New Poll: 'Geithner Plan:' What Good Will It Really Do?

Discussion in 'Economics' started by ByLoSellHi, Mar 23, 2009.

Will The 'Geithner Plan' Help Heal Impaired Balance Sheets of Banks & Financials?

  1. Yes

    12 vote(s)
  2. No

    19 vote(s)
  3. It is impossible to determine, as the details are still too murky

    7 vote(s)
  4. I have no idea

    7 vote(s)
  1. Okay, so apparently the futures are popping because Geithner finally set some details forth on the new plan to subsidize private acquisition of difficult to value/market/sell assets via the use of tax dollars, allowing private investors to leverage their money 6 to 1, in a non-recourse fashion, with the government providing the financing above and beyond the minimum capital amount invested by private investors.

    I think the details on this are still rather scarce, but does anyone here think this will be an effective and significant plan in terms of cleansing the currently impaired balance sheets of financial institutions and other bag holders of the 'toxic assets' at the center of the financial crisis?

    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.

    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.
  2. TGregg


    It's different this time. :rollseyes:
  3. m22au


    Edited with correct debt/equity ratios:

    I'm happy to hear opposing arguments, but I think this "plan" might actually work.

    7.15% down:

    govt loan = 85.70%
    govt equity = 7.15%
    "investors" equity = 7.15%

    so at first glance, this seems like toxic assets will get fake high bids, because the loss for "investors" will not be more than 7.15%.

    The obvious caveat is that US taxpayers are on the hook for losses above 7.15%, so this means:

    > more US govt debt and/or
    > more money printing

    From US Treasury:

    Sample Investment Under the Legacy Loans Program

    Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

    Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

    Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

    Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

    Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
    Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.
  4. m22au


  5. Okay, by my simple math:

    Group of investors bids 100,000,000 to purchase formerly 'illiquid' assets from bank.

    Government uses bid price and provides 85% of funding to private investors in the form of a non-recourse loan.

    So, government provides a 85 million dollar, non-recourse loan.

    Of the remaining 15% that requires cash, or 15 million, the government will pay 12 million, and the private investors will pay 3 million.

    Yeeeeaaah, I don't see how the taxpayer can possibly get hurt under this plan, as they're bearing the risk on 97% of the purchase.....suuuure.......

  6. m22au


    I agree with your argument, except I believe the figures are:

    85% govt loan (non-recourse)
    7.5% govt equity
    7.5% equity provided by other "investors"

  7. AK100


    The clock starts ticking today till the next 'new' plan is released.
  8. This is a liability free TARP injection. I think it works. But 40-60% of those FDIC funds will lost (to the banks). Such is the cost of a bank rescue. Bank rescues aren't free.
  9. Allen3


    The real question should be, what will the trillion dollar spending program be next week to stop the stock market from moving south again? At this rate they will be able to take onto the government all the crap in the economy by the summer and declare bankruptcy by fall. It'll save on paper work if we as a nation do it all at once. Lovin the collective double down!:D
  10. Daal


    The taxpayer will lose money in all likelyhood because the market will price in the cheap put being offered by the government. The reply to the paul krugman cries is 'the taxpayer will lose, so what?'. Its not like this crisis is exactly the best time to turn the Treasury in a money making hedge fund
    #10     Mar 23, 2009