What Treasury's New Plan Means: John Jay, the Aite Group
In an exclusive interview, John Jay of Aite Group discusses:
Jay is a senior analyst at Aite Group, LLC. He specializes in fixed-income-structured products and technological applications involved in the structured products space. Aite Group is a leading independent research and advisory firm focused on business, technology and regulatory issues and their impact on the financial services industry.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. We're talking today about the new plan from Treasury to bolster the banks. We're speaking with John Jay, Senior Analyst with the Aite Group. John, thanks so much for going with me on such short notice.
JOHN JAY: Thank you for having me.
FIELD: So we saw Secretary Geithner this morning -- presented his plan with some details. What are your first thoughts on what we saw?
JAY: I think that overall, number 1, the specificity of it is a lot better than what we've been getting, so there's actually a plan in place. I think that it should be generally well received by the marketplace. One of the biggest problems that has been really facing everybody is not knowing the values of what are in some of these larger balance-sheet banks such as Citi Group, and even possibly B of A. Having said that, by providing a method of additional financing that should, in my mind, also play into the hand of actually getting the data point in the form of pricing of the so-called toxic assets. So by providing a method of partnering up with private institutions, I think that [is the] right direction by providing more liquidity, and therefore in the end providing a data point from which people can work the prices of the so-called toxic assets, and then from there, the what was once sort of very opaque valuations of the balance sheets of these larger firms can become clear.
FIELD: John, what would you say is substantively different from what we saw today versus other plans that we've seen from this administration or the previous?
JAY: I think that number one, going back to this whole specificity, it is being able to show what the component parts are, meaning that, okay, FDIC is taking a portion of this is not for free lunch. It's going to be paid by way of the transactions. But at the same time, whatever that leverage ratio that is provided as financing, it will be in partnership with the government. So, I think, you know, just it's something that's a little bit higher level, it's just the greater specificity that's provided.
FIELD: Now from the optimist point of view, what do you see here that really could work in the bank-rescue relief that we're looking for?
JAY: I think that's just a crux of what's going on right now, which is to provide the system with greater capital, and by doing this, we're in by the way, since a lot of these problem balance sheets have already listed large breakdowns, any types of transactions that occurs here in my original thought process that increase equity increase pricing, and theoretically means balance sheets can actually theoretically book a gain. So, let's say a large firm or a large bank has already had a breakdown of, let's say, 10 billion dollars for instance, but they're able to with this new financing methodology, actually sell all those out for 12 billion. So then right away, they can actually book the 2 billion. So, I think it definitely is a methodology that, as I said earlier, should include liquidity.
FIELD: So, the flip side of that John, pessimistically, what types of forces could derail the plan?
JAY: Well, I don't know - I don't know if it's derailing per se, but I think what's important to keep in mind, is that even though the private investor is now partnered with Treasury, that one has to still keep an eye on what the actual assets are. So that is to say, one doesn't, whether he's on the aisle of the investor, the private investor, a money manager let's say, or hedge fund, or on the side of Treasury or on the side of FDIC, that they must really pay close attention to what the underlying assets are nonetheless. Because every poll that's put for the bid is going to have specific risks attached to them, and so I think that alternately, it's one thing to actually be able to start bidding on these assets, but on the other hand one shouldn't forget that credit work is still very, very important for anyone of these loans or packages of loans of securities that are put out for the bid. So, in answer to your question, in terms of derailment, maybe the process of bidding doesn't get derailed, but derailed in the sense that one doesn't put as much diligence as one should otherwise have if the public sector were not involved.
FIELD: Now this level of public and private partnership, is there a model for this, or have we sort of invented a new wheel?
JAY: I think these are unprecedented times, but at the same time, the methodologies that are in place are techniques that have been part of structured finance for quite a while in the sense that there are debt holders, there are equity holders within a capital structure, and then it's a matter of what the specific parties involved in that transaction wish to allocate the risk and returns. So, to the extent that one or two of the parties in this particular transaction happens to be in the FDIC and the other one being Treasury, that unto itself might be "new," but the allocation of that risk is something that I think is well understood by structuring professionals. So, it's not from one sense, because it's public monies, but it's also well understood tax and structuring techniques.
FIELD: Sure. Now, what does this mean to the rank and file bank-credit union executive in the main street institution?
JAY: Well, I think that for firms that have been planning very, very close to their knitting and have paid very, very close attention to the types of mortgages that they underwrite to the folks around their own area, actually have no particular impact on the extent that their own credit worthiness of the books that they are managing are unchanged. Right, so they really understand the credits, and so therefore they're comfortable with it. On the other hand, what this whole process of a government providing liquidity does, is potentially make their own ability to source additional financing easier, because the larger institutions have such a strangle-hold on just overall cost of funding, that even though the regional and small type of institutions may not have had anything to do with what's going on today and may actually have very pristine book, that they will find their own cost of funding improve and be able to finance whatever their own business model wants to, you know, do going forward a little bit easier than otherwise would be.
FIELD: So there should be some trickle-down affect?
FIELD: Now, as I understand it, this is sort of the first shoe, and the second shoe is to drop tomorrow when Geithner comes back with details as sort of a greater financial services plan. What do you expect to see next from Treasury?
JAY: Potentially what - the first response was really, I think, directed towards mortgages. I think thereafter, there are a whole class of other types of consumer debt potentially out there that might require some sort of more specific response, meaning potentially credit cards and auto loans, things along those lines, possibly student loans.
FIELD: Now, at what point do you think we'll start to hear this new administration talk about regulatory reform? We hear people with rumblings about shaking up the agencies and putting in new structure; when is that going to get serious?
JAY: Well, I think one of the things that have been leveled against this current administration is that there might be too many things on its plate all at once. So, I think it would just take a moment to step back. That's definitely on the dockets. I mean, we are in an environment where more regulation is better than - is viewed as being healthier than by the previous administration. So that's coming down the pike. I don't think there's any stopping that. In terms of actually getting it off the ground -- I would suspect something in the next 3 to 6 months. Even if it just means providing policy statements at first, because as we all know, it's very, very difficult to sometimes to translate policy into operational, but I feel that this administration is pretty serious about trying to tackle a whole bunch of things all at once. So number one is the economics of it, which they're trying to with this particular program, and then next would be to try to tackle the regulations and the policy surrounding regulation, whether that means consolidating different agencies, potentially re-writing or modifying existing policies, and that goes all the way down to operational level.
FIELD: Thank you for your time today. We've been talking with John Jay, Senior Analyst with the Aite Group. For Information Security Media Group, I'm Tom Field. Thank you very much.