Wonkette
The stock market has rallied in response to Tim Geithner’s latest details on his plan to fix America’s Banks by giving them lots of money for their trash, which makes sense, because the new plan is good good GOOD for Wall Street! Imagine a world where the government put up like 85% of the financing for something that you wanted — a robot, say — and you only had to throw in 5%. But after realizing that the robot was, indeed a piece of crap, made from defaulted mortgage contracts instead of the usual metals, the government lost all of that 85% investment, and you only lost 5%, so whatever. Let us look into this modern marvel of financial engineering known as the “Public-Private Investment Fund.”
One of the main problems with the original TARP plan as devised by Hank Paulson — aside from the fact that some toxic assets will always and forever be toxic assets, regardless of market conditions — was that it offered no fair mechanism to price the toxic assets it was going to buy from banks. If some dumb mortgage-backed security was only going to fetch $1 in the market, that was precisely why it was considered “illiquid,” because banks saw this as a firesale price that didn’t reflect its actual value and was merely a symptom of a panicked economy. (WE’LL SEE.) So if the government were to buy these securities, they would have to offer above-market-value prices. And then the banks would never learn their lesson and run off with bags of money as the government figured out what to do with the massive hoard of horseshit it had just purchased for top dollar and was temporarily storing in Ben Bernanke’s unfinished basement, next to the cave of rats.
The Geithner plan tries to circumvent this fair-pricing issue by having banks sell off their toxic assets in auctions, so then the price is determined by market forces and not simply by Fat Cats trying to high-ball Tim Geithner over the phone.
And once investors have set prices for these assets in auctions, their next move is to turn to the fucking government, pinch their index finger and pinky tips about four inches apart, and say, “I need this much.”
At the core of the financing package will be $75 billion to $100 billion in capital from the existing financial bailout known as TARP, the Troubled Assets Relief Program, along with the share provided by private investors, which the government hopes will come to 5 percent or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired.
The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds, insurance companies and other long-term investors.
The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match, one for one, every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”
What this amounts to, naturally, is a clusterfuck, but as long as it gets around Congress…
The Treasury Department offered this example to illustrate how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. The F.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, with funds coming from the $700 billion bailout program; the private investor contributes the remaining $6.
So yes, this public-private deal is MUCH MORE PUBLIC THAN IT IS PRIVATE. Why not buy anything if your exposure is a few percent? And since Wall Street actively enjoys watching American taxpayers get reamed, they’ll love it when the government loses its entire “subsidy” (MOST OF THE PRICE) in this ludicrously leveraged non-recourse jaunt!
Oh and of course here is how the hedge funds will end up making shit-tons of money:
1. First the hedge fund buys an asset with a face value of $100 for $80. The hedge fund puts up $2.40, while the Fed contributes the rest, $77.60. Huge leverage.
2. The next day, the hedge fund re-runs the model and realizes that they overpaid the bank. Turns out, it was only worth $20 — which was where the market had been, sans-government leverage.
3. The hedge fund loses it entire $2.40, and the taxpayer loses its entire $77.60.
4. BUT! The bank buys the asset back from the hedge fund at $20, while paying it a $5 million fee for its trouble.
5. The upshot: The banks sells high, buys low. The hedge fund collects a fee for holding the asset. And the taxpayer is screwed.
Although maybe Tim Geithner is a secret genius and this will buy us all homes again, who even knows.
Treasury Details Plan To Buy Risky Assets [NYT]
For once they got the acronym correct.
PPIF. The sound that US America Taxpayer money makes when it gets chucked into this wonderous black hole.
My new drinking game is reading this article and taking a shot of Old Crow every time Jim says something I don’t understand.
Is there a bustle in your hedgefund row? Don’t be alarmed now.
spencer:
I was lost at “Geithner”
spencer: I died of alcohol poisoning.
So Main Street is Down The Drain Street?
Oh shit, Kruggy is crying on ATC right now. Don’t listen, sheeple.
… though I think Jim, “This American Life” http://www.thislife.org/Radio_Episode.aspx?sched=1285 and Alex Blumberg and Adam Davidson at Planet Money are pretty darn cogent.
At some point, we taxpayers are going to get it, and then woe betide the slower learners in Congress… and, sad to say, the administration.
A person comes to Wonkette hoping to escape yet one more analysis of the financial crisis. I guess it finally had to happen. Wish it were funnier, or had some buttzechs.
