http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html Excerpt 1: Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program. Citi holds $100mm of face-value securities, carried at $80mm. The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm. I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest. I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm. In the fullness of time, we get the final outcome, the bonds are worth $50mm. SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm. Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program). U.S. Treasury loses $22.75mm. Great program. It's just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction. You've also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So it's incredibly inefficient. How did fraud and money laundering become the national economic policy of the US? One would have to be a criminal to participate in this. ***************************** Excerpt 2: Now, given that Congress doesn't want to authorize more money, Summers/Geithner are trying to misuse Fed/FDIC authority to hand out cash. This is illegal because the FDIC and Fed are authorized to lend, but not to hand out gifts/grants. Lending non-recourse undercollateralized is a gift/grant.
Great post. I think it's close to how it will play out, except maybe with a few more opportunities in the middle to scam $. The fact that you bid $75 is because the taxpayer is backstopping th risk, and the reason your CDS is so cheap is becuase the taxpayer is backstopping the risk. Unfortunaltely I am pessimistic about the general public understanding this. They're busy being angry about bonuses (since they understand that so well).
As everyone well knows ....there are very significant losses that are not going away.... One can create lots of "smoke and mirrors".... But at the end of the day....the taxpayers will bear these losses.... Call it "big bank extortion with the politicos in mind".... The question is....is this method the best way for the taxpayers to incur the losses....?
you might aswell mention every other deceptive policy in the world why you are at it. It is the nature of the beast. humans are terrible people. They do bad things to each other. And some of them group up and bully the rest. The only way to beat them is group up and bully them. But after that, greed will rear its ungly head again. My advice is to stop whining about government and corporations - they have been doing this for hundreds of years. If you want to do something, start a meetup group to overthrow the government. Otherwise you waste your breath.