About a year ago, after hearing so many pie-in-the-sky perma-bullish
pundits and bankers say how banks paid every cent of TARP and government
assistance back, I went on the following rant – 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer! Monday, January 18th, 2010:
Yes, some of the banks repaid TARP,
with interest and warrants. Okay. The investment big banks (that were
still in existence) were offered expedited financial holding company
(bank) charters. That is why they didn’t fail, at least in part. So,
running down the list, the banks paid back TARP. That’s a +, but….
- What was the value for bank charter, to get cheap access to the Fed’s funds? did they pay back this value yet? No!
- How about the payment of interest on the banks’ excess reserves at the Fed. Have the banks repaid that yet? No!
- The Fed and the Treasury have purchased hundreds of billions of
dollars of Agency debt, Agency mortgage-backed securities (MBS) and
related securities through Treasury purchase programs. Have the banks
paid back the capital behind those purchases yet? No!
- How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
- Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
- Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
- What about the PPIP? No!
- Hey, there’s the Foreign Exchange Swap programs (the currency
swap lines, that saved not only our banks but out banks facing
counterparties who were short on dollars), has that been paid back? No!
- There’s the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
- Most importantly, the opportunity cost of ZIRP, which
hurts those who do not speculate (or have not speculated) with near
free money! How do you pay that back to grandma and her .017% CDs?
Well, all rants aside, if you bothered to go through the mass dump of
data that the Fed produced as a result of the Bloomberg FOIL suit, you
will find that not only did the banks not pay back the massive amount of
assistance that was given to them, they were actually granted more in
the form of MOPTARP (MBS Overpayment Troubled Asset Repayment Program),
and yes, I did make that up. How much more? Well, potentially more than
the original TARP bailout! I’m getting ahead of myself though, so let’s
As we all know, we had a credit and real estate bubble that first
lifted then toppled nearly all of the major US banks. Apparently, none
of the gurus on the Street saw this coming (the very same gurus who now
say we are in recovery and the worst is behind us), save a tiny coterie
of truth seekers (Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?).
The downfall of the banks was basically binging on inflated, junk
assets using excessive leverage at the top of a big bubble. The
government used the alphabet soup of programs to bailout the banks, but
the mainstream media focused primarily on TARP of about $750 billion,
which kept everybody’s focus off of the real money that ran well into
the tens of trillions (listed in the 3rd paragraph above). The
government then agreed to buy many of the aforementioned junk assets off
of the banks using programs that I warned were truly suspect. Now that
we have caught up to recent history, let’s move on…
These mortgage and real estate related assets are of very little
value to anyone outside of vultures and speculators looking to purchase
them at a deep discount, despite the fact that the government has
overpaid for them continuously with taxpayer monies. Bank of America is trying to sell $1 billion of toxic mortgage assets, and these assets have already been written off,
which goes to show you have bad they want to get rid of them vs trying
to work them out to achieve maximum recovery. Maybe the bank has come to
the same realization that I have been espousing for years, that there
is little to no effective economic recovery to be had.
About a month ago I explained that “The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!”
and literally days later Bank of America was hit with a massive $47
billion put back request from investors. The CEO vowed to fight the
requests, but now seems amenable to settle. What do you think all of the
other investors will do if or when this bank (or other banks) cave
without a fight? Now we have Bank of America negotiating with PIMCO over $47 billion of put backs:
Bank of America
Corp., after vowing to fight requests that it repurchase certain loans,
has begun potential settlement discussions with some of its largest
mortgage investors, according to people familiar with the situation.
The group discussing a possible
settlement with the nation’s largest bank as measured by assets
includes the Federal Reserve Bank of New York, government-owned
mortgage company Freddie Mac, BlackRock Inc. and Allianz SE’s Pacific Investment Management Co., or Pimco, a unit of Allianz SE.
The approach appears to be a major shift in strategy for Chief Executive Officer Brian Moynihan,
who in November pledged to engage in “day-to-day, hand-to-hand combat”
on investor requests to repurchase flawed mortgages made before the
U.S. housing collapse.
