Wall Street Implosion

[nugnfutz]

 The fund isn't for the failing bank....but for their exposures/commitments to other banks. The AIG $180 bill bail-out didn't go to AIG ...but went to their creditors, mostly other banks. The "too big to fail risk" is all about leaving creditors with nothing, rather than leaving the company and shareholders bankrupt.

All that creating a central insurance "superfund" like this will do is encourage banks to take extra risk on other peoples dime. I'd rather see individual banks be held accountable - so for example...if u lost 20 billion on AIG trade exposure, then you lost that amount (rather than get 10 bill back from the US taxpayer like Goldman Sachs did).

I'd rather see banks cover their exposures with enough capital, than paying into some kinda superfund that goes nowhere, and only advantages the weak and incompetant.

[wibbit]

What a dumbass. Which bank would fund the bail out pool? why should good banks chip in and bailout the bad banks, that goes everything against capitalism. On top of that, the banks will fall over each other trying to take on riskier bet, knowing the first one to fail will get the bailout fund before it's used up.

All they needed to do is breakup the big banks/insurers, and separate retail banking from risky betting, where there is no "too big to fail" anymore, then bad banks will be allowed to fail and consumed by good banks, advancing market darwinism.

But of course, noone wants to tackle the real fix, instead those retards keep coming up with patches after patches of useless bank lynching dog&pony show, to appease an even dumber american public for votes.

Meanwhile everyone looks at china with anger and jealousy, as if the chinese invaded usa and stole all its banks money then forced all the idiots to take out leveraged loans, causing the banks to fail.

U.S. Sen. Menendez pushes for passage of bailout prevention fund
By Mark Maurer/The Jersey Journal
April 12, 2010, 1:32PM

U.S. Senator Robert Menendez announced his proposal of the increase of a bailout prevention fund from $50 billion to $150 billion at a press conference at the Light Rail station in Hoboken Terminal on Monday morning. The proposal is part of Wall Street legislation reform that would create a fund pre-paid by corporations, entitled an “Orderly Liquidation Fund,” to prevent taxpayers from having to foot the bill for future bank bailouts, he said. The senator plans to debate the issue on the Senate floor in the next few weeks.

“The bottom line is that if these firms fall hard, we’re all paying dearly, bailout or not,” Menendez said. “That’s why the most effective way to protect families is to create system in which, instead of a bailout, failing corporations have a soft landing into bankruptcy that is aided by a Wall Street-paid insurance fund, not taxpayers.”

Menendez places responsibility on the shoulders of the profitable Wall Street companies to internalize the costs. “We cannot accept a system that privatizes business but socializes risk,” Menendez said. Menendez named Sen. Jack Reed (D-RI) and Sen. Sherrod Brown (D-OH) as among supporters of this legislation. He said it was determined $150 billion would be sufficient for a single company, contrasting the figure with the $180 billion it took to bailout AIG in 2008. In terms of the government’s authority over the banks, banks are governed by federal charters and follow long-standing regulations.

Representatives of advocacy groups New Jersey Citizen Action and the New York Consumers Union were on hand to support the proposed fund. “This will be a powerful deterrent to the high-profit, high-risk environment that Wall Street has become today,” said Leslie Schlesinger, CRA organizer for New Jersey Citizen Action.

[MCA]

U.S. Sen. Menendez pushes for passage of bailout prevention fund
By Mark Maurer/The Jersey Journal
April 12, 2010, 1:32PM

U.S. Senator Robert Menendez announced his proposal of the increase of a bailout prevention fund from $50 billion to $150 billion at a press conference at the Light Rail station in Hoboken Terminal on Monday morning. The proposal is part of Wall Street legislation reform that would create a fund pre-paid by corporations, entitled an “Orderly Liquidation Fund,” to prevent taxpayers from having to foot the bill for future bank bailouts, he said. The senator plans to debate the issue on the Senate floor in the next few weeks.

“The bottom line is that if these firms fall hard, we’re all paying dearly, bailout or not,” Menendez said. “That’s why the most effective way to protect families is to create system in which, instead of a bailout, failing corporations have a soft landing into bankruptcy that is aided by a Wall Street-paid insurance fund, not taxpayers.”

