Under the Treasury Department's toxic asset proposal, the government puts in 85% of the investment in these assets through a loan given by the FDIC. The Treasury puts in another 7.5% of the money and the private investor contributes the final 7.5%
This is a guaranteed way of transferring money from the American taxpayer to the private investors. Let me show you how.
Let's take two assets that the government and investors buy together, both at the purchase price of $100 million. Now, assume that one investment does great and goes up by 50% (to $150 million) and the other one does poorly and goes down by 50% (to $50 million).
Well, the combined assets would still be worth $200 million, so the investors and the government should be exactly where they started, right? Nope. Look at the financial magic in this plan that makes the money disappear from the taxpayer and appear in the private investor's pocket.
In the investment that went down, since the private investor is part of the original 15% deposit, he actually gets wiped out when the loan cannot be paid back. That's really bad for the investor and he has lost his whole $7.5 million. This is the risk that Geithner is talking about to the private investor.
The government on the other hand does not lose all of their money. They had put in $92.5 million, but now that's down to $50 million, so they lose $42.5 million. Unlike the private investor, they got something back. But they lost a lot more money.
Now, when you look at the investment that went up in value, the government has done well. They get 50% of the profits because they put in 50% of the deposit (the loan from the FDIC does not count toward divvying up the profit from these assets). So, the asset went up $50 million and the government gets $25 million in their pocket.
But when you look at the private investor he has done even better. He gets the same $25 million for his 50%, except he only put in $7.5 million to begin with. Why does that matter? Because when you add up the profits and losses for both investments, something funny and tragic happens.
The private investor put in an initial $15 million in to the two assets. He lost $7.5 million in one and wound up with $32.5 million in the other (profit plus initial investment). So, he's at $17.5 million profit overall.
The government on the other hand put in a combined $185 million into the two assets. They lost $42.5 million in one of them and made $25 million in another. Will you look at that? The government lost $17.5 million from the same exact investments with the same exact results. The $17.5 million magically got transferred from the government to the private investors.
Well, that's the magic of leverage. If you put in the great bulk of the money, you take the great bulk of the risk. If I put in a small amount of money but share equally in the rewards, then I make money while you lose money.
Oh, one final thing. Do you know who the government is? That's us. The American taxpayer. This will literally be coming out of the taxes you pay on the money you work so hard for. This toxic asset plan will pick your pocket to pay off some of the richest people in America. If you think that makes sense, then you deserve to have your pocket picked. What's that about a fool and his money ...
Who knows, maybe Geithner has his eye on Bob Rubin's old job...at Citigroup.
The Government is taking our tax dollars/pounds/euros, giving them to a bunch of bankrupt bankers, who skim off billions in bonuses and they then lend our money back to us and charge us interest for the privelidge?
Am I missing something here?
If it was any more ludicrous, I'd be laughing, not crying.
Just how did we let these bankers/brokers steal our economy, not once, but twice?
Take back your money, you will make better use of it than any politician or banker.
Stop paying taxes to any government that wants to bail out the 'too big to fail' banks.
They are all crooks in cahoots with each other.
Give us back OUR money and we will spend it where we want to!
Say NO to any bailouts!!!!!!
Banks, go collapse and see how many real citizens give a flying fiddle!
The return to common sense begins with us, the people. Get out and lobby, write, campaign, tell Obama, your'e a good guy, but you're wrong. Don't listen to your 'advisors', (these people, or people like them, got us in this doodoo in the first place) listen to Michelle!
T Jefferson wrote:
Never spend your money before you have earned it.
My personal bank is acting like any $$$ I deposit belongs to them. I tried to get some out of their ATM today and couldn't......they were closed ( which is a new development on a Saturday morning. So, I went to another bank's ATM and THEY wouldn't give me any $$ either. I begin to wonder if this is the new "policy" to help keep $$ out of the hands of the people? It sure wasn't like this last year.
As Jerry Falwell used to say "Cash will be the Mark of the Devil". I don't mind some horns if I can just eat...
"Regulators Close Colorado Bank - New Frontier In Greeley Shut Down; 23rd U.S. Bank To Be Taken Over By Feds This Year"
Yet another "nationalization" despite Obama-Bernanke-Geithner saying "no nationalization" --- when it applies to the most politically connected, derivative laden, CDO writing, friends of the treasury, Morgan, Goldman, etc.