It’s a TARP!
spencer: I’d be drunk before sundown.
V572625694: Yes now it is over, breathe. There should be a Penis Joke soon.
Hmmm…
There appears to be a problem with the 5 step plan from the businessinsider people. The problem is that the hedge fund loses the asset between steps #3 and #4, so it can’t sell back to the bank in step #4. Why? Because if the hedge fund defaults on its 77.60 loan, the government acquires the asset. If, on the other hand, the hedge fund doesn’t default, then is still owes the goverment the full loan amount. It can’t both default and then sell an asset it no longer owns. By the way, the “non-recourse” stuff only means you can’t look behind the assets in question, but the debt holder (government) can always just seize the asset itself if the hedge fund fails to make its loan payments.
This isn’t to say that this whole thing isn’t a sweet deal for the goons who got us into this. The hedge funds stand to gain the entire upside, but only lose the value of their equity on the downside. That’s a fantastic deal. The added government equity is the cherry on top — pure profit from day one assuming that the asset was valued properly. And the banks get the benefit of that deal by reaping the rewards of the auction for these lopsided (good on the upside/ok on the downside) assets.
I’m going to get myself banned if I keep posting boring — and possibly wrong — shit like this.
Jim Newell: Or a big sale on Truck Nutz! That never gets old!
another good read for non-economists:
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print
Fox n Fiends: Knowing Taibbi, this one prolly has buttsecks in it.
Rush: I did like the part about the cave of rats.
Jim is a witch. Get him!!!
I think this financial crisis is turning me evil, since the first thing I thought of when I saw Newell’s easy guide for scamming the federal government is, “Ooh, how can I get in on that?”
Re pinching the index and pinkie 4 inches apart — is another finger involved here? Are we talking shocker? Or maybe this is reverse shocker, because there is definitely more poo than goo here …
Ok, once again: Failed Asset Relief Troubles? Or maybe it’s Working Asset Relief Triumph? Or possibly Buttfucked Asset Relief Formula.
Whatevs. Pass the hobobeans.
I thought Hopey was gonna stop all this shit. Have the Masters of the Universe nailed his ass too?
I have too many sadz for decent snark.
So it’s kind of like when the republicans waste billions of dollars minus a few thousand dead servicemen, tens of thousands of dead Iraqi civilians, however many disabled survivors, refugees, and orphans. I’ll stick with the shitty waste of money that doesn’t come with a side order of dead people.
Phase One: Collect Toxic Assets.
Phase Three: Profit.
Giant Robot: Good point.
Time will tell. I suppose if we fake prosperity long enough, some real prosperity might catch up to us.
Esteemed Friend:
I am the economic minister of a large nation in North America. I have come into possession of a portfolio of greatly undervalued assets, however I require a co-investor, due to local currency control rules, etc., to whom I can transfer these assets. If you could please, in strictest confidence, send your account and pin number,…
twowheeljunkie: I started drinking before reading this article. It doesn’t make it any easier to understand…
Wait, is this … thing, this place where the toxic assets go, a “bad bank” like the Swedish Communists used? Aren’t we in favor of a “bad bank,” maybe? In the immortal words of one of Jerri’s paramours in Strangers With Candy, “Damn, I wish I was smarter!”
V572625694: Oh, the whole thing is full of the buttsecks, in its own way.
My friend is a hedge fund manager, and he’s ECSTATIC. That, and my Apple stock went up $7 today. Now, maybe the best way out of this is to let the fuckers fuck us all over again, except with government money?
When this plan fails we can nationalize the banks after wasting trillions on the hedge funds..
Geithner-U R DOIN IT RONG
Fox n Fiends: Excellent article. Thanks.
See also: http://news.yahoo.com/s/ft/20090306/bs_ft/aa741ba80a7e11de95ed0000779fd2ac
AIG saga shows dangers of credit default swaps
Dreadful Gate: maybe….
With our new federal stockpile of toxic assets, we can make now some money by threatening other countries with them.
Vewol Mevemont: You are right, but the bank will just buy the assets back from the new owner, the guvmint, who doesn’t want to get into the business of managing mortgages because it’s not in our culture of loserism, failure, and dispair. Any which way, the taxpayer is fucked.
Also.
In fact, maybe the guvmint can create a new public-private partnership to dispose of shitty assets by then, so that even the 20 cents goes to teh hedgies. That way, taxpayers can lose everything, instead of just most everything.