Menendez places responsibility on the shoulders of the profitable Wall Street companies to internalize the costs. “We cannot accept a system that privatizes business but socializes risk,” Menendez said. Menendez named Sen. Jack Reed (D-RI) and Sen. Sherrod Brown (D-OH) as among supporters of this legislation. He said it was determined $150 billion would be sufficient for a single company, contrasting the figure with the $180 billion it took to bailout AIG in 2008. In terms of the government’s authority over the banks, banks are governed by federal charters and follow long-standing regulations.

Representatives of advocacy groups New Jersey Citizen Action and the New York Consumers Union were on hand to support the proposed fund. “This will be a powerful deterrent to the high-profit, high-risk environment that Wall Street has become today,” said Leslie Schlesinger, CRA organizer for New Jersey Citizen Action.

[nugnfutz]

[url]http://news.hereisthecity.com/news/business_news/10038.cntns[/url]

[jehu]

I wouldn't call out economic system Socialist, I prefer the term Keyensian. Reason being, the government doesn't have overall control of the economy, it does however, try to mitigate problem areas where free-market economics doesn't work well.

But back the the whole banking issue. The government for years allowed the foxes to watch the hen houses, and nothing has changed/will change unless there is a strong push from above (The President).

It boggles the mind to watch these banking institutions, which only 15 months ago were about to collapse, putting up record PROFITS! Why aren't they re-investing those profits back into the economy!?JP Morgan Chase alone is giving out 239 BILLION dollars in bonuses to employees who's average income is 129K+.

And don't even get me started on the whole mortgage mess. The banks knew they were giving out risky loans. They didn't care. They just packaged those risky loans, gave them high bond ratings, and then sold them off back to the public.

As far as I am concerned these banks need to be taxed heavier on risky behavior, and they need to be watched by someone outside of Washington. 

 

[brewster]

There's no jobs because there's no investment in the real economy because there's no trust out there. The people who broke it are still in charge, and still raping the system. Never mind for a moment those bloodsucking clowns testifying in DC: who would buy a bond when the same ratings agencies that created this mess by stamped AAA on trash are still the ones rating and still being paid the same way by the issuers rather than the buyers? Moodys and S&P are at the top of my "go to jail" list, without their cooperation and failure to do their specific job, much of the debacle would have been avoided since no one would have bought the bonds if they were properly rated. And if the derivatives were too complex to understand, that should have been a red flag, not a sign to rate them AAA.

Wibbit, if you were POTUS, what would YOU do, considering the political and economic constraints. And lets not hear that socialist bugaboo. This country IS socialist, has been since the New Deal, and even the most red state Americans would point their guns at you if you messed with their SS, Medicaid or Farm Welfare. This "socialist" crap is simply the latest code word in the class/race war being waged by the GOP.

[wibbit]

Nothing more than a dog and pony show to satisfy the angry masses who lost their over-leveraged houses due to their own stupidity.  This will generate little real money, much controversies, and misdirect the focus from the real economic problems. Even more terrifying is the fact now the government can just create policy(this is but one of many) at will to tax whomever they want, impacting the free market as they chose. I am no fan of the banks, but many repaid their tarp in full, now they will have to pay extra money because "it feels right", how is that any different than a bunch of guys in mask showing up to the bank and take the money by force, it is downright scary.

How are we ever going to get back on track if the answer is more spending(debt) and more taxes, companies are afraid to hire due to the pending and uncertain major tax increases, consumers are afraid to spend because of the higher taxes and fear of losing their jobs. It is a never ending vicious cycle. The latest job reports proved we are in this deathloop, when almost all previous recessions after WWII will be generating jobs right about now, we are still not.

At this rate, the best one can hope for is a lost decade of stagnation, at worst a runaway inflation dollar currency crisis like we never seen before.  I used to support obama, after bush i would support anyone, but his economic policies of major spending and "socialist"(yes i said it!) mindset/policy is destroying this country literally inside out. Now they have dug themselves into a hole where the only way to prop up the economy is by throwing cash at it.

[jehu]

True. But it isn't like Detroit is giving it's Executives a few billion in 'bonuses' for creating a disaster.

