Using Veritas to Construct the "Per…

29-04-2017 Hits:85845 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:80058 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:79919 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:84400 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:80938 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:83179 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:54191 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:82321 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:82164 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:82035 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:88079 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:85941 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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This is part 2 of Reggie Middleton on the government's Public-Private Investment Plan. You can find part 1 here: Reggie Middleton's Overview of the Public-Private Investment Program.

 

Public-Private Investment Program

Impact on Lending

The program's aim to ensure that banks kick start lending is most likely overly optimistic. The program's core premise that the banks are reluctant to lend due to a overhang of legacy assets is based on a false assumption. The many reasons banks are unwilling to lend - not withstanding a dearth of capital - include fast deteriorating economic conditions, poor credit quality of borrowers, increased risk aversion, and the tumbling prices of underlying assets. Banks will continue to remain cautions unless, and until, the real economy stabilizes or risk acting against the best interest of their shareholders (and their bonus programs), defeating the very (stated) purpose of the program. Any program which focuses only on securities without focusing on fundamentals that affect the underlying assets (economic fundamentals) would fall short of its intended purpose. Common sense from my perspective, but I've always been sort of different so maybe I see things in,,, differently...

Lack of liquidity

The second basic premise of the plan's success lingers upon adequate participation from private investors. Even based on the assumption of maximum leverage granted by FDIC to everybody for everything that can possibly be purchased by anybody in the program (6:1) private investors would have to come up with $68 bn of funds (in this investor scary environment) to achieve the $500 bn target of legacy assets and $136 bn to purchase the full stated $1,000 bn of legacy assets promised to be leveraged into by the government. If the Fed's valuation committee is just slightly more conservative in its valuation estimates and uses lower (but more realistic, at least on average) leverage (ex. 4:1) granted to everybody for everything that can possibly be purchased by anybody in the program, then private investors would need to raise $188 bn to achieve the target goal of $500 bn and $375 bn to achieve target of $1,000 bn. Lest we show our short term memory propensity, do not forget that there are $2 trillion+ of these assets out there, not $1,000bn! So even with the government program maxed out to the fullest, we are still touching only 50% of the asset pool, as the underlyings to these assets are still in rapid descent that will probably not cease for some time. 

Click this graph to enlarge to print quality.

shiller_house_price_graph.png.png 

Let me put this into perspective for you. The entire hedge fund industry is currently only about $1.5 trillion in assets under management (with many of those assets still fleeing as the lockups expire and the exit gates that were thrown up last year to prevent a run on the fund start to open). So, to fund the government's equiity tranch of the program, every hedge fund will have to invest 33 cents of every dollar under management. Hmmm! Garnering such an enormous amount of capital from private investors would require a significant amount of time and persuasion that could significantly delay the process and further depress the asset prices and the economy along with it. That is assuming it can be done at all (most likely not) - after looking at and digesting the numbers above appear to be increasingly unlikely. Despite all of these very real facts, the broad market participated in the biggest rally ever, in the history of exchange traded stocks in the US. What's next, see the graph here: Bear Market Rallies Shake Out Weak Hands!

(In Billions)  

$500

 

$1,000

 

 

Legacy Loan Program

Legacy Securities Program 

Total

 

Legacy Loan Program

Legacy Securities Program 

Total

 

 

$250

$250

$500

 

$500

$500

$1,000

Min Pvt contribution

Leverage

6: 1

4: 1

 

 

6: 1

4: 1

 

to make the plan 

FIDC / Federal Reserve 

$214

$200

$414

 

$429

$400

$829

work

Treasury

$18

 

$18

 

$36

 

$36

 

Private Investor

$18

$50

$68

 

$36

$100

$136

 

 

 

 

 

 

 

 

 

Max Pvt contribution

Leverage

1: 1

1: 1

 

 

1: 1

1: 1

 

to make the plan 

FIDC / Federal Reserve 

$125

$125

$250

 

$250

$250

$500

work

Treasury

$63

 

$63

 

$125

 

$125

 

Private Investor

$63

$125

$188

 

$125

$250

$375

 Risk and Reward in the PPIP!

ppip_worksheet_with_collusion_8813_image002.png

Now, to be fair to Geithner, et. al., he (they) never declared the PPIP to be a be all and end all. What he did state was that this was a method of facilitating price discovery. It was to be bundled with a variety of other tactics, from quantitative easing to forcing capital down the throats of banks that fail government mandated stress tests. Well, looking at everything as a package, it does tend to make sense. The caveat is that although I definitely see the logic in the whole plan, the market seems to have misconstrued what I see as somehow being positive for extant bank common and preferred shareholders - NOT!!!! It may very well end up being a positive for the banking system, but I wouldn't even buy a bank stock with YOUR money!. Now, on to the biggest potential problem with the plan...

Possible loopholes

The plan specifically provides for the exclusion of SIVs (off balance sheet Structured Investment Vehicles of banks) from investing in the bank's legacy assets through PPIP by excluding affiliates of banks participating in distressed assets .So technically a bank cannot set up an SIV with a more than 10% stake and overbid for those assets.

However there is no such mechanism as such to prevent private investors to engage in collusion and overbid for securities, risking tax payers' money since both the parties stand to gain in such an event (out of this three party affair).

 

"Private Investors may not participate in any PPIF that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF."

