March 24, 2009

Bad Banks – The Details

Posted at 11:08 AM by John Quinterno

Much ink (and type) already has been devoted to the new “Public-Private Investment Program for Legacy Assets.” As is typical, national media outlets have focused on the plan’s politics and packaging — and yesterday’s Wall Street rally — and have paid little attention to its substance.

So what exactly does the plan do?

The blog Self-Evident recently posted two nice summaries explaining the plan’s major components: the Legacy Loan Program and the Legacy Securities Program. While the programs do not provide direct subsidies to the banks, they achieve the same outcome by providing public-private partnerships with the funds needed to purchase bank assets at prices above what the market currently would pay. Private investors will need to contribute some money, but the bulk of the resources will come from the public through different mixes of “non-recourse” loans, guarantees and equity.

Under this set up, the public could potentially make money but the real winners would be the banks and private investors. Banks win if the public-private partnerships pay more for assets than they otherwise are worth (which isn’t an accidental by-product of the plan’s design; it is the point), and investors win if they are able to buy assets for less than their true worth. Any investor gains will be split with the Treasury, but losses are not really shared; the federal government will bear most of them.

The bottom line, at least according to Self-Evident, is the following:

Apparently, we are left with private equity firms and bankers being able to fleece the FDIC and the Fed via abusing the non-recourse loans, with the Treasury/taxpayer participating in the upside of the fleecing. Which is fine, I guess, if you believe the FDIC and Fed are themselves good for the losses; i.e., that the losses will not ultimately be placed on the taxpayer. Color me skeptical, especially with regard to the Fed.

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1 Comment

1 Comment Add yours »

Louis 25 Mar 2009 7:35 am

If nothing else, it appears that the more than $69 million that the finance, insurance and real-estate sector gave to Barack Obama’s presidential campaign is one investment that may pay off.

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