Now, what is really the value of these securities and assets that
Moynihan is trying to dump so aggressively? Let’s look at the Fed’s
recent disclosures to find out. The asset buying binge that we are
focusing on today was aided by the Public/Private Investment Program
(PPIP, see Reggie Middleton’s Overview of the Public-Private Investment Program). The “stated goal”
of the Public-Private Investment Program is “to strengthen capital base
of financial institutions and enhance their ability to lend, ensure
efficient price discovery of legacy assets by involving private players
and minimizing the risk to taxpayers while providing opportunity to
private players to earn sufficient returns.” I have raised concerns that
this program is actually a backdoor bailout and would enable sole
sourcing in lieu of open market, competitive bids. Thanks to Bloomberg’s
FOIL suit against the Federal Reserve, we can now see how correct I
have been in my warnings and proclamations regarding funny business in
the MBS markets. Let’s take a look see.
The Government’s MBS Purchase Program
As we highlighted in Reggie Middleton’s Overview of the Public-Private Investment Program,
price discovery has to occur at a natural level for a sustainable bull
market which was not a prominent feature of the PPIP. In “Reggie Middleton on PPIP, part 2” Thursday,
March 26th, 2009 I gave explicit examples of how collusion and price
manipulation could take place in the absence of true price discovery.
Fast forward to today, and we find that the Fed’s newly minted MBS sales
disclosure page states that “Outright [MBS] purchases were conducted via competitive bidding to ensure that trades were executed at market rates.” However, according to a paper (h/t EB from ZH)
entitled “Large-Scale Asset Purchases by the Federal Reserve / Did They
Work?“, written in part by NY Fed SOMA Manager, Brian Sack states that “Because
the MBS purchases were arranged with primary dealer counterparties
directly, there was no auction mechanism to provide a measure of market
supply. Instead, the pace of purchases of each class of MBS was adjusted
in response to measures of whether that class appeared relatively cheap
or expensive. To avoid buying at excessively high prices and to support
market functioning, purchases were increased when market liquidity was
good and were reduced when liquidity was poor.” Sounds like
somebody’s stretching the truth a little, doesn’t it? Well, I dug a
little farther to see just who that somebody may have been.
The truth swept behind the 340,000 data item spreadsheet, buried
beneath over 70,000 transactions and over 10,000 MBS-only transactions
We have conducted analysis on all MBS sale and purchase transactions
conducted by the Fed whose data was recently released. Of the total
10,058 MBS transactions, 72% were done at a yield of less than 5% (5%
below yield of 4.0%, 32% between 4.0%-4.5%, 35% between 4.5-5.0%) with
an average yield of 4.75% on all MBS transaction. The table below
presents the number of transactions under their respective yield
We have also analyzed the yield on MBS purchased and MBS sold,
looking for price discrepancies between MBS purchased and MBS sold. The
data points out that the average yield on MBS purchased was 4.71%,
29bps lower than average yield for MBS sold, thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!
Yield on sale: 5.00%
Yield on purchase: 4.71%
Difference in bps: 29.1
Assuming a 4.0% implied yield on all securities, 95% of the MBS securities were purchased at a premium to market value
while assuming 5.0% implied yield 28% of securities would have been
purchased at a premium to market value. Of course, the question remains…
Why pay a premium to market value at all (with even .01% of total
purchases) in a distressed and downtrending market with highly
questionable collateral? Had the government/Central Bank followed the prudent man rule
and paid a slightly higher yield (avg yield of 5.0% instead of 4.75% –
basically a discount for the assets as is called of in distressed
buying), it would have saved $62bn of tax payers’ money on MBS
transaction while a 6.0% and 8.0% yield would have saved $391bn and $869bn of tax payers’ money, respectively. Please keep in mind that Ex-secretary Paulson’s initial TARP request was for a mere $750 billion.
One could be rest assured that the private sector using its own money
at full recourse will be looking for steep discounts, unfortunately our
fair government was all too generous.
Deutsche Bank with $411bn of trade volume, had the highest MBS
transaction value followed by Credit Suisse at $383bn and Morgan Stanley
at $280bn while Canto (4.55%), UBS (4.60%), Nomura (4.61%) had more
favorable yields compared with other banks (average yield for
transaction was 4.75%) The table below presents information on MBS
transactions and yield for each participating financial institution.
All paying subscribers should feel free
to download the scrubbed and analyzed data for all banks, primary
dealers and investment managers here: Federal Reserve MBS Purchasing Analysis.
I have made it easy to go through the data by sorting through the
340,000 or so data points for you and putting them in a neat little
Excel model. Those who are interested in subscribing should click here.