Geithner’s Bank Plan Made Simple: Probably a Rip-Off

The heart of the issue remains pricing. No matter how they structure the financing of any plan to buy up all those “toxic securities” on the books of a few big financial institutions — and clearly they’re trying to use as little tax-payer cash up front as possible — they’re still protecting investors against losses that are likely inevitable. Or, at the very least, they’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.