U.S. Plan to buy up toxic assets

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This provides an opportunity to make easy money big time (for some of us).

First this is how it works – the Geithner's way:

Geithner's plan is not as complex as it seems. The main objective is to get a “price” for the so-called “toxic assets” by creating a market for them. If the plan works out as it should, the “market price” will be above their net book value currently carried in the banks' balance sheet. This will improve the banks net worth and encourage them to lend and perhaps, more importantly, allow some of the banks to remain solvent. This is more attractive than insuring these toxic assets (as the UK Government did) as the US Government will benefit from any subsequent increase in the “market price” - an insurance scheme, on the other hand, will pass all potential benefits to the banks while guaranteeing to take up all the potential losses.

In order to give incentives to the private sector to participate in creating this market, the US Government will chip in $1 (from TARP) for every $1 of private fund. In addition, the FDIC will provide a 1:6 leverage as non-recourse loan (it means that the private investor's maximum loss is capped at the $1 he put in and he doesn't have to worry about the $12 loan made available to the partnership).

In essence, for every $100 the partnership has at its disposal, the private investor only has to put in $7.14 – the Government will make it up by matching it with $7.14 from the TARP fund and $85.71 from FDIC in the form of a loan.

Now it's time for some easy money:

How sweet this deal can be (or the potential hiccup of Geithner's gamble) is what the “market price” the partnership will pay and what price the banks are willing to sell these “toxic assets”. Given the huge dose of sweetener from the US Government, the private investor will likely price the “toxic assets” higher than what they would otherwise be in a free market. Hopefully, the banks will sell at this government subsidized price. But will they?

If the private investor can see that there is a potential gain in acquiring the “toxic assets”, so will the banks. Why should the banks be selling something that will generate a reasonable return? Unless, of course, they are forced to sell (possible through the stress test to be carried out) or the price is so outrageously attractive as to exceed any potential return. In the former case, it's easy money for the private investor at the taxpayers expense. In the latter case, the bankers will benefit, also at the taxpayers expense. It will never be a win-win-win situation as some of us may have wished. It guarantees a win-win-lose situation.


If you believe the first scenario (bank forced to sell) will pan out, it's time for us to pool some money and queue up for some truly under-valued assets in your lifetime. There is no restriction (except for the banks themselves) for anyone to set up a fund to bid for these assets. If you believe the second scenario is likely, it's time to go all-in for bank shares – guaranteed 100% return.

And there is the third scenario but players will be restricted to senior bank executives. We cannot join in, unfortunately.

Although banks are barred from bidding these “toxic assets”, there is nothing to prevent bank executives doing it through the back door by setting up a private fund anonymously or pool their money into an existing fund to bid for these assets. To guarantee an attractive return for these funds, all they have to do is agreeing to a rock bottom price for these assets. This is why I think the Geithner's plan will work because if I were a senior bank executive, I would be a fool not doing this (especially now my retention bonus is gone).

As always, a small group of people will benefit and it's not going to be you or me. And forget the second scenerio, it won't happen.

[sandar]

It is an absolutely appalling plan.

They expect (and will actually try to encourage) private individuals and businesses to invest in "toxic assets". I mean, if it wasn't actually happening it would be laughable!

Nobody in their right mind would invest in these toxic instruments. No doubt however people like fund-managers investing other peoples savings and pensions will be encouraged to invest in these ticking-timebombs.

In fact it will be twice as bad for creditors in a few years times, if people were lucky enough to realise a repayment let alone return on their "toxic-asset" investments, the dollar will more than likely be less valuable as a result of inflationary measures such as printing $1 trillion dollars out of thin air ( link )


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ivgf you offer people a good enough deal they will invest,they problem with these assets iss not that they all have bnot value, its that they have a reduced but unquantifiable value, you like the market, well lets see what they market says...............anyone buying these toxuic assets is taking a punt, but are only putting up a tiny percentage of the notional value of the assets themselves, about 6% which means that the actual value of the toxic assets need only be a a third of what its book value is for them to see a return....
and the markets have rwecated to this so far........

[atlantic]

I think this guy but it together pretty well
https://self-evident.org/?p=502

[cyberianpan]

Well they are all CDOs but the problem but the problem is the value of the collatoral is very little. Examples of CDOs which are not property based would be anything from bonds backed by automobiles to bonds sold by credit card issuers. Some years ago a rock star sold a bond which was backed by his future earnings

My typo ... I meant to say CDSs (Credit Default Swaps) - that's why I was interested in the "insurance" language ...

The CDSs are where the real problems are (as we've seen with AIG) ... also that whole area is now a different world to what it once was.

Previously the big boys saw little or no counterparty risk between themselves[SIZE=1]*[/SIZE] - then Lehman's fell. This caused horrendous contraction of activity. Part of the idea with CDSs was to let people pretend these risks didn't exist ... and then as we saw the problem was that AIG etc were too big to fail.

So methinks CDSs , risk assessment & insurance are key to a solution here - and I'm a littled puzzled over the absence of CDSs from the plan.

cYp
[SIZE=1]* well Goldman did see it, but there's a book in that story[/SIZE]

[youngdan]

I thought alright that it was CDSs that you meant to say. CDSs are not in this bailout as they have their own bailout. AIG has gotten 3 or 4 chunks of money now totalling something like 170 billion. This money went straight to the counterparties.

Then you had the 138 billion JPM gave to Lehman so that Lehman could give it to JPM with the knowledge by JPM that the Fed would reinburse JPM because the ceo of JPM sat with Geithner on the board of the NY Fed.

Lehman's Bankruptcy and the Hidden $138 Billion Bailout of JP Morgan :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website

This slight of hand was discussed on the iseq thread at the time