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Geithner-san's bailout explained: We assume the risk, the banksters get the rewards (if any)

Tables and everything! Go read Willem Buiter, I'll wait. The first thing Buiter asks is where the money is coming from:

The US Treasury is putting at most $100 bn into the PPIP pot. “Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets - with the potential to expand to $1 trillion over time.” The programme is hoped to do up to $1000 bn worth of toxic and bad legacy asset purchases. Hope is good. Cash is better. Where is the remaining $900 bn going to come from?

The answer is loans or loan guarantees from the FDIC and the Federal Reserve and co-investment with private sector investors.

Now, as I understand it, there are two parts to Geithner-san's scam: The Loan part, and the Securities part. (I know they're called "Legacy Loan Program" (LLP) and "Legacies Security Program" (LSP), but the "Legacy" name is or Orwellian -- or Axelrodian -- that I can't bear to use it.) The loan guarantees work differently for each part of the program.

Of the Loan Part, Buiter provides a worked example of a $100 face-value mortgage pool that a private investor purchases, at auction, for $84.* Because the program leverages the equity by a 6 to 1 ratio, $12 is invested, and $72 (6 * $12) for a total of $84 ($12 + $72). Of the $12 invested, $6 comes from the private investor, and the program (ultimately, taxpayers) provides $6.

First note that the public sector as a whole (Treasury plus FDIC) is at risk for $78 out of a total investment of $84. The public sector has the same upside as the private sector (through its $6 worth of equity). [The equal upside is the point emphasized by the OFB on the threads] However, the private sector gets this upside by putting only $6 at risk, against the public sector’s $84 at risk [because the public sector (ultimately, taxpayers) is guaranteeing the entire $72]. Small wonder the stock markets loved this. If there were a stock market for taxpayer equity, it would have tanked by a commensurate amount.

It must be recognised that the FDIC is in this picture only for cosmetic, window-dressing reasons. The FDIC has no resources of its own to spend on leveraging the PPIP. It cannot raise taxes and it cannot print money. ... The FDIC’s lending or guarantee of the loans to the PPIP is no more than a convenient way to move the Treasury’s exposure into supposedly independent ‘government agency land’. ... The FDIC is there only to confuse Congress by making it difficult to follow the money.

Now, on the Securities part. This one is simpler:

Under the Legacy Securities Program, the Treasury will provide equity of $100 for every $100 of private equity put in. The Treasury will also lend up to $200 for each $100 of private equity. So the Treasury puts at risk $300 to gain the same upside that the private sector will only put $100 at risk for. Nice work if you can get it (if you work in the private sector). Again, the tax payers’ stock takes a hammering.

So, this is a shell game. The upsides are numerically equal -- which is how the OFB help work the con and rope in the shills on the threads. However, since the taxpayers are taking most of the risk, the taxpayers should be getting most of the gains, and in a normal market -- the one that Geithner-san and Summers and all the rest of them believe in, except when they don't -- they would be. I don't know if that's the only con going on here, but it certainly is one.

With that I will end for now, since RL calls. Again, I recommend the whole article. Buiter closes with comments to the effect that with Treasury not staffed it's amazing a plan was created all (one can only ask who really wrote it, then), that it's not as bad as it could have been, and that although the Fed is "debauched," $100 billion isn't so much to lay out, these days. Yay!

Oh, and a blind pig finds a truffle every so often. Apparently, I was right on the idea that "lemon markets" are of interest here. Buiter writes:

By making participation voluntary the Treasury has created an adverse selection machine. Only those whose toxic or bad assets are priced higher than the reservation value of the banks who hold them will offer them for sale. Surely, the designers of the scheme must have read George Akerlof’s famous ‘lemons’ paper (JSTOR access required)? Participation in the programs should have been mandatory for all FDIC-insured banks with balance sheets in excess of $100 billion.

NOTE * Which is a lot more optimistic than the example in the initial Times coverage, where if the banks wanted $100, the private investors were willing to pay $50.

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