"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "


Chinese premier Wen Jiabao 12th March 2009


""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."


Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Monday, October 06, 2008

Hanks Dilemma - How to get a Goodeal for both Uncle Sam and the cousins on Wall Street

Franklin Delano Roosevelt quipped, “If something happens in politics, you can be rest assured it was no accident”.

Therefore the lengthy , tangled Byzantine passage of Hank the Bank's stark 3 page proposal to shell out US$700Bn of the US taxpayers funds to shore up the bankers of Wall Street and beyond may look like a slo-mo car crash.

All the winking lights on this Christmas tree each carry the hopes and dreams of soon to be elected pols in both Houses and the last gasp of a despairing Administration.Now is not the time or place to untangle the skeins of Pork and plunder. Let's look at Hank's Dilemma.

OK - it is now US$800Bn Bill with the FDIC need for extra funds etc., but the original blackmail note from Hank and Ben stands.

So let's see how that US$700 BN will ;

1 : shelve the so called "toxic" debts
2 : Impact on the sellering banks as they re - jiggle their shaky balance sheets

ASSUME :US Treasury buys $1 trillion of mortgages at face value for 80 cents on the Dollar (which is probably what they are carrying them at) from the 8 key domestic players (The Group of 8) who we limit for this exercise to Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM), Merrill Lynch (MER), Morgan Stanley (MS), (PNC) and US Bancorp (USB) (The aggregate shareholders’ equity of these 8 Banks is US$590 billion(ish)) at say 80 cents on the Dollar;

The Banks have to write off nothing.

But .... but .... for every one cent of new write downs on the $1 trillion portfolio these eight firms will be writing off 1.7% of their share capital.

If Hank has to pay “pay market price” for these assets, which is well below the current carrying values - which he has to, to build in a pay back for Uncle Sam and the taxpayer - the Banks will see thei capital flow away along with their capacity to lend.

Say Hank holds out for 60 cents on the Dollar - that means that the Group of 8 would wipe out 34%, or US$200 billion, of their collective share capital in the next few days/weeks/months.

So that means they have to raise more capital, dilute their shares and further upset the market.

Even if this is an overestimate the Group of 8 alone needs to line up another $50 billion of new equity after being "bailed out" - ten times what warren Buffet handed over on the basis of a 10% fixed coupon with 100% warranty.

Hank and Ben (don't expect to hear much more from Ben the bit player in this farrago from now on ) have a Dilemma. Hank's Dillemma - like squaring the circle...

The lower price for this ordure that he pays on behalf of taxpayers the worse the pain will be for banks offloading it.

The lying bankers, who so carefully prepared their gossamer thin balance sheets can hear the beating of the wings of their chickens coming home to roost.

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(C) Very Seriously Disorganised Criminals 2002/3/4/5/6/7/8/9 - copy anything you wish