by Charlie Rose interviews Timothy Geithner, Mar 10, 2009
A conversation with Timothy Geithner, U.S. Treasury Secretary
Link: http://www.charlierose.com/view/interview/10137

 

[kent nickell]

Re: Charlie Rose interviews Timothy Geithner

It seems that one of the positive aspects of quantitative easing strategies is that it does seem to also ease some of the worst toxicity into the limelight... Although it's not reasurring to see bloodbath and commercial real estate in the same article..

http://zerohedge.blogspot.com/2009/03/true-state-of-cmbs-market-and-reason.html

Saturday, March 21, 2009

The True State Of The CMBS Market, And Why Billions In New Writedowns Are Coming

Posted by Tyler Durden at 2:36 PM

In response for requests for information on where the capital markets objectively evaluate commercial mortgage backed securities, and also to demonstrate the recent knee jerk reaction of how CMBX spreads ripped wider once it became clear older vintage, sub-AAA would not be eligible for TALF 1.0 participation, I am presenting the recent trading levels of CMBX 1 through CMBX 5, segregated by tranching (rule of thumb: the higher the chart line, the lower the underlying value, the more MTM pain for sellers of the CMBX tranche i.e. banks). The mid-to-late February explosion was a result of the market realizing these securities would not be eligible for taxpayer support in the TALF 1.0 version, and thus indicative of the true, and very sad, state of the commercial mortgage backed real estate market (some good intro material on CMBX here).

The annihilation in CMBX (for lack of a better word), explains the recent urgency behind the Treasury's moves to provide an iteration of TALF that will return some sense of normalcy to the CRE securitization market. The majority of CMBX tranches trade at levels which imply vast losses at low recovery values on the underlying loans.

As there are hundreds of billions in underlying notional behind the various 1 thru 5 vintages, the mark to market pain experienced by major banks and financial institutions (who would sell CMBX risk to willing purchasers) in the recent widening sprint is likely to generate another round of massive write-downs at all TARP recipients.

Also, for an indication of just how bad bank writedowns will be this quarter, a good proxy is the average levels of the various CMBX indices at Dec 31 and where they are trending now. If the current price levels persists, it will be a bloodbath.

 

[sharon sanders]

Re: Charlie Rose interviews Timothy Geithner

Insurance companies will be in trouble if commercial real estate duplicates the same phenomena as in the housing market.


From October 2008 -


GlobeSt.com Commercial Real Estate News and Property Resource

Last updated: October 23, 2008 02:21am



Life Insurance Cos. Real Estate Investments Take More Hits


By Erika Morphy


NEW YORK CITY-Ever since the conduit market all but closed its doors more than a year ago, other sources of capital have stepped in to fill the gap. The problem has been, none of these sources – a group in which life insurance companies figure prominently – have been able to close the gap. When speculation that one of the few remaining lending sources might exit, the market sends borrowers into a quiet panic.

The most recent such sign for the life insurance firms was a Goldman Sachs research report that came out on Monday, warning that Prudential Life Insurance Co.’s exposure to mortgage-backed securities and real estate loans could trigger anywhere from $1 billion to $4 billion in impairments – essentially making a serious dent in its excess capital. Met Life, it said, could realize between $1 billion to $6 billion in similar impairments, although these losses would be mitigated by the $2.3 billion raised in new capital.


The concern by some is that life insurance companies may dial back their appetite for real estate investment even further, especially as such weak spots in their portfolios become apparent. “At the beginning of this year a lot of insurers decided that the risks in the market meant that they would cherry pick the best deals and then withhold investment until the market improves,” one source tells GlobeSt.com. Next year promises to be even worse, this source says. .


Indeed, many feel that insurance companies are all but through lending for the year. “For the rest of 2008, life insurance companies’ investment in real estate will be very limited,” Andrew Oliver, EVP and principal with Cushman & Wakefield Sonnenblick Goldman in New York City, tells GlobeSt.com. “Most insurance companies have not used up their real estate allocation for this year -- however they are not under any kind of mandate to invest a certain amount, so they will put the money out next year if they think it is advisable.”


Still, though, fears of an industry exit are overblown – at least for the moment. For starters, there are plenty of signs that life insurers remain active and interested in real estate as an asset class. Earlier this week, Guardian Life Insurance Co. of America announced it invested $30 million for its second equity stake in Beverly Hills, CA-based Kennedy Wilson. The New York City-based life insurance firm previously invested $23.25 million in a Publishing SystemKennedy Wilson apartment acquisition in San Jose, CA. Also, this month, in Thompson, NY, Concord Associates LP received a $250 million loan from Union Labor Life Insurance Co. Publishing Systemfor its $1-billion Concord Resort, and ING Clarion Partners secured $97.5 million to Publishing Systemrefinance a seven-property, multi-state industrial portfolio from a life insurance company. In August, UBS Realty Investors secured first mortgage financing totaling $206.99 million for six, class A multifamily communities through MetLife Real Estate Investments on behalf of the Trumbull Property Fund; Horizon Properties secured 10-year, fixed-rate $74 million, forward permanent loan for the 384,000-square-foot corporate headquarters of CONSOL Energy in Canonsburg, PA., through Nationwide Life Insurance Co.