But they didn't make that clear, else it would appear hypocrisy, or favorable to the biggest campaign contributors.
You are perfectly reasonable, except for your criticism of me.
I agree with you, but I am talking about Team Obama's use of the word "nationalisation" to label exactly what you describe.
Mayor: Tim Geitner
http://www.huffingtonpost.com/2009/03/30/economists-laid-end-to-en_n_181031.html
I also do some more explaining at my Texas Holdem Investing blog.
However, as I mentioned on other HuffPost article a straight analysis of the PPIP doesn't fully examine the potential taxpayer benefits.
The Treasury is looking at all methods to reflate the economy. This is potentially one way to do it (if it is good enough for Brad DeLong and Nouriel Roubini then it has to have something going for it!).
If it works, then the economy will recovery and all taxpayers (and non-taxpayers) will benefit from a healthy economy i.e. more jobs, less bankruptcys. If you figured this into the equation it would actually increase the reward to the taxpayer if things go well, and so reduce the skewed element of the pure financial analysis. The benefit of a better economy probably won't be as relevant to the potential investors in this plan because they're probably already quite wealthy if they're able to participate.
best way to handle this mess is expose the banks, and take the insolvent ones in receivership... its the law...
The US governmnet SHOULD follow the will of the people.
I think you mistake the vast majority of "socialists." They are not against someone coming into 50 million honestly. What they object to is unnecessarily bailing out the kleptocratic Wall Street fat cats. To fully understand their objection you need to understand some facts. The large investment banks (and AIG) were "captured" by their own officers some years ago, to the detriment of their stockholders. They appointed their own directors, which meant they could construct their own compensation packages. With so much money and power they proceeded to "capture" the US government through billions in campaign contributions, which allowed for the final deregulatory push, which resulted in trillions of dollars in totally unregulated credit default swaps. When their bets turned against them, their companies collapsed and the too big to fail syndrome forced taxpayers to save capitalism from its own inherent greediness. AND what do the working stiffs get for this? Better schools? Jobs? Security? Health care? No, they get to save the very capitalist system that broke the bank. The money should have been spent to lower mortgages for the working class, not to save the rich class.
I advocate calling these new instruments BOAs, as in Bend Over America. Wow are they cleaning our clock!
Why is this Happening?
Because Right NOW Wall Street OWNS our Government Paying:
1. Average of $7.5 Million to each Senator every 4 years!
2. Average of $1.86 Million to each House Member every 4 years! Some get over $3 Million!
REF0RM Political Contributions! - A Clearing House that equitably distributes all Funds BLINDLY. Politicians don't have to sell their V0TES for M0ney!
______________________________________
WALL STREET = $TRILLION FROM GOVERNMENT = TREASURY+FED = NO LENDING
MAIN STREET = LOST PRODUCTIVITY = NO LENDING from WALL STREET BANKS
MAIN STREET = GOVERNMENT CREDIT FLOWS OPENED = FAIR LOW RATES and FEES = MAIN STREET PROSPERITY
_____________________________________________
1980 WS Executives made _20 times the average Worker
2008 WS Executives made 400 times the average Worker
NOW Canada Executive make 20 times average Worker
NOW Britain Executives make 22 times average Worker
NOW Japan Executives make 11 times average Worker
300% Increase in Pay for Top 1% from 1980 to 2008!
20% Decrease in Pay for Other 99% from 1980 to 2008!
1980 Banking was 10% of Profits
2007 Banking was 40% of Profits
Shrink Banking back to SUPPORT ROLE in Our Society in 1980 of 10% (deleting 75% of its corruption)!
http://eye-on-washington.blogspot.com/
Would I be amiss if I mentioned the 'Fed' loans these billions to the government normally with 2% interest? The last I heard on that detail the 'Fed' had agreed to 1%. So aren't we paying 1-2% more than the sums being revealed? Also why can't all homeowners refi at say what the 'Fed' charges the Treasury? My rational is that if the Treasury didn't borrow it from the 'Fed', but rather let Congress tell them to mint it there wouldn't be that interest?
By the way I bought my house in '93 and there are no liens except original mortgage. Sure, it was part investment for retirement, yet these newer mortgages were at 35% of income or more for mortgage and escrow. Mines no where near even 28%. And, really, people should read up on real estate anywhere new info is for a year before sticking their future in the hands of shady characters esp. w/o lawyers.