How the Toxic Asset Plan Will Magically Make Your Money Disappear
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 ...
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It is much worse. Tim Geithner has decided to allow his banks to bid for the assets as well. Gone is the last pretense of creating "independent pricing". The troubled banks THEMSELVES can now bid $100 for the toxic securities while risking 7.5% and leaving the rest to the taxpayer. If they all do it (do you think these people are above colluding?) they will all MAKE money in the process.
Who knows, maybe Geithner has his eye on Bob Rubin's old job...at Citigroup.
If we divided 2 trillion dollars, however much that is, into the adults 18 to 88, paid them the amount it comes to, whatever that is, wouldn't we all be better off? Those with toxic debts could repay their mortgages! Now wouldn't that be something?
The Government is taking our tax dollars/po
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.
Oh, I'm quite sure we're all being screwed to the wall and with no jobs on the foreseeable horizon either. We've been looted.
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..
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...
http://www
"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-Bern
But they didn't make that clear, else it would appear hypocrisy, or favorable to the biggest campaign contributors.
What a silly, uninformed post. Doesn't anybody understand anything? The bank wasn't "nationalized" at all. The State Bank Commissioner, by Order of the Banking Board of the Colorado Division of Banking closed the bank and turned its operation over to the FDIC, which will pay off the depositors, etc and then close it down for good in 30 days . Do you understand that in the overwhelming number of instances the FDIC already has the bank sold to new owners before it closes it down? They have a list of investors (usually other "healthy" banks) they contact and arrange the sale. Then they go into the bank on Friday at closing time, seize it and turn it over to the new owners. The bank then reopens Saturday morning under new ownership. It's surgical. In this case, New Frontier Bank was such a POS nobody wanted it. Ouch.
"What a silly, uninformed post. "
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.
The Wall street terrorists have stolen everything you own, owned, or will own America.
Welcome to Fantasy Land, USA!
Mayor: Tim Geitner
The following HuffPost article does a good job of explaining the PPIP using a poker-based analogy.
http://www
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.
So, if the plan WORKS we'll all be better off? Ahhhhh, such insight. Thank you sooooo much.
the wall street shiesters who just rifled through your pockets, are now writing checks to themselves and you are giggling like a french school boy...
best way to handle this mess is expose the banks, and take the insolvent ones in receiversh
Now, now ... put the pitchforks down and snuff the torches. I've never seen the MSM get this story straight, and now this article perpetuates the myth. All the numbers are fine but he makes the same mistake everyone (other than some rather well written economics blogs) does. The money he refers to is coming from the FDIC, as he correctly states....
Cenk. Pay attention to this one. He's right. You're not.
maybe we need to check this... fdic has a reserve up to like 55billion or so... thats just like a drop in the bucket...
I assume you mean the banks who have hundreds of billions of taxpayer money to pay these premiums with.
I'm not sure I'm following you correctly. What does the FDIC have to do with the bank bailout monies? The FDIC isn't responsible for anything other than insuring consumer deposits up to, now, 250,000 USD. The FDIC isn't injecting any capital into the banks. The TREASURY is and as you state, that is OUR money.
The US governmnet is the Taxpayers?
The US governmnet SHOULD follow the will of the people.
If the US government did that all the time, we would still have slavery.
Without the Bill of Rights.
ya can't blame the snake oil salesmen if the rubes insist on buying snake oil and there still seems to be a healthy number of rubes left.
I understand this example, and I think it's great. It was great when Krugman used a similar example on his blog as well. I appreciate the scaled down version so the rest of us can understand these huge economic games. I must mention, I am a liberal--a liberal's liberal even. But I get so annoyed with liberals regarding certain issues and this is one of them. We liberals are absolutely fine with spending billions of tax payer dollars for the sake of spending them. We're happy to give people money all the time if we think the cause is worthy. Socialized medicine? Sure. Public parks? Heck yeah. You name it. But when we talk about spending money to help the economy, we start getting edgy. And then if there's any chance that some fat cat might make money off the deal then by god we're not going to stand for it. Bluster and herumph! Who cares if some guy we don't like makes another 50 million? If it means progress for the economy because the over all spending of money stimulates confidence then what difference does it make? We are such an idiotic lot at times.
Camel54,
I think you mistake the vast majority of "socialist
Here's the best part. Guess where the private funds are coming from--from you. K-Street Lobbyists in conjunction with large mutual fund originators like PIMCO and LEGG-MASON are planning to create funds of securitized bank toxic assets which will then be sold to small investors (you and me). If you havw a 401 K, you may wind up owning a share of these toxic assets.
I advocate calling these new instruments BOAs, as in Bend Over America. Wow are they cleaning our clock!
Quote: "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 ..."
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)!
Another thing, the more money private "partners" offer for these "legacy" assets, the more the public has to put in. So what is to stop private investors from ponying up millions for POS assets (that, incidentally, nobody wants to touch now) just so that the government puts in even more?
http://eye
Cenk,
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.
Every single dollar that the FED prints, or is ordered to print, is worth more than a dollar to the FED and by proxy it's membership bank(sters). The US gov't, and our citizens, are in perpetual debt and we'll never escape the debt for as long as the FED and it's private memberships exist. So, not only are we throwing our tax dollars into this mess, we are deepening our sea of debt to the FED and it's member bank(sters). It's a massive racket.
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