Treasury Unveils PPIP Choices

The Treasury Department has just announced the identity of the anointed few that may preside over the Legacy Securities Public-Private Investment Program ("PPIP"). The winners are:

• BlackRock
• Invesco
• AllianceBernstein
• Marathon Asset Management
• Oaktree Capital Management
• RLJ Western Asset Management
• TCW Group
• Wellington Management Co.
• Angelo, Gordon & Co. / GE Capital Real Estate

A handful of other "established small-,veteran-,minority-, and women-owned business partnerships" were chosen to participate in the program in a role ancillary to that of the large firms listed above (Congress just could not resist forcing this issue, could they?).

We definitely weren't surprised to see GE Capital make the cut; the Company has world renowned lobbying capabilities. Altogether though, today's announcement felt a bit anticlimactic (irrelevant even?) now that the Government has bastardized it's reputation with the private sector beyond recognition. PPIP will go on, and some will participate; however, history will likely view it as one in a long line of failed attempts to cleanse the balance sheets of US financial institutions.

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Is Uncle Sam Creditworthy?

This is a somewhat difficult question to answer, as it is questionable whether any truly objective means of evaluating the creditworthiness of an individual/corporation/nation even exists. However, given that the investment community tends to rely upon a letter based rating system, developed and implemented by a small group of "ratings agencies", we will comment on Uncle Sam from this pseudo-objective standpoint.

Many of the inquisitive minds who frequent this site will remember a declaration that we made on March 19, 2009 in a post entitled The Fed Follows Suit ,forecasting the eventual loss of the United States Government's AAA credit rating. At the time, we were lambasted as a bit "out in left field" for making such a preposterous prognostication. Now however, the idea is starting to gain traction, and has even managed to "earn" a bit of discussion time on the popular stock market "investment" shows. As usual though, the producers of these programs either lack the will or the ability to deliver any content other than the latest pre-packaged storyline from Wall Street.

This story in general began gaining traction yesterday, when the US's feeble associate, the United Kingdom, was warned by Standard & Poor's about the country's ever growing public debt as a percentage of GDP, and put on alert that a AAA rating is a privilege earned, not a right given at birth(or in Britain's case, through conquest). Instead of diverting attention away from Uncle Sam, this announcement served to increase investor scrutiny concerning, to put it simply, just what kind of ship is the US running?

The future of the US's AAA credit rating is quite uncertain, however, we would be willing to speculate, in general terms, just how we see this all "going down". The situation in the coming months, we think, will be quite analogous to that of General Electric-another American entity that had likely come to take its AAA rating for granted. As most of you remember, GE was stripped of its AAA rating by all three agencies quite recently. The official downgrade announcement however, came absent any sort of fanfare, panic, or surprise. The reason: The Market told us all about the looming downgrade long before the ratings agencies did. Similarly, as evidenced by the steadily increasing yield on the 10 year Treasury note, The Market is clearly beginning to question the vaunted AAA rating of the United States of America. The signalling process is in its very early stages however, and a change of course by Washington could still prevent the embarassment of a downgrade. Unfortunately, the sort of ideology/principles that would be necessary to effectuate this change of course are notably absent in both of the major political parties that operate in Washington.  

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Of Nero and Fiddles

One of our favorite historical tales features the Roman Emperor Nero, who ruled during the years 54-68 CE. It was during his reign that the Capital was ravaged by what later became known as the "Great Fire of Rome". As implied by its name, this fire was particularly destructive, decimating a substantial portion of the City. According to the lore, during the fire, Nero was spotted on top of a hill overlooking Rome, playing a fiddle while the City burned to the ground. Nearly two thousand years later, remnants of this sort of behavior still exist.

The "fiddlers" of today are the chief economic policymakers of the United States. Instead of playing a musical instrument, these individuals are aggressively pushing a storyline that contains, as its foremost element, a concept described simply as "green shoots". The media has been complicit in the advancement of this fable: one morning while perusing a rather well known newspaper, we noticed that across two consecutive pages, there were six separate articles. Every article invoked the term "green shoots" in either its Headline or Sub-Headline. 

The "fire" at present is the financial system, which continues to deteriorate. The most recent flare up is the somewhat under-reported trouble at Syncora, a provider of debt guarantees, or bond insurer if you prefer, with Total Assets in excess of $5Billion. New York State insurance regulators have literally compelled Syncora to cease all payment of claims until the Company can reduce its liabilities to a more manageable level. Presumably, New York will attempt a Chryler style Creditor Coup in order to avoid bankruptcy proceedings.

Our primary issue with this latest strategy is simply that the Government's hired economic hands know better. While they may misspeak in public occasionally or fail to fulfill their tax liabilities, these men are not obtuse beings when it comes to reading the economic tea leaves. We would classify the current developments as merely part of a larger strategy-one that has been conceived for the purpose of allaying public discontent for a minimum of two years. The reasoning is simple: as long as the public perceives a recovery to be close at hand, overall levels of unrest will remain minimal. The prosecution rests.

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Geithner's Quandary

Treasury Secretary Timothy Geithner has managed to create the most ridiculous quagmire of uncertainty that we have ever seen. None of this should really be a surprise however, given that he was exposed as a tax cheat and accused our largest creditor of manipulating its currency-all prior to his confirmation by the Senate. The main issue facing Mr. Geithner at present however, is how to prevent the complete stratification of the United States Banking System into a midieval caste system, where a well-capitalized nobility siphons increasingly greater resources from an insolvent peasantry.

To date, several smaller banks have returned their "bailout" money to the Treasury, thanking Mr. Geithner on the way out the door. Recently however, the calls have been growing louder from a select few of the Nation's largest financial institutions that they be allowed to prepay this onerous "loan". These initial requests have been met by Treasury with a certain amount of trepidation, as allowing the prepayments to occur would immediately create a de facto Bank Peasantry. The problem is, as time goes by, one can easily listen to the words of any given Bank Executive and discern, to some general degree, the overall health of that Bank. As the executives of the truly healthy insitutions continue to be angered by the useless interest payments that their Banks must remit to the Federal Government, their public statements have become definitive, proud, and bordering upon boastful. From the weak institutions however, silence is the Modus Operandi.

The question for Mr. Geithner then is "How do I stop this?". Unfortunately, this process can not be stopped. The Market has decided that, if Mr. Geithner's choice is inaction and lack of disclosure, it will discern for itself who are the fittest of the group. We are in the midst of a deleveraging process that can not be stopped by any amount of Government interference or balance sheet realignment. The question is rather how long the entire process will take, and how acutely the pain will be felt at any given moment in time. It appears that the Federal Government has chosen the path of a lost decade, albeit one without intense pain.

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