Geithnerâ€™s Bank Plan Made Simple: Probably a Rip-Off
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The heart of the issue remains pricing. No matter how they structure the financing of any plan to buy up all those â€œtoxic securitiesâ€ on the books of a few big financial institutions â€” and clearly theyâ€™re trying to use as little tax-payer cash up front as possible â€” theyâ€™re still protecting investors against losses that are likely inevitable. Or, at the very least, theyâ€™re taking on a lot of risk -- on behalf of you and I and the tax-payers we know -- in order to protect investors from the potential for steep losses.
The nub of it is this, via the WaPo:
The program provides capital for new investment funds, matched with by private investors such as hedge funds. The Federal Deposit Insurance Corp. will guarantee debt issued by those private funds, meaning that lenders probably would view them to be as nearly as safe as lending to the U.S. government.
It works like this, according to a Treasury Department fact sheet: Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
OK, so the treasury and private investors are in for a 50-50 split up front, an they share in the eventual profits if the underlying assets regain value and the loans are repaid or losses if they continue to go South. They're trying to create a market for a "shitpile" nobody wants to buy without protection. So far, so good.
Joshua Holland is an editor and senior writer at AlterNet.