Seller Bank A

 

 

Seller Bank B

 

 

Face value

 

100.0

Input

 

Face value

 

100.0

Input

 

Price determined by auction

 

80.0

Input

 

Price determined by auction

90.0

Input

 

Current fair value in books, cents to dollar %

60.0%

Input

 

Current fair value in books, cents to dollar %

80.0%

Input

 

Debt-Equity ratio

 

6.0

Input

 

Debt-Equity ratio

 

6.0

Input

 

Debt FDIC Guaranty

 

68.6

 

 

Debt FDIC Guaranty

77.1

 

 

Equity by private investor, Bank B

5.7

 

 

Equity by private investor, Bank A

6.4

 

 

Equity by treasury

 

5.7

 

 

Equity by treasury

 

6.4

 

 

Interest on FDIC Debt

 

4.0%

Input

 

Interest on FDIC Debt

4.0%

Input

 

Fair value, cents to dollar %, actual at EOP

25.0%

Input

 

Fair value, cents to dollar %, actual at EOP

30.0%

Input

 

 

 

 

 

 

 

 

 

 

 

As seller of Legacy Assets to PPIP

 

Bank A

 

 

 

 

 

Bank B

 

 

Gain on sale to PPIP

20.0

 

 

 

 

 

10.0

 

 

 

 

 

 

 

 

 

 

 

 

Bank B (assuming it has purchased Legacy asset of Bank A

 

 

Value at EOP

Gian (loss)

 

Interest on FDIC debt

Gain to equity investor

Gain / loss to Private investor*

% return

Gain / loss to Tax Payer

 

 

 

75% discount on FV

 

$25.0

($55.0)

 

$2.7

($57.7)

($5.7)

(100.0)%

($52.3)

 

 

 

 

 

 

 

 

 

 

Bank A (assuming it has purchased Legacy asset of Bank B

 

 

Value at EOP

Gian (loss)

 

Interest on FDIC debt

Gain to equity investor

Gain / loss to Private investor*

% return

Gain / loss to Tax Payer

 

 

 

70% discount on FV

 

$30.0

($60.0)

 

$3.1

($63.1)

($6.4)

(100.0)%

($56.9)

                   

Net Gain (Loss) Bank

 

 

 

 

 

 

 

Bank A

Bank B

Taxpayer

 

 

 

 

 

As seller of Legacy Asset

$20.0

$10.0

 

 

    <--As long as bid value is greater than economic value banks stand to gain as seller

As Investor

($6.4)

($5.7)

 

 

    <--Maximum loss as pvt investor is only to the extent of equity

 

Net Gain (Loss) Bank A

$13.6

$4.3

($109.2)

 

<--Maximum loss to tax payer virtually unlimited. Banks stand to gain both from sale of legacy asset and as investor.

         
 

In the model above (which you can download for free for your own use: PPIP full model, with collusion and implied leverage PPIP full model, with collusion and implied leverage 2009-03-26 01:00:41 202.00 Kb) we have assumed that Bank A and Bank B both participate in the PPIP program. Current fair value of Bank A's asset are at 60 cents on the dollar while Bank B's assets are at 80 cents on the dollar. However during the auction Bank A's and Bank B's assets are sold at 80 and 90 cents on the dollar, respectively. Bank A purchases Bank A's asset with equity investment of $6.4 while Bank B purchases Bank A's asset with equity investment of $5.4. At the end of period the actual value for these assets of Bank A and Bank B (originator) were 40 cents and 60 cents on the dollar, respectively.

Although both the banks lost 100% of their respective equity under the PPIP they were considerably better off (and I do mean considerably) selling each other their legacy assets, (effectively, selling them to the Treasury) with tax payers taking the ultimate hit. This should be safeguarded against. No need to worry, unless bank management takes out this blogger in the near future, I and my team will have our eyes out for such shenanigans. I can't guarantee I will catch it, but I wouldn't bet against me, either!

The Implied 14x Leverage Effect

Jeff S. posted the following comment on BoomBustBlog:

Am I mistaken in that the "Treasury Equity" is being funded by the remaining TARP balance? If so, is this not a deceptive title in that this "Equity" is really no different than the additional PPIP funds, and therefore, should be classified as "Debt?" And if so, does this not make the leverage ratio 14:1 (84/6) and not the stated 6:1?

Me thinks we are being lied to again. But I could be wrong.

Please advise...

In response:

There are 2 parts of the plan - the Legacy Loan Program and the Legacy Securities Program.

The Legacy Loan Program would purchase legacy loans through the Fed Guaranty (limited to leverage of 6:1) and the balance would be contributed equally between Treasury and Private Investor.

As a result under the assumption of maximum leverage (6:1 D/E) the effective Debt/Equity for the participant is 13:1, or leverage of 14.0x. We have highlighted the same in the structure, although probably not in the most lucid way, and we believe that Fed has provided sufficient information on the same without the intent of misleading the investment community,

 

    Every $100 Dollar Invested    
Debt / Equity* Contribution by FDIC Contribution by Treasury Contribution by Pvt Investor Contribution by FDIC Contribution by Treasury Contribution by Pvt Investor Effective D / E for Pvt Investor Effective Leverage
6: 1 6.0 0.50 0.50 86 7 7 13x 14x
5: 1 5.0 0.50 0.50 83 8 8 11x 12x
4: 1 4.0 0.50 0.50 80 10 10 9x 10x
3: 1 3.0 0.50 0.50 75 13 13 7x 8x
2: 1 2.0 0.50 0.50 67 17 17 5x 6x
1: 1 1.0 0.50 0.50 50 25 25 3x 4x