[duke_of_earl]

I'm wondering when he's going to levy a Responsibility Fee on the automotive industry...also recipients of TARP funds but which never paid the money back.

duke


Fact Sheet: Financial Crisis Responsibility Fee

Financial Crisis Responsibility Fee

Today, the President announced his intention to propose a Financial Crisis Responsibility Fee that would require the largest and most highly levered Wall Street firms to pay back taxpayers for the extraordinary assistance provided so that the TARP program does not add to the deficit. The fee the President is proposing would:

Require the Financial Sector to Pay Back For the Extraordinary Benefits Received:   Many of the largest financial firms contributed to the financial crisis through the risks they took, and all of the largest firms benefitted enormously from the extraordinary actions taken to stabilize the financial system. It is our responsibility to ensure that the taxpayer dollars that supported these actions are reimbursed by the financial sector so that the deficit is not increased.

Responsibility Fee Would Remain in Place for 10 Years or Longer if Necessary to Fully Pay Back TARP:  The fee – which would go into effect on June 30, 2010 – would last at least 10 years.   If the costs have not been recouped after 10 years, the fee would remain in place until they are paid back in full. In addition, the Treasury Department would be asked to report after five years on the effectiveness of the fee as well as its progress in repaying projected TARP losses.

Raise Up to $117 Billion to Repay Projected Cost of TARP: As a result of prudent management and the stabilization of the financial system, the expected cost of the TARP program has dropped dramatically. While the Administration projected a cost of $341 billion as recently as August, it now estimates, under very conservative assumptions, that the cost will be $117 billion--reflecting the $224 billion reduction in the expected cost to the deficit. The proposed fee is expected to raise $117 billion over about 12 years, and $90 billion over the next 10 years.

President Obama is Fulfilling His Commitment to Provide a Plan for Taxpayer Repayment Three Years Earlier Than Required: The EESA statute that created the TARP requires that by 2013 the President put forward a plan "that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt." The President has no intention of waiting that long. Instead, the President is fulfilling three years early his commitment to put forward a proposal that would – at a minimum – ensure that taxpayers are fully repaid for the support they provided.

Apply to the Largest and Most Highly Levered Firms: The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt.  Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.

...more on the Treasury site....

[jehu]

Yeah... The bastards repaid the loan by jacking up their fees and all!

[TheFang]

Bank of America to Repay $45 Billion From TARP

Bank of America said late Wednesday that it would repay its entire $45 billion in government bailout money before the end of the year. The move should help the bank recruit a new chief executive by freeing it from government restrictions on executive pay at bailed-out companies.

“We appreciate the critical role that the U.S. government played last fall in helping to stabilize financial markets, and we are pleased to be able to fully repay the investment, with interest,” Kenneth D. Lewis, the bank’s current chief executive, said in a statement.

Mr. Lewis is scheduled to retire at the end of the year and the bank’s board is searching for his replacement. Mr. Lewis came under sharp fire for not disclosing billions of dollars in losses at Merrill Lynch before the bank completed its purchase of the securities firm at the beginning of the year.

Bank of America said it had authorization from the Treasury Department and other banking regulators to repay the bailout money. Under its agreement with the government, the bank would repurchase 1.8 million preferred shares that it had given to the Treasury for the money, but not the related warrants.

Bank of America received an initial $20 billion in October 2008 at the height of the financial crisis as part of the government’s Troubled Asset Relief Program. It received another $20 billion in TARP money in January to help it deal with the billions of dollars of losses at Merrill Lynch.

Bank of America said it planned to repay the TARP money by using $26.2 billion in available cash and selling $18.8 billion in “common equivalent securities,” which would be treated as Tier 1 common capital. The bank said it would ask shareholders next year to approve converting those securities to common stock.

[MCA]

NJCA will Picket Goldman Sachs in Jersey City on November 24

NJ Citizen Action (NJCA), the state's largest citizen watchdog organization is sponsoring an Informational Picket to urge Goldman Sachs to donate its $23 Billion in anticipated bonuses to foreclosure prevention programs, increase lending and donations to small businesses for job creation, and to stop fighting real financial reform. Goldman Sachs still owes $53 Billion to the Taxpayers and yet they are back to making record profits and paying out mega bonuses while millions of regular folks are suffering from job losses, foreclosures and depleted pensions caused by the financial meltdown.

