Since Obama and Timmah Geithner have a new new bank bailout plan, which is secrelty justt he original Paulson plan from last fall just with a new name, I am all ears. Not just ears to learn about it to make fun of it, but to take advantage of it. This article spells out a view of why it will fail. I also want to point out that the debt we create to pay for these bank shenanigans is just money young people will have taken out of their future wages. The same young people that blindly supported Dear Leader Obama.
With this plan, a private firm just has to put up 7.5% of the purchase price. I'm going to start a hedge fund an call it M-squared, maybe Untz Inc, or Ow Investments. Say this $100 million MBS or CDO investments have a winning bid of $70 mil. I would only have to scrounge up $5.25 million in investing equity. The loans granted by the FDIC would be non-recourse, so if the investments go bad, we don't owe anything on them. All we need is to generate an income stream from these investments that covers the opportunity costs of the $5.25 million.
As the article states, the winner no matter what is the banking industry as they rid themselves of this crap. Potential winners/losers are the Treasury and private equity. A loser is most likely the FDIC, and since the FDIC can make up for losses in the premiums it collects from banks, I guess losers are good banks that avoided this junk. We privatize the gains and socialize the losses. Somewhere in all fo this, JP Morgan is going to end up making out big time as they wrote down their assets a ton over the last 4 quarters. They might get mark ups with this TARP 2 program.
Why would someone not try to get in on this action? Say the yield was set around 5% on that original $100 mil. You buy it for $70 mil, making the yield 7%. Still, you have an unknown chunk of that $100 mil lot that is just gone, never to return, which you could discover is more than the discount you bought the lot for. What is left that you can get your % back on? That is the great unknown. One thing to consider is that right now, government bonds, supposedly safe corporate bonds, money market assets and stocks are returning shit. Wouldn't someone want to take a chance to get 5%+ on this when the govt is bankrolling 93% of the operation? What if the govt steps up it's "mortgage enslavement act" on underwater and struggling homeowners and finagles people into staying in their homes paying you back?
Remember this is all to protect the banking interests. Protecting foreclosed families is really protectign the banks those families owe money to. These funny money solutions help banks, they do not help you. With this "change" administration being once again an admin for the banks and by the banks, I want to be a part of the inside. I want to be too big to fail.