Nice work, Jim. I’ve been trying to come up with a way to think about this plan without buttsecks metaphors and was failing. It’s a flaming pile of dogshit on the doorstep of every American.
When can I get 100% government backing on my NCAA bracket bets?
Giant Robot: What you said.
As for the rest of this shitter-gazing, I guess I must be confused. I coulda SWORN that this was a website where confidence in Hopey was supreme. Sorry. My mistake.
Y’know there WAS a time when people took risks, in precarious circumstances against formidable odds, because at the end of the exercise, THERE WAS A BUCK IN IT. It was called capitalism, and its rising tide raised a lotta boats. Imperfect, to be sure; but a meritocracy in which risk equalled reward. Eighty five percent of the risk equals a like share of the reward.
Y’all can bemoan your predicament and rail against the unfairness of the universe, but at present SOMEBODY has to fuckin’ DO SOMETHING! If Timmeh Da G’s massage ensures that Wall Street can once again find the confidence to lend actual cash to schmucks like y’all, perhaps you can buy that new car, upgrade to a better house, replace your sputtering marital aids, and shop ’til ya drop, like Bush advised y’all to do.
Your economy is like a shark; when it stops moving, it’s dead.
Now I’m gonna trundle off and watch Lou Dobbs to cheer me up.
Fuck. Also.
Jim seems a bit… pessimistic? about the whole plan. I don’t understand why. I mean, it’s not like it completely ignores the fact that Wall Street built it’s models around the fact that our economy has become one huge clusterfuck, and then assumed that said clusterfuck would continue indefinitely. I mean, if that were true, then this WOULD be a half-assed plan. But, as it is, you should just calm down. Now, excuse me, I have to go drink heavily.
Isn’t the FDIC almost failing? Doesn’t it also insure all of our savings and money-market accounts (if we had any monies)? Is it really a good idea to use the FDIC to back our purchasing of shit mortgages? What will Jimmy McNulty do after his retirement?
What happened to Swedish Models? I thought we were all promised Swedish models?
Where does it say anything about a fee? And since the investors only get a percentage of profits eq
Where does it say anything about a fee? And since the investors only get a percentage of profits proportional to their investment, wouldn’t they lose 100% of their investment if the asset is worthless?
Canuckledragger: I’m all for capitalism and I’m looking forward to it. Maybe, someday, in the distant future we’ll be able to see it.
It’s a mark of how badly Wall Street has hosed us that “capitalism” is now a synonym for “kleptocracy.”
I heart this article. It sounds like something Warren the Oracle would say if he were about 25, a hipster and had 2 or 3 shots too many.
‘couse, I laffin’ to keep from cryin’
any hobobeans left?
Much as I hate to disagree with Jim Newell on anything, points 3 and 4 are wrong.
Before the hedge fund gets ANY money, the government has to be paid in full. That’s because the government is providing debt, and debt is senior to equity.
So, if the hedge fund sells the asset to a bank or whatever for $20, the government gets all of that $20 (booking a loss of $57 on its initial commitment of $77) and the hedge fund gets zero.
The hedge fund only makes money if it can sell the asset at a price high enough to pay back the government, and then it takes whatever is left over.
My Great,Great Grand Children’s Children will be paying off my Stimulas package and I give not a SHIT !
Accordion-o-rama: w.i.n.
jagorev: ooh, that sounds good akshully, yes?
Thank Jeebus for Wonkette. Otherwise I would never have the patience to figure out what this whole Treasury giving away the Treasury to banks thing is all about.
We will be going back to the buttsecs soon, tho, right?
Sweet Jebus, Jim–Why the fuck aren’t you assistant sec. to the treasurer. Did you major in something beside history of english in college, or what?
I want to tear into that damn hearing and yell, “Look, you dicks–you’re the ones who de-regulated and created this fucking disaster.”
jagorev: I hope you’re right. At this point, I’ll cling to any hope, however fragile.
How completely appropriate that the Baby Boomers, the most self-possessed generation in history (before their parents found out they were the Great Generation and youldn’t STF up about it) will go out on a massive debt they’re passing on to the poor fools they sired.
A buck-21 huh! Wow, that’s alot! Why can’t Congress go whole hog (excuse the pun) divide that up and re-distribute the wealth? Maybe break open the Congressional piggy-bank (oops again) and really go hog-wild! (enough already) As Porky Pig always said…That’s All Folks!