Members of NJCA will be joined by members of the public and members of other New Jersey organizations that have joined Americans for Financial Reform, a coalition of more than 200 national, state and local groups spearheading a campaign for real reform in our banking and financial services system. A new report by Public Citizen, which breaks down contributions from the financial services industry to members of Congress and their political action committees will also be released.

When: Tuesday, November 24, 2009. Noon

What: Informational Picket on Goldman Sachs' benefits from bailout money and a Press Conference to Release Report on Financial Industry Campaign Contributions

Where: Goldman Sachs Tower, 30 Hudson Street, Jersey City, New Jersey. Near Exchange Place and Essex Street Light Rail Stop

[duke_of_earl]

U.S. Loses Bear Fraud Case
By AMIR EFRATI and PETER LATTMAN

The U.S. government lost the first major criminal trial spawned by the financial crisis as two former Bear Stearns hedge-fund managers were acquitted of securities fraud. Some prosecutors had viewed the case as a blueprint for future charges against Wall Street executives.

The two men, Ralph Cioffi and Matthew Tannin, were accused of lying to investors -- telling them they were optimistic about their funds, while privately worrying they were all but dead. The funds collapsed in 2007, in a prelude to the mortgage crisis that eventually felled Bear Stearns itself less than a year later and heralded the arrival of a full-blown credit crisis. (Bear Stearns was bought by J.P. Morgan Chase & Co.)

The acquittals are a setback for the U.S. attorney's office in Brooklyn, N.Y., which along with several other offices is investigating Wall Street for possible criminal wrongdoing stemming from the credit crisis, including at Lehman Brothers Holdings Inc. and American International Group Inc. In Tuesday's case, the question boiled down to this: Were the two men misleading investors, or simply putting a positive spin on sagging returns?

Jurors in Brooklyn found there was no evidence beyond a reasonable doubt that the defendants had criminal intent and conspired to mislead their investors. There "was nothing that was clear and convincing," said juror Tabasam Bhatti, a 31-year-old civil servant. The prosecution didn't provide "enough information," he said.

...more...

------------------------------------------------------------------------

Someone must be blamed!  Forward march to the criminalization of bad judgment!

duke

[MCA]

Protesters picketing AIG slam bailed-out firm's big bonuses
Saturday, November 07, 2009
By MICHAELANGELO CONTE
JOURNAL STAFF WRITER

About 20 members of the New Jersey Citizen Action group picketed outside the Jersey City offices of AIG yesterday afternoon, protesting bonuses that have already been paid and those promised to workers at the company that was central to the financial industry meltdown.

"We urge AIG to stop paying bonuses and to make employees who have already received bonuses give them back," said Phyllis Salowe-Kaye, executive director of NJCA.

The protesters carried posters and sang song parodies attacking the insurance giant, which received more than $182 billion from taxpayers to avert its collapse.

"You got bailed out! We got sold out!" they shouted outside the 101 Hudson St. offices that opened in 2004 and are staffed by 1,300 employees.

According to NJCA officials, AIG has promised $475 million in bonuses to employees of the Financial Products Unit even though the unit was the root of the company's losses. Total bonuses, they said, are estimated at $1.2 billion.

AIG spokesman Mark Herr responded that those at fault in AIG's Financial Products Unit are gone. He said current FP workers are winding down the unit and when done, they will lose their jobs.

He added that in March AIG workers agreed to return up to half of their retention bonuses and have already returned $19 billion.

To the protesters' complaint that at $10.5 million, CEO Robert Benmosche's pay is higher than any chief running, Herr noted that Benmosche's salary was cleared by the government's special master for compensation.

"The men and women of AIG continue to work diligently at rebuilding the companies, restoring shareholder value - which benefits the American taxpayers, our largest shareholders - and repaying the government," Herr said.

Protester Paulette Everle of Jersey City, who stood in the cold wind with her seeing-eye dog Prudy, noted that many people are out of work.

"Unemployment is at 10.2 percent and they are still working and getting bonuses with our tax dollars," she said.