At that same time, some insurance firms have hastened to assure shareholders and regulators that their portfolios are positioned well to ride out further troubles. After Lehman Bros.’ bankruptcy, Netherlands-based Aegon released details of its exposure to Lehman Bros., stating that during 2008, Aegon actively lowered its exposure to Lehman Bros. by approximately 20%. As of September 12, Aegon had a total general account fixed income exposure of EUR 265 million (approximately $340 million), it said, and the ultimate effect of a default on Aegon’s excess capital and net income would be substantially lower than that amount as a result of a variety of factors, including taxes and recovery values as well as counter party exposure through derivatives contracts and securities lending transactions.


The overriding argument, though, for life insurance companies’ continued presence in the real estate investment community is that fact that allocations for these firms do not easily change overnight. “I think insurance companies will continue to lend in real estate,” Oliver says. “It is an allocation that has been there for many decades and will continue – albeit in a much more conservative manner, at least until the credit markets settle down.”


Insurance needs a very safe long-term investment with good cash flow to balance their assets against liabilities, agrees William Gamble, a consultant specializing in emerging real estate markets. “A temporary bear market in real estate will not disqualify it as an asset class,” he tells GlobeSt.com. “As Will Rogers pointed out, they are not making any more land. With the possibility of infrastructure investing, which is subject to the vagaries of law and regulation, over time there is probably nothing safer.”

 

[AlaskaDenise]

Re: Charlie Rose interviews Timothy Geithner

Welcome to the forum Angie.

.

 

[kent nickell]

Re: Charlie Rose interviews Timothy Geithner

Roubini basically likes the new Geithner public/private plan to get toxic assets (legacy assets) off banks balance sheets which is a good sign. He thinks that getting private equity involvement will help keep the government from overpaying for these assets which are largely based on residential and commercial real estate mortgages. This process could still lead to nationalization of banks that don't 'come clean'. Several private equity firms along with government backing will bid on these assets but the banks don't have to sell them at the price the bidders come up with. But if the banks don't sell (probably because they think they are not getting a good enough price and the mark-downs could make them insolvent) then they are in a sense not passing the 'stress' test and may need to be nationalized to have these assets dealt with in a realistic manner.

http://www.ft.com/cms/s/0/0e14664a-18bc-11de-bec8-0000779fd2ac.html

US banks face big writedowns in toxic asset plan

By Francesco Guerrera in New York and Krishna Guha in Washington
Published: March 24 2009

The government?s toxic assets plan will force banks such as Citigroup, Bank of America and Wells Fargo to take large writedowns on their loans, requiring them to raise more capital from taxpayers or investors, executives and analysts have warned.

Senior bankers say the authorities? latest drive, announced on Monday, to cleanse financial groups? balance sheets by encouraging investors to buy troubled residential and commercial mortgages will prompt banks to record losses on those portfolios.The government will also use its ?stress tests? to force banks to take more aggressive provisions on these loans, creating a stronger incentive to sell. This process will increase the pressure on banks that have large loan portfolios to raise fresh funds from investors or the government if capital markets remain frozen.

The possibility of further government injections is set to weigh on banks such as Citi, in which the authorities are about to buy a 36 per cent stake, BofA, Wells and other recipients of federal aid.

?The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,? said an executive at a large bank.

Citi and BofA declined to comment.

Wells said it would support ?any plan by the Treasury that helps financial institutions efficiently sell troubled assets while still providing an investment return to the US tax payer?, but said it had not seen all the details of Treasury?s proposals.

Accounting rules allow banks to carry loans on their balance sheets at their original value and set aside a percentage of the losses expected over the lifetime of the loan.

However, the government plan, which offers investors generous financing to buy banks? distressed assets, will force institutions that sell loans at a discount to take a writedown equal to the difference between the original value and their sale price.

Some analysts believe the potential writedowns would deter banks from taking part in the plan, which was unveiled by Tim Geithner, Treasury secretary.

Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: ?[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.?

But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made ?in consultation with regulators? ? a sign that the authorities might put pressure on banks to sell toxic assets.

Policymakers say the Geithner strategy is intended to fix the disconnect between the market and the banks by restoring investor confidence in their financial statements.

Outside investors and bank executives are miles apart in their assessments of the true capital position of the banks, making it impossible for them to agree a price at which to re*capitalise.

By forcing a more realistic and forward-looking assessment of expected losses on bank loans through the stress test, and creating a secondary market that establishes the expected credit losses on loan portfolios, the authorities intend to force banks to write down these loans.