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So You Want 14x Free Leverage?

Tyler Durden's picture




 

And yes, as reader Mike points out, it is 14x, not 12x (as ZH also erroneously assumed). The administration's 6x definition of leverage is really debt to equity. In their example where a PPIP participant invests $6 in equity, he ultimately purchases $84 in assets, or a total effective notional leveraging of 14x. (14x upside, 1x downside: taxpayer footing the difference. Where can I sign up?) But semantics aside.

As for signing up, today on the government's Financial Stability website, the Treasury posted the application for all aspiring and established fund managers who want to try their luck at abusing free taxpayer-subsidized leverage.

Among the selection criteria are:

  • Demonstrated capacity to raise at least $500 million of private capital.
  • Demonstrated experience investing in Eligible Assets, including through performance track records.
  • A minimum of $10 billion (market value) of Eligible Assets currently under management.
  • Demonstrated operational capacity to manage the Funds in a manner consistent with
  • Treasury’s stated Investment Objective while also protecting taxpayers.
  • Headquarters in the United States.

Curiously, the $10 billion minimum cutoff greatly facilitates the analysis of the earlier question of cui bono: luckily for both Blackrock and PIMCO, this criteria should not pose a substantial difficulty.

Additionally, The selected PPIP manager will "control the process of asset selection and pricing, and will also control the process of asset, liquidation, trading and disposition." Nothing like giving HF managers full authority to do as they see fit with a $1 trillion in toxic assets. A little more on the pricing issue - the term sheet states "Price of Eligible Assets for reporting purposes must be tracked using third party sources and annual audited valuations by a nationally recognized accounting firm." Of course, if our earlier tip that there are some serious shennanigans going on with these "third party [pricing] sources" this would only add gasoline to the MTM fire.

As for adding insult to injury, Hedge Funds will also be allowed to charge "private investors fees in their discretion." Not only are funds getting the greatest gift in the history of leverage, but they are also allowed to charge money for the privilege.

After looking at these terms, it should become immediately obvious why funds would be worried how the general public will regard their TALF gains (through a microscope). But not only that: hedge fund will only dispose of these toxic assets to comparably insulated hedge funds, thus starting a game of hot potato and greater fool at the same time, in which a certain toxic asset pool will be repurchased over and over until there is no nominal buyer left (nobody in their right mind would purchase an $84 toxic pool without $72 in non recourse loans backing their equity, especially not at a premium). Thus the gains will be merely short lived until, yet again, the greater fool disappears, and the last fund is stuck as bagholders unable to offload these assets, thus having to hold them to maturity, but much more likely to default.Those who manage to flip these "assets" early on will be the only winners in all of this, with the full losses again falling flat on the taxpayer's shoulders.

 

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