Now I See What They're Doing

Thanks to Mish for this Wall Street Journal article.

The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as "fund managers" to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible.

But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very
distressed assets that the Obama Administration is trying to offload from
banks.

Let me throw one other bit of info and connect the dots. Recently, the word on Wall Street has been that Bank of America and Citigroup have been gobbling up toxic MBS and CDO's. However, I think something else is going on. BAC, C, JPM, and GS have $5.2 trillion off balance sheet. I would expect that a few of those off-balance-sheet entities (which have probably already outsourced management to Pimpco or Blackrock) will get Treasury funding for their own assets. This looks to me like the transparency will be nonexistent. As the housing, commercial real estate, and corporate bond markets continue to decline, the losses will be hidden. Short run, this might bump up stocks. In the long run, however, this will further destroy trust in markets as outsiders increasingly realize that the game is rigged.