From this story:
To entice private investors like hedge funds and private equity
firms to take part, the F.D.I.C. will provide nonrecourse loans – that
is, loans that are secured only by the value of the mortgage assets
being bought – worth up to 85 percent of the value of a portfolio of
troubled assets.
The remaining 15 percent will come from the
government and the private investors. The Treasury would put up as much
as 80 percent of that, while private investors would put up as little
as 20 percent of the money, according to industry officials. Private
investors, then, would be contributing as little as 3 percent of the
equity, and the government as much as 97 percent.
Why did you think they were typos? I don’t see how anyone who has been alive the last six monthis could have expected anything else.
The federal govt has the power to set prices for anything in the economy. It is one of the features of fiat currency.
… and quickly the “lender of last resort” becomes the lender of first resort. Welcome to the new socialism, its the US is turning into a banana republic.
To make it worse, the idiots will handcuff the domestic drilling, mining,logging,fishing, and solar power industry.
Bring manufacturing back home and we can work our way out of the jam…it won’t happen because the DemocRATS aim to destroy our country.
The risks of dealing with the fdic and the treasury department are too great even at these prices. A positive return from the investment could cause negative publicity, threats, additional taxes, and unknown future regulatory requirements. Plus, one would need additional resources and personnel to deal with all the future government requests and unpredictable effects of partnering with the government.
Does anybody remember that the last people who brought in 3% equity partners to take control of an off-balance sheet hedge fund in a no-loss deal designed solely to absorb toxic assets at inflated prices, were sent to jail by the government for misleading the public? Their names were Andrew Fastow, Jeffrey Skilling and a raft of other managers, at Enron.
The goal of their off balance sheet partnerships was to conceal where and when the real losses had occurred and thus who was responsible for them, until some later date when they could either be transferred back onto the public (Enron’s shareholders) in a way they would not notice, or at least after the Enron managers had a chance to unload their shares.
Now we have a virtually identical scheme, but this time it’s being promoted jointly by the banks and the US Treasury. Once again the effort is to construct a vehicle into which toxic assets can be transferred at inflated prices, positioning the public to take the losses while disguising them in the short term, and giving the managers of our biggest banks a chance to both profit now and then sell out ahead of the public.
Perhaps Lay, Skilling and Fastow should be hailed as innovators in the field of public finance.
I’m with IWantCookieNow — I want in on this deal. How much do I have to have (and whom do I have to know?) before the government is willing to deal with me?
Bad plan. Really bad plan.
Say what you want about structured finance and market efficiency, but if you apply it to EXISTING assets, it’s a zero sum game. It does nothing to change the underlying cash flows. It does not create value.
If you assume the treasury is backing the banks, which you have to given the ‘No more Lehmans’ philosophy, this is a game between the banks and the treasury.
If you let another party in and you give them a bet where it is very likely that they make money, they are therefore very likely removing money from the other two parties.
This is simple arithmetic.
In other news . . .from March 17, 09 WaPo
The Obama administration yesterday unveiled a series of measures to help the nation’s small businesses, saying it would spend up to $15 billion to help them get the loans they need to weather the economic crisis†¦.
Treasury Secretary Timothy F. Geithner yesterday admonished the nation’s largest banks for withholding loans to many small businesses, telling the banks that they helped create the current mess and “bear a special responsibility for helping America get out of it† by increasing the flow of credit, especially since they have benefited from massive federal bailouts. He said the administration will now require the country’s top 21 banks receiving federal assistance to include small-business loans in their monthly reports.
“We need you to put that assistance to work for the American economy,† Geithner said at the White House. “Many banks in this country took too much risk, but the risk now to the economy is that you will take too little risk.†
To paraphrase Mr. Geithner . . .”You helped get us into this mess by giving out risky loans (with a wink and mighty nudge from us). We demand that you help us get out of it by giving out . . .risky loans.” No, wait . . . what?
I don’t understand how the article can claim that up to 97% of the “equity” could come from the government. Since the FDIC money is in the form of loans, it isn’t equity and should not be treated as such.
If the purchased securities shoot up in value way past anyone’s expectations, the government captures part of that value increase only through the Treasury money. The FDIC loans get paid back at whatever interest rates the hedge funds agreed to. Right?
This means that the leverage for hedge funds is really “only” 6.6-fold or so, not 30-fold.
The only way the NYT article makes any sense is if the interest the FDIC is charging on the loans to hedge funds is somehow tied to the market price of the securities in question, which I doubt.
How about 97% of potential losses could be borne by the government – does that sound better. Look, you throw in $3, the FDIC covers you for $85, and the Treasury or Fed kicks in the other $12. Ok, so it’s not 30:1 – it’s only 88:3.
Wait, so the loan would not go to the combined “partnership” of {hedge fund + Treasury}, but just to the hedge fund? In that case, which in retrospect seems more likely, you’re right.
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