[duke_of_earl]

The picket is to urge AIG to rescind bonus awards and take back bonuses already paid to executives. AIG has received at least $120 billion in bailout money from the federal government since last year to cover their financial losses.

I can't think of a faster way to lift this company out from receivership than to alienate and embitter the leadership.

Wonder how the folks who originally drove Hank Greenberg out of the company (his new company competes with AIG, thus hurting AIG's ability to re-pay the taxpayers) feel about all this.

Don't tell me you actually think taxpayers are going to get repaid? 

duke

[bdlaw]

Wonder how the folks who originally drove Hank Greenberg out of the company (his new company competes with AIG, thus hurting AIG's ability to re-pay the taxpayers) feel about all this.

[MCA]

Protest is today, according to the JC Reporter:


Citizen's group plans to picket AIG office

JERSEY CITY - NJ Citizen Action (NJCA), a citizen watchdog and advocacy coalition, is planning to hold an "informational picket" in front of the Jersey City office of financial company American International Group (AIG) on Friday at noon.

The AIG office is located at 101 Hudson St. in downtown Jersey City.

The picket is to urge AIG to rescind bonus awards and take back bonuses already paid to executives. AIG has received at least $120 billion in bailout money from the federal government since last year to cover their financial losses.

Citizen Action says they are complaining because AIG has promised $475 Million in bonuses to employees of the Financial Products Unit even though that unit was instrumental in causing the company’s losses, and CEO Robert Benmosche will receive the highest payout of any chief running a bailout company -- $10.5 Million, they say. - RK

[duke_of_earl]

Who knew there was already a solution?!

<a href="http://www.youtube.com/v/s0vvQF2-InU&amp;color1=0xb1b1b1&amp;color2=0xcfcfcf&amp;feature=player_embedded&amp;fs=1" target="_blank">http://www.youtube.com/v/s0vvQF2-InU&amp;color1=0xb1b1b1&amp;color2=0xcfcfcf&amp;feature=player_embedded&amp;fs=1</a>

[duke_of_earl]

<a href="http://media.mtvnservices.com/mgid:cms:item:southparkstudios.com:222638" target="_blank">http://media.mtvnservices.com/mgid:cms:item:southparkstudios.com:222638</a>

[skwirrlking]

Ways to Play the Rescue Game
(from NYT)
Timothy F. Geithner, the Treasury secretary, has offered generous financing to the private investors to help bail out banks. His promise of lots of cheap leverage could make investments in toxic assets attractive. But ingenious minds will probably find elaborate ways to play Mr. Geithner’s game. Here are two ideas.

 The first game is for banks. A bank sells $7 million in so-called legacy loans. It then reinvests $1 million of the proceeds in a fund, receives another $1 million in equity from the government and borrows $12 million with a guarantee from the Federal Deposit Insurance Corporation.

The fund then buys $14 million in loans that are nearly identical to the ones the bank sold, paying the same price if it can. The bank can now reap half the gains on a $14 million portfolio, rather than retaining all of the upside from its original $7 million of loans. But it has capped its downside at $1 million, rather than $7 million.

The second game is for investors. Here the investor spreads his bets among funds with different approaches to buying legacy securities. Some focus on residential or commercial mortgages, others on credit card loans, in different vintages and geographies. The aim is to make sure that, even if some funds plummet in value, others do well.

Imagine playing Colony of Vultures with just two funds. Our investor, who has $2 million to play with, puts $1 million each into Vulture 1 and Vulture 2. The two Vultures now borrow $9 million apiece from the Federal Reserve, giving them each $10 million to invest. Vulture 1 makes 30 percent; Vulture 2 falls 30 percent.

This might seem like a dumb strategy that leaves the investor flat. But the availability of nonrecourse funds, meaning the loans are backed only by the assets they have purchased, changes the outcome. Vulture 1 is now worth $13 million. After paying back the $9 million loan, the investor has $4 million. He loses all the $1 million he has put into Vulture 2, but the remaining losses are absorbed by taxpayers. Our investor ends up doubling his original $2 million stake.

These are hypothetical examples that don’t take into account interest charges on the debt or any restrictions the authorities might impose on such tricks. There is also the risk that the banks may not be able to find toxic loans identical to the ones they are selling and that all the vultures might plummet simultaneously. Nonetheless, there should be enough fun and games to keep financiers entertained and wealthy.

