More Big Bucks for Private Investors - Geithner "Plan" Leaked - TARP II

Here we go, once again trying to get something for worthless assets at the U.S. taxpayers expense. This time since Obama and Geithner know there is no way Congress is going to give them more, they are going to raid the FDIC.

The plan, which will not be released until next week is now leaked all over the press.

In order to get $1 trillion of the estimated $2 trillion of "toxic assets" off of the banks books, now the plan is to offer private investors huge subsidies and loans and then auction off these various assets to these same investors. These "toxic assets" are assuredly really toxic for the banks get to choose which ones they will sell.

The New York Times:

The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.

To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

The plan is in three pieces:

  1. FDIC manages "private" partnerships with 85% of the money loaned to these "private" partnerships from the FDIC.
  2. Treasury outsources to partners with investment management firms, with a 100% dollar match that each of these firms offers. These are the private-public partnerships. (but 50-50 fund match is contradicted later)
  3. Expanding the Federal Reserve TALF program.

and of these three components it appears they will deal with:

  1. FDIC buys Pools of Bad Mortgages
  2. Treasury "private" partnership auctions/buys Mortgage Backed Securities (read CDS, derivatives).
  3. Federal Reserve through TALF buy even more toxic Consumer Debt from 2005/2006

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.

Anybody make heads or tails out of this yet? If the U.S. is loaning all of this money in order to buy assets, precisely how is the U.S. taxpayer not getting the shaft and precisely how are the investors or taxpayers going to make any profit out of this to get any money back? And we're going to basically pay for the highest bidder? Sure seems the banks are getting a free and easy dumping for their (ahem) assets in a rigged auction where the U.S. taxpayer is paying for it! Check this section out:

To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

The government would receive interest payments on the money it lent to a partnership and it would share profits and losses on the equity portion of the investment with the private investors.

Who keeps the profit if there is any long term? Who also believes that a bunch of private hedge fund investors are going to do this and what would be the consequences if they did? Anybody believe private hedge funds would do this out of the goodness of their hearts?

Anybody see a 50-50 split in these details? It's like one sentence says one thing and then the details are contradictory and state another.

Who here believes that as long as houses are out of alignment with actual wages and income stability in the United States, prices will simply be artificially inflated?

Isn't the same fatal flaw built into these assumptions, that the value of houses will go up? That was the base assumption of the entire deck of cards.
People, Americans are flat broke and we need houses to live in not as a global poker chip.

I am fed up with this entire Ponzi nation, super elite, financial jack ass ripoff machine. Nationalize these bad banks plus AIG and write off these losses in receivership. You know, the banks had a great offer at 30% of book value and they won't take it. Screw them. Move it into receivership and let's get on with this! Make the investors pay, the bond holders pay and clean up the banking system.


Please post a link in case by some fog brain confusion this layperson misread this hogwash and it actually makes sense somewhere and isn't bleeding this entire country dry. So far I can only believe it makes sense if I smoked a whole lot of Mexico's biggest economic export.



Hey Bob,

Sure is a depressing mess we are in. I have little hope that Obama intends to fix anything but the bankers.

They're asking for another four years -- in a just world, they'd get 10 to 20 ~~ Dennis Kucinich

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I'm reading the blogs and news today

and it appears my assessment is dead on. I'm seeing Paul Krugman also write despair in the financial system and pointing out very similar problems that I saw.

these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

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Why the Plan won't work...

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On this, Stats Guy from Baseline says...

"Funding the draw-down of the social-security system is essentially impossible without significant changes. The Boomers borrowed too much, saved too little. Various small changes - retirement age, adjustments to Medicare part B, etc. - are going to be required to keep it solvent.

"I suspect Team Obama is sensitive to this issue.

"As to management of the other aspects of the real economy-it seems the Obama administration should get better marks than its management of the fake economy (e.g. finance).

"They are right to target the medical system; we have a system in which (whether you like it or not) the emergency room has become a public health system. In which we overdiagnose and overtreat, with little concrete proof of effectiveness. In which other countries pay far less than the US for the same drugs (which were developed in the US). In which GPs are underpaid and overstretched. In which the costs of pursuing payment, managing the system to prevent non-payment, and negotiating payment levels have created real burdens on everyone - even though we have proven incapable of denying treatment in many cases for those that cannot pay. And, finally, in which the private insurance system is incapable of making rational decisions between million-dollar end of life care and providing less expensive prenatal care - simply because hospitals are compelled to chase profits.

"The argument for letting the profit motive drive the entire health care system was that it would give us a better (and more disciplined) system, yet there is no evidence to that end, and mounting evidence that the opposite is true. While we do see some excellent private sector innovations (health clinics in drugstores and Walmart), the health care system is _inherently_ plagued by incredible market distortions:

- Asymetric information
- non-rational behavior
- individuals who are non-functional (dying, senile) making complex “decisions”
- bargaining inequities/oligopolies (insurance companies pay much less for identical services than individuals)
- both adverse selection and moral hazard in insurance contracting
- previous non-market attempts to ‘fix’ the system that were patched over 70 years, now creating huge competitive disadvantages for US firms

"Team Obama has also targeted energy, environment, infrastructure, and education as primary areas for additional investment. And they are right across the board. To place your faith _entirely_ in the profit motive and sanctity of contracts to mobilize the US economy to fix drastic problems within a decade is entirely unrealistic.

"The baseless and unchallenged faith in the profit motive to _always_ work has allowed grossly anti-productive behavior to continue unchallenged.

"Consider one example of how the profit motive increases economic “growth”:

"Company X is a mining company. In order to keep costs down, the Federal govt. relaxes effluent and emissions controls (turns out the agency in charge has some bribery and sex scandals, but heh, who doesn’t these days?). Company X generated $100 million in revenues and $20 million in profits over 10 years, until the mine is played out. The wages and profits are then recycled into the economy, and it looks like we have a lot of growth.

"Unfortunately, after the mine distributes its winnings, it closes down and declares bankruptcy - leaving large unpaid environmental debts. As with the financial sector, it’s virtually impossible to recover profits that were already distributed over 10 years prior to declaring bankruptcy, even if you can win the lawsuit (a costly and time consuming process). And even then, the total profits generated would not come close to covering the cost of cleanup…

"Destroyed waterways, arsenic and slag-tainted soil and underground water supplies, and a littany of health problems among employees (and even non-employees in the vicinity).

"The “economy” then “grows” because the govt. has to pay for health/end-of-life care for disabled workers. It also has to pay for cleanup. And for this, it levies taxes.

"In this sense, official GDP number grew twice - once from the damage-causing activity, and again from repairing the vast amount of damage. But are people better off?

"One of my great feats regarding the financial crisis is that Team Obama’s incompetence at handling it would cause collateral damage to its other initiatives, which are much more sensible."

--Stats Guy

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bankrupting the nation to force denial of health, SS

it sure is looking like that's the plan to bankrupt the US and deny all social safety nets...

but I think it's more short term profit theft.

These MNCs could care less about any nation...they are not loyal.

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Helicopter Ben Bernanke is

Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!

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