Let the gaming begin!
The kind of people who figure out how to game Geithner-san's auction for toxic assets are already hard at work. Here's
Let's see an example. "Bank" has a mortgage-backed security (MBS) with original par (nominal) value of $100. In 2008 Bank "marked-to-market" and now values the MBS at $95 in its books. But we all know that this MBS is worth a lot less, maybe less than $60, but Bank won't acknowledge reality.
In 2009 we have the new Treasury plan, whereby "Peter" buys this MBS, for say, $90. That's because the bank won't take anything less. If it did, Bank would be shown to be insolvent and would be out of business.
Peter puts only $6 out of pocket. Uncle Sam puts another $6, and the remainder $78 is a nonrecourse loan from Uncle Sam to Peter. (Total, $90).
Then Peter turns around and sells the MBS to his pal "Paul" for $48. Paul pays $48 b/c he thinks the MBS is actually worth $58 as justified by what the homeowners will actually pay in monthly mortgage payments.
Peter's $6 investment is wiped out. So is the govt's $6. And the $48 Peter gets from Paul goes to pay back the govt loan of $78. So now, Peter lost $6 but Uncle Sam lost $36 ($84-$48).
Since Peter and Paul are buddies (co-conspirators), the latter can compensate Peter. Say, Paul gives Peter his $6 plus another $2 for his troubles. Paul pays $48 for something worth $58, but because he gave $8 to Peter, his profit is only $2. And the banks get fully $90 for paper that is worth actually $58.
Peter puts in $6, makes $2 profit
Paul puts in $48, makes $2 profit
U.S. puts in $84, makes a $36 LOSS
Bank had paper that was really worth $58 but got $90 for it, makes a $32 profit
Again, no matter the rhetoric, no matter the budget, even with all the best intentions in the world, this is the biggest story in town.
If we keeping throwing trillions of dollars into the enormous hole that is the banking system -- with no accountability for those who created the problem, and no transparency for what's done with the money -- then we won't be able to afford anything else! And all the people who created the problem will still be in charge. How does this make sense?