[skwirrlking]

The much awaited Plan!  Here is a good example breakdown I found.  Very exciting indeed!

duke

---------------------------------------------------------------------------------------

The “Geithner Put”, part 1

The details of the “Geithner Put” have been released.  It has two parts:  One to deal specifically with bad loans, the other to deal with other legacy assets (securitized yadda yadda).  In this post I will discuss the first part, dubbed the “Legacy Loans Program”.

The Treasury helpfully provides an example, which I reproduce here:

    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.

Let’s flesh this out by repeating it 100 times.  So say a bank has 100 of these $100 loan pools.  And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which.  (These numbers are made up but the principle is sound.  Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece.  Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those.  But the other half wind up worth $100 each for a $16 profit.  $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury.  So the investor gains $400 on these winning pools.  A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400.  So the private investor gained $100, the Treasury gained $100, and the bank gained $3400.  Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless.   But no worries.  As long as the FDIC has more expertise in valuing toxic assets than the entire private equity and banking worlds combined, there is no way they could be taken to the cleaners like this.  What could possibly go wrong?

if this scenario plays out, the banks should set up shell companies to buy their own toxic assets.....

[duke_of_earl]

I am happy to announce that Geithner is very confident that this will work.  So confident that there is no backup plan:

<a href="http://www.youtube.com/v/9GK9Rg9M6-g&amp;hl=en&amp;fs=1" target="_blank">http://www.youtube.com/v/9GK9Rg9M6-g&amp;hl=en&amp;fs=1</a>

duke

[duke_of_earl]

The much awaited Plan!  Here is a good example breakdown I found.  Very exciting indeed!

duke

---------------------------------------------------------------------------------------

The “Geithner Put”, part 1

The details of the “Geithner Put” have been released.  It has two parts:  One to deal specifically with bad loans, the other to deal with other legacy assets (securitized yadda yadda).  In this post I will discuss the first part, dubbed the “Legacy Loans Program”.

The Treasury helpfully provides an example, which I reproduce here:

    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.

Let’s flesh this out by repeating it 100 times.  So say a bank has 100 of these $100 loan pools.  And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which.  (These numbers are made up but the principle is sound.  Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece.  Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those.  But the other half wind up worth $100 each for a $16 profit.  $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury.  So the investor gains $400 on these winning pools.  A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400.  So the private investor gained $100, the Treasury gained $100, and the bank gained $3400.  Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless.   But no worries.  As long as the FDIC has more expertise in valuing toxic assets than the entire private equity and banking worlds combined, there is no way they could be taken to the cleaners like this.  What could possibly go wrong?

[jcpeace]

We'll keep our Judeo-Christian values.. You are welcome to Islam, Scientology, Humanism and Shirley McClain. You can also have the U.N.. But we will no longer be paying the bill.

humanism lumped in with islam....priceless!
guess john lacks a background in the humanities....but still feels comfy associating it with religion and cults! 

This guy doesn't happen to be going to Regent University does he?

OMG...just checked it out...they actually have an MFA program!
sweet jesus would i love to be a fly on the wall in one of their graduate art classes....or better yet; one of their gallery exhibits. 

[TheFang]

Sigh, I can't believe I'm doing this because it's so stupid and easy to turn over but I guess I can't help myself, so I'll only stick to these three points...

We'll keep our Judeo-Christian values.. You are welcome to Islam, Scientology, Humanism and Shirley McClain. You can also have the U.N.. But we will no longer be paying the bill.

Hey, dumbfuck, Islam is Judeo-Christian. Oh but those guys are brown, right sorry. And if by Judeo-Christian you mean things like peace, and redistribution of wealth and rebellion against crazy-ass war mongers, well ok... I'd also like to once again bring your attention to a lovely website: WTFWJD?

Sincerely,

John J. Wall
Law Student and an American

This guy doesn't happen to be going to Regent University does he?

P.S. Also, please take Barbara Streisand & Jane Fonda with
You.

Yeah, the last thing someone like you would want is strong women with opinions opposite to yours speaking out and getting attention. Damn womens.







That said, I've said we should give the Louisiana Purchase back to the French for years.