We Are So F*#@ed

Are you an American? Or maybe you just live and work in the USA? Or maybe you live elsewhere, but hold US dollar-denominated assets? If you answered yes to any of these, follow-up question: have you been feeling optimistic lately? Yeah, well, snap out of it now. Timmy and the Lords of the Underworld - Tim Geithner, Ben "Helicopter" Bernanke, and our glorious POTUS Obama - have just pillaged and raped you in a manner and to an extent that would make flagellum dei Atilla the Hun and Genghis Khan look like benevolent amateurs, and Bernie Madoff like a harmless two-bit hustler. John P. Hussman describes the PPIP - Public-Private Investment Program (I am not even gonna try to ponder what genius came up with the "public-private" oxymoron) well here. The key number from his excellent analysis: $10-14 trillion - the amount for which US taxpayers have been put on the hook for. Feel raped yet? And no lubrication is forthcoming, mind you. This is a pretty conservative estimate, which, somewhat implicitly, assumes that housing prices have bottomed out. Is that so? Subprime mortgages have by and large already reset, and it is believable that we have seen the worst of the foreclosures from those. However, the option ARM's and Alt-A tsunami is about to hit, and hit hard, and that's not even giving a thought to commercial real estate.

In Retard Timmy's parallel universe:
1) The banks are not lending.
2) They are not lending because they are stuffed up their eyeballs with bad assets.
3) The assets are bad because the market does not appreciate that they are actually good.
4) Ergo, if the banks are helped to unload those assets, they will lend again, and the economy will recover.

In our universe, meanwhile, the banks are lending, just not quite as much as before, mostly because they have come to the realization that lending to borrowers who are unlikely to repay is not all that smart. What is not "lending" is the securitization markets, which at the peak of the craze provided more funding to the economy than the banking system. Good luck reviving that charred corpse. Also in our universe, the bad assets are really pretty damn bad.

Oh, wait, you do not feel royally screwed yet? Here's an example of how the PPIP will work, with made up, but plausible numbers. Bank X holds a boatload of bonds that the market values at 25 cents on the dollar. The Fed and the FDIC give investor Y (not you or me, there are requirements to qualify - $500 mln in private capital and $10 bln in eligible assets under management) non-recourse loans so Y can leverage 6:1. It may actually be 12:1, since the rules are a bit unclear, but let's assume 6:1 - that's horrible enough. Thus, if Y buys the junk for 70 cents on the dollar, he/she puts up 10 cents, and the taxpayer is shafted for the rest. The 10 cents is Y's maximum loss, and that's if the asset goes down to zero in value. There is very little to prevent X from lending Y the money for this - in fact about the only protection is "Asset managers may not purchase eligible assets from sellers which are affiliates of such asset manager or of any private investor which has committed at least 10% or more of the aggregate private capital in the PPIF." Some protection. Thus, if the market's current valuation of 25 cents on the dollar is correct, 45 cents of loss is realized, and the US taxpayer eats about 38.5 cents of that.

I do not know about you, but I want to see Timmy and the Lords of the Underworld swinging from the nearest lightpole, although I would compromise and travel to Washington, DC to watch.