Sound bite by sound bite, investors are starting to come around to the thinking that the Treasury Department’s Public Private Investment Program is a profit waterfall waiting to happen.
There are disparate fragments of evidence that investors are coming around. I just heard Dominic Konstam, the head of interest rate strategy at Credit Suisse, laud the program. A friend of mine yesterday said he is thinking about putting his private money into a fund aimed at investing in the PPIP. Another friend at a hedge fund has modeled an 20% to 30% internal rate of return on PPIP investments. The sharks are circling.
Konstam put it most succinctly, telling Bloomberg that the PPIP offers a “framework where we can make substantial progress.” It all boils down to this: the PPIP will effectively give private investors free put options, Konstam said. I see his point. And if Credit Suisse is correct that about $1 trillion of assets can be classified as toxic ($900 billion of which being loans), then, yes, the math works and the $100 billion of TARP should be sufficient to take those assets out of the system.
Will the price discovery be sufficient for every financial institution? Probably not. But if the inflated price to, say, $0.80 on a the dollar of assets is not enough to cure a bank’s balance sheet, the bank probably doesn’t deserve to remain in business anyway.
I assume there will be auctions to determine price. It can’t be reasonable to think that if one security brings 80 cents on the dollar that they should all be valued the same way. What is inside each security is different.
In the auto business, our pre-owned vehicles were worth what they would bring at auction that day, and should have been valued on the books as such. Dealers would sometimes take vehicles to auction to have them “appraised.” The vehicles wouldn’t be sold if they didn’t reach “reserve,” but the last bid would be noted. That’s a pretty good way to get a feel for a market. I expect there will be those who will follow the auctions closely. I suspect there will be a “reserve” option for a lender offering a security. I presume there will be time for prospective bidders to do some due diligence before bidding. I suspect there will be companies offering to do “due diligence” and offer a “rating” before bidding. Lots of issues to be decided! Step right up!