Geithner Plan Puts Taxpayers on the Hook

This post first appeared on Minyanville.


The phrase “taxpayers will share in any upside” always makes me shudder.

And with good reason: Last September, as Fannie Mae (FNM) and Freddie Mac (FRE) crumbled under the weight of their massive loan portfolios, the US taxpayer ponied up $2 billion to rescue them, along with $200 billion in guarantees for future losses.

We were told that our investment would be well-protected, since the companies barely played in the subprime space: Their $5 trillion portfolios consisted of only the finest prime mortgages. One Wall Street Journal columnist even called Fannie and Freddie “a gold mine.”

Six months later, Fannie and Freddie have chewed through almost half their taxpayer-funded safety net. With delinquencies on prime loans rising, and home prices tumbling in high-end markets, losses are likely to keep growing - as will the taxpayer's obligation.

Then, just a week after the Fannie and Freddie rescue, insurance giant American International Group (AIG) took the national stage. Federal Reserve Chairman Ben Bernanke promised he had struck a hard bargain with AIG, and that taxpayer money had been shrewdly invested. The company was strong, we were told, and it was being unloaded at a bargain.

Three bailouts later, we’re collectively out almost $200 billion - and public outcry has reached a fever pitch.

$13 billion to Goldman Sachs (GS), $12 billion to Deutsche Bank (DB), and hundreds of millions to AIG executives: Not exactly what we signed up for.

Yesterday morning, in a long-awaited announcement, Treasury Secretary Tim Geithner said his Public-Private Investment Program “will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments.”

According to Geithner, private investors, alongside Treasury capital and Fed leverage, will jumpstart the market for the so-called “toxic assets” clogging up the financial system. Many hope the initiative will place a floor beneath the loans and securities that banks are unwilling to sell at prevailing market prices.

Geithner is encouraging private investors -- including pension funds -- to aggressively participate in the program. The assumption is that these distressed assets are trading well below their intrinsic value, and that buying delinquent loans and esoteric mortgage-backed securities at pennies on the dollar is an astute investment.

To be sure, certain well-connected private investors and the money managers chosen to coordinate the trades will make out famously. Meanwhile, Americans are being asked to blindly toss their tax dollars and pension money at the riskiest, most leveraged, least transparent securities the financial system has ever dreamed up.

If the federal government's track record as a steward of public funds is any indication of future performance, I'd welcome an opportunity to take the other side of whatever investments my tax dollars are about to be thrown toward.

AIG: Contractually Obligated to Spit in Face of Taxpayers

This post first appeared on Minyanville.

The AIG (AIG) rabbit-hole keeps getting deeper.

Reports of the $165 million in bonuses shelled out to executives (the ones the New York Times said were "at the very heart of AIG's worldwide conflagration") are eliciting fresh cries of outrage from the public.

Lawmakers, intent on demonstrating their aggressive stewardship of taxpayer money, are up in arms about bonus payments AIG is making to retain top executive “talent.” Barney Frank, chairman of the House Financial Committee, questioned the wisdom of the bailout, saying "clearly there was a mistake from the beginning."

AIG's chief executive Edward Liddy, for his part, argues the payments are not only a legal obligation but essential to retaining key employees -- in his words, "the best and brightest talent" -- and maximizing the value of business units it aims to unload in an effort to repay taxpayers.

The Wall Street Journal reports $450 billion has been paid to employees of the company’s Financial Products unit, the group responsible for much of the trading losses that torpedoed AIG in the first place. In addition, more than $700 million in bonuses and retention payments are being paid to another roughly 10,000 employees.

Liddy, the CEO, said he found the arrangements “distasteful,” but that they were set up before he took the job last year. In defense of the payments, he argued, “Honoring contractual commitments is at the heart of what we do in the insurance business.”

Meanwhile, the company and its government shareholders are facing increasing pressure as we learn just where our $170 billion in bailout money has gone. Trading counterparts have reaped big payments on credit default swaps gone bad: Goldman Sachs (GS) got almost $13 billion, Deutsche Bank (DB) received around $12 billion, and tens of billions more was doled out to trading clients and other banks.

As AIG executives and regulators struggle to untangle the truly nightmarish mess that was once the largest insurance company in the world, the public will demand further retribution against those it holds responsible.

No matter that some, like Liddy, weren't even there when the troubles started. Others, like Congressman Frank, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke are being tasked with the cleanup of a mess they were very much complicit in creating.

Perhaps elected and non-elected government officials alike will acknowledge their role in this mess by refusing both salaries and lobbyist money from the financial sector until the problems are sorted out.

