Monday, March 23, 2009

More Problems to Unwind

While the NYSE cheered the Geithner public-private partnership plan, two other problems hit the wires. Second mortgages prevent resetting of primary mortgages under the Obama plan. Reuters reported:

Bank of America held $148 billion in second liens at the end of last year, while JPMorgan Chase held $131.4 billion and Wells Fargo & Co. held $129.9 billion, according to Inside Mortgage Finance.

Early this month, Treasury officials promised that they will present a payment schedule to buy out second liens but they have not yet released details.

The next round of corporafornication for the big money boys? Recall their carnivorous behavior last summer and fall. Bloomberg reported:

The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.'"

Market makers had the ability to naked short sell. Major investment banks savaged peer Lehman Brothers. When the razor blade flipped, storied investment houses fled to the safe harbor of commercial bank status.

Guess who stands to benefit from Geithner's public private partnerships (PPP's)? The same institutions that ganged up on Lehman. Wall Street is now joined at the hip with banks, institutions hoping to offload toxic products at premium prices. Taxpayer subsidies should favor banks, now able to sell at book value.

Ex-Wall Street firms could also partner with the government in PPP's. They meet Treasury's criteria. Giethner's sweet deals should produce returns in the teens, 13% or greater.

The financial sector is nowhere near done suckling on the taxpayer tit. The second lien issue portends more corporafornication.

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