TheSphinx 2.0
03-23-2009, 09:13 PM
This "new" plan seems to be a psuedo rehash of the Bush/Paulson plan. The gist of it is that the government (i.e. taxpayer) will buy up bad debt from the banks. However instead of the taxpayer getting 100% of the upside if it works (like under the Bush/Paulson plan) and 100% of the loss if it doesn't this time they get 100% of the loss and a lot less of the upside (I don't know the exact percentage but it is mush lower than 100%).
Here is how it works in simple terms. Lets say there are $100 in bad assets. The government (i.e. the taxpayer) will loan the same evil "Wall Street" firms that supposedely are at the heart of all this mess $85 to buy them. The evil, greedy Wall Street theives will then put up $15 and buy the bad assets using the $85 the were loaned by the government and $15 of their capital. The government (i.e. taxpayers) will get a very low interest rate for the loan (probably 1% - 2%). The government loans are non-recouse (meaning if it all goes bad the Wall Street firm can just say "too bad" and walk away).
If the loans go bad the wall street firm does not owe the government back the money. If the loans do well the tax payer get a %tage of the upside (this is where I am less clear).
So lets say today I buy $100 of bad assets using $15 of my own money and $85 of the government's money. In a month I realize that the assets are only worth $50. I can sell the asset for $50 take my $15 back and only give the government $35. I basically lose no money and the taxpayer loses $50.
If on the other hand I find out a month later that I can sell the asset for $150 then I pay the government back it $85 I give myeslf back my $15 and there there is some split of the last $50. I am not sure what the split is but even if it is 50/50 then the government is taking 85% of the risk (actually closer to 100% of the risk in practical terms) and at best 50% of the upside and Wall Street is basically getting free money because they are getting some upside but will never let the loan go to less than $15 before they sell it
In essense this is another massive giveaway to that evil "Wall Street". (Oh yeah and there is no exec comp restriction on it as well). So for all of you guys who are complaining about bailing out the banks you just did it again.
Once again we are basically being used as the "airbag" of the financial markets. If it crashes we take the impact first. If things go well we become an afterthought. The same firms that did the bad lending and that bought the bad assets in the first place get to now make money off of them on the back end. Our job in this is solely to make sure Wall Street continues to make money.
I think the plan is incredibly short-sighted as there is no back market for these securities. Meaning after I buy it with the benefit of tons of free government money who am I going to sell it to. If you don't have the free government money you are not going to buy it at anywhere near what I bought it for because you actually have risk involved. So basically we are artificially inflating the value of assets with free government money that can't be duplicated after the frist sale. The plan is basically a way to get the loans off the books of the banks and levels that allow the bank to remain a going concern even if it is higher than the market price. If that is the case (and it is) and the goverment is taking all the risk why not just nationalize the banks and get all the upside as well.
For all the demonizing of Wall Street and lavish exec packages this seems to me an extremely Wall Street friendly plan. Basically it can be boiled down to: Taxpayer take all the risk and get only a portion of the gain.
-TS
Once I find out what the actual split on the upside is I will get back to you guys...
Here is how it works in simple terms. Lets say there are $100 in bad assets. The government (i.e. the taxpayer) will loan the same evil "Wall Street" firms that supposedely are at the heart of all this mess $85 to buy them. The evil, greedy Wall Street theives will then put up $15 and buy the bad assets using the $85 the were loaned by the government and $15 of their capital. The government (i.e. taxpayers) will get a very low interest rate for the loan (probably 1% - 2%). The government loans are non-recouse (meaning if it all goes bad the Wall Street firm can just say "too bad" and walk away).
If the loans go bad the wall street firm does not owe the government back the money. If the loans do well the tax payer get a %tage of the upside (this is where I am less clear).
So lets say today I buy $100 of bad assets using $15 of my own money and $85 of the government's money. In a month I realize that the assets are only worth $50. I can sell the asset for $50 take my $15 back and only give the government $35. I basically lose no money and the taxpayer loses $50.
If on the other hand I find out a month later that I can sell the asset for $150 then I pay the government back it $85 I give myeslf back my $15 and there there is some split of the last $50. I am not sure what the split is but even if it is 50/50 then the government is taking 85% of the risk (actually closer to 100% of the risk in practical terms) and at best 50% of the upside and Wall Street is basically getting free money because they are getting some upside but will never let the loan go to less than $15 before they sell it
In essense this is another massive giveaway to that evil "Wall Street". (Oh yeah and there is no exec comp restriction on it as well). So for all of you guys who are complaining about bailing out the banks you just did it again.
Once again we are basically being used as the "airbag" of the financial markets. If it crashes we take the impact first. If things go well we become an afterthought. The same firms that did the bad lending and that bought the bad assets in the first place get to now make money off of them on the back end. Our job in this is solely to make sure Wall Street continues to make money.
I think the plan is incredibly short-sighted as there is no back market for these securities. Meaning after I buy it with the benefit of tons of free government money who am I going to sell it to. If you don't have the free government money you are not going to buy it at anywhere near what I bought it for because you actually have risk involved. So basically we are artificially inflating the value of assets with free government money that can't be duplicated after the frist sale. The plan is basically a way to get the loans off the books of the banks and levels that allow the bank to remain a going concern even if it is higher than the market price. If that is the case (and it is) and the goverment is taking all the risk why not just nationalize the banks and get all the upside as well.
For all the demonizing of Wall Street and lavish exec packages this seems to me an extremely Wall Street friendly plan. Basically it can be boiled down to: Taxpayer take all the risk and get only a portion of the gain.
-TS
Once I find out what the actual split on the upside is I will get back to you guys...