Thursday, March 05, 2009
Bruce Krasting worked on Wall Street for 25 years, which is 25 more years than I worked there, which is probably the reason why I haven't got a clue what he's talking about in this piece, which I'm pretty sure is satire - Secret conversation between Volker and Geithner.
BIG PAULIE: Good evening Tim. How you doing Kiddo? You still in the office?You see, I'm lost here already. TurboTax, Jeff Immelt, kum by ya... Once they start talking about zero coupon bonds my eyes just start to glaze over.
TIMMY: Hi Paul. Thanks for calling. I guess I am okay. It was another bad day for me.
BIG PAULIE: Those Senators tough on you? I could not tell. CNBC had you on in a small box in the corner with no sound.
TIMMY: Yes it was tough. Not as bad as the House though. They all want to blame someone and I am always in the way. I am at my desk now, looking at the email and phone messages. 90% are negative. The press, half of Washington, foreign finance officials, industry leaders. Irate voters from every State. They all hate me. They blame me because I am the one in the hot seat.
BIG PAULIE: That bad huh?
TIMMY: You should see the Blogs. It breaks my heart. Half of them refer to me as a tax cheat.
BIG PAULIE: You are a tax cheat.
TIMMY: That was a computational problem. 80% of all Americans have had this problem at one time or another. I did get one nice note from Jeff Immelt. He wrote of kum by ya. What does that mean?
Here's the rest of it:
BIG PAULIE: Oh boy…. Speaking of GE I got a call from Jack Welch. He said he would become a Democrat if the President spoke nice about GE. Heh.heh.heh. (the noise of the lighting of a cigar is heard)
TIMMY: Well, I am so sorry that I have failed the Administration in these critical times.
BIG PAULIE: What fail? You are doing a great job. Perfect in fact.
TIMMY: I don’t get it. How is that possible given the negative reviews my financial plans have received? The markets are collapsing!
BIG PAULIE: We set it up for you to fail Tim. Sorry. We needed a beard. We needed to have someone propose the conventional approaches to economic problems as a blue print for addressing today’s black hole. We knew you could not sell that sack of weeds. Before we came forward with Plan B we had to let you and the “conventional wisdom” have a shot. (Puff, Puff, Puff) And then let you fail.
TIMMY: You set me up? Who is we? What the hell is plan B and how come I do not know about it? What does a beard have to do with it?
BIG PAULIE: Slowdown. Here is the deal. (Puff, Puff) There are going to be some changes announced. I am going to become actively involved in the big issues we are facing. You are going to continue to be Treasury Secretary. I will assume the title of Uber Secretary of Treasury.
TIMMY: Uber? Does this mean I lose my office?
BIG PAULIE: You can keep the office and get to go to all the meetings. But, you report to me. Get it? You can call me Boss.
TIMMY: Well, I guess that is a relief. So, Boss What is plan B?
BIG PAULIE: I am calling it the Low/Short, High/Long - Gap Fund Program.
TIMMY: What? I did not understand a word you said. Let me get some paper. You talk too fast. Hold on….. Okay, now I have a pencil. What did you say about gaps?
BIG PAULIE: Plan B is the VolkerII Plan. I call it PLOVER. It will bring Shock and Awe to the global financial markets. In less than one week I will solve the $2T funding gap and also solve the balance sheet problems of the top fifteen banks in the Country.
TIMMY: Hold on. I am writing this down. Shock and awe… All the funding… Fix the banks... One week... Hmm. I can’t wait. How are you going to do this?
BIG PAULIE: Treasury will create a new evergreen security. It has no stated maturity. It is a floater. It is re-set based on the future t-bill rate. It will be priced at 35 BP over Treasuries. We will sell two Trillion of this in one week.
TIMMY: No way Jose!. We are having troubling lining up buyers for 50-60 billion. Forget 2 Trillion. In a week no less! Even you can’t do that. No one can sell that many bonds. If you price something like that at 35 beeps no one will come to your party!
BIG PAULIE: Let’s just say I know the buyers.
BIG PAULIE: The fifteen banks are going to buy it. All of it. In exchange for the American people extending a hand and setting them right the banks return the favor and buy the bonds. Get it? I am going to stuff the banks with this. Remember, we own the banks. They will do anything I tell them to. You think EPS means anything anymore? I will call these new notes Federal Agency Resolution Trust Securities. This is the Low/Short side of PLOVER. Low interest rates for Short-term borrowing.
TIMMY: Okay. I am writing. Let’s see. Stuff the banks…. No EPS….We own them….Low interest. That does seem easy! Now the name. F as in Federal… A as in Agency…. R as in Resolution… Oh! I see a problem! With the name I mean. How about this? We can call them Perpetual Tees. People will think of underwear that lasts for decades! See! I am contributing to the process! But how do you fix the banks? Surely the banks can’t buy these Notes unless they are made sound. That is the core problem!
BIG PAULIE: In the same week Treasury will issue $2 trillion of 20-year zero-coupon bonds. The yield on the bonds will be set at 10% The cash price for the zero’s will be 15% of par with the big implied coupon. The fifteen banks I choose will get the right to buy these beauties. They will use the Zero’s to immunize themselves against principal loss on $2 trillion of dodgy paper they have on their books. We will capitalize the lucky fifteen with the remaining TARP money. They will use that new capital to buy the zeros. 300B in 300B out. We round trip the money. Therefore there is no money. I already have the accountants in my pocket on this. That was a lay up.
The banks will agree to use this accounting break to restructure all manner of loans providing real debt relief. With the zero’s behind them they can no longer take a loss and therefore any settlement is bottom line income.This is the Long term/High rate part of PLOVER.
That is it. We start on Monday. We finish on Friday with the securitization of $2T in stinky paper backed by the zeros, the banks are saved, the deficit is pre-funded for the next 18 months, Treasury has raised $2.3 T in cash with a decent duration and a reasonable average blended cost. Saturday I go to Canada to fish for Salmon. (Puff, Puff, Puff)
TIMMY: This seems so simple. Why didn't I think of it? One thing I see is that your plan is at risk to rising short-term rates. What is your response to that?
BIG PAULIE: That is the gap funding part of PLOVER. Get your seat belt on Timmy. We are making a big rate bet. Let’s say I have an understanding with Bernanke. PLOVER keeps the assets off of the FED’s balance sheet. In exchange Ben will set rates where I need them. It’s all a deal Timmy. I gotta go.
TIMMY: Good night Boss.
Heard from TIMMY: I think he just took over Treasury. Gulp
Heard from BIG PAULIE: I just took over Treasury. Puff, Puff, Puff