Hey, a guy can dream, right?

Deutsche Bank Gambles on Casino

This post first appeared on Minyanville.

Bloomberg reports Deutsche Bank (DB) is trying its hand at interior decorating.

The German banking giant is now the proud owner of the 40% completed Cosmopolitan Resort & Casino, the latest project going up on the Las Vegas strip and adjacent to The Bellagio and MGM Grand (MGM).

After New York developer Ian Bruce Eichner defaulted on his $760 million loan in January, Deutsche Bank took over the multi-billion dollar development. Bank representatives are getting their hands dirty, touring the site and even critiquing plans for a black-and-white décor, according to Bloomberg.

Deutsche Bank is one of the many financial firms now sifting through the rubble of its self-inflicted real estate woes. Although defaults on commercial real estate loans are still relatively low, Wall Street banks like Lehman Brothers (LEH), Morgan Stanley (MS) and Merrill Lynch (MER) are being dragged down by eroding value of commercial mortgage-backed securities, or CMBS.

And while CMBS holdings are wreaking havoc on already battered balance sheets, defaults on bridge and construction loans may cause bigger headaches for the banks.

When these loans go sour, lenders end up owning properties. Unfamiliar with how to build a massive resort-casino or soaring condo complex, banks are now begrudgingly becoming real estate developers and property managers.

The trend is mirroring a similar one on the residential side of the fence, as foreclosures leave banks holding thousands of individual homes and condos. Property upkeep and sales efforts are creating huge cost centers, not to mention absorbing precious human resources badly needed to address a myriad of other problems.

Whether it’s a McMansion in California’s central valley, a condo in Miami Beach or a casino on the Vegas strip, banks are faced with a difficult choice: Pony up millions in development costs or dump assets at fire sale prices. The former creates a slow bleed of cash, while the latter means banks take a big hit now. Without the infrastructure to handle owning properties or the balance sheet to absorb more losses, most banks are ill-equipped for either choice.

The result will be years of real estate supply, both commercial and residential, that owners aren’t crazy about holding on to. Seasoned developers are readying themselves for the opportunity of a lifetime to snatch up unwanted properties. The catch, of course, is that there may be no one left to lend them money to do so.

This Bid's For You

This post first appeared on Minyanville.

Lost in the travails of Wall Street's latest round of executive downsizing, a $46 billion takeover could place one of America's most iconic corporations under foreign control.

Belgium-based Inbev, the world's largest brewer, made an unsolicited bid late yesterday for American beer-maker Anheuser-Busch (BUD). Bloomberg reports Inbev has strong support for its $65 per share bid from a consortium of banks, including Banco Santander, JP Morgan (JPM), Deutsche Bank (DB) and others. The offer will be financed with $40 billion of debt, reducing the amount of stock Inbev would have to sell to raise capital for the deal.

Inbev's stock popped on the news, rare for a suitor in a takeover situation. Typically an acquiring company will see its shares fall on such news, as investors fret about the cash it may have to shell out to complete the deal.

Despite some public statements opposing the sale of his great-great grandfather's firm, Anheuser-Busch CEO August Busch IV may not have much choice in the matter. The family owns less than 4% of the company's stock, a smaller share than Warren Buffet's Berkshire Hathaway (BRK-A). In an email sent to vendors and employees, Busch said the decision on whether to accept Inbev's offer would be made in the shareholders' best interests.

Attempting to assuage concerns about the status of the Budweiser brand in the U.S., Inbev will reportedly adopt the Budweiser name and has promised not to close any domestic breweries. Still, the transaction faces stiff opposition from labor unions (and those who stubbornly refuse to drink beer that doesn't taste like elephant urine).

The takeover would follow recent consolidation in a beer industry hell bent on collapsing competition. According to The Wall Street Journal, SAB Miller is set to combine its U.S. operations with Molson Coors (TAP) and Heineken NV and Carlsberg AS are buying and splitting up the assets of U.K. brewmaster Newcastle PLC.

With shares of Anheuser Busch trading just shy of the $65 offer, investors are voicing their approval for the deal. And with battered banks backing the bid, the deal supports the thesis -- long-proposed on Minyanville -- that consumer staples will be pockets of strength as consumers focus on needs, not wants.

Beer is a classic recession-proof consumer item. Their questionable taste notwithstanding, Budweiser and Bud Light are poised to capitalize on these shifting consumer priorities. The two already account for more than half of the beer consumed nationwide, and with a little help from their Belgian friends, they may someday actually taste like, well, beer.