March 23, 2009
Geithner's Toxic Asset Plan: Can It Be Gamed??
I hope Geithner has stopped all the ways to game his proposal. I am not hedge fund guy, paid millions to game the markets, but I suggest the following. A hedge fund makes an investment of $7 in a bank's toxic assets and, under the program,the government matches the investment with another $7 and with a loan for $86. The fund then hedges its risk with a default swap, written by the selling bank itself perhaps for a small fee (added to the purchase price), for a $7 loss if the investment (on resale or collection) does not pay back the loan with interest and $14. The result? All upside to the fund, all downside to the government with the largely free use of government money. The incentive for the fund? Take huge risks on the worst bank assetsin order to make a killing with government money. Will the government stop the hedges? Not if it wants private money to get in the program. No wonder the financial stocks are soaring: another opportunity to play the government for a sucker.
March 23, 2009 | Permalink
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The government is always the fish at the table. Governments are truly efficient at one thing - the exercise of violence against people.
This plan is an attempt at cleverness. Having gotten away with funneling money to institutions via AIG because the average American doesn't understand the first thing about finance, it hopes for another slight of hand. The taxpayer is no less on the hook in this deal than they are if the entirety of the assets were simply held on the Fed's balance sheet. Adverse selection in the auctions will ensure that the best assets will be acquired cheaply and with a free put written by government to boot. The worst assets will be sold to hedge funds at a price that both has positive edge and no risk at all. The risk will be born entirely by taxpayers.
Of course, this is worse than if the government simply held the assets. If the government held the assets, there is hope that the better assets will at least partially offset the losses in the bad ones. In this plan, all the gains will go to hedge funds while the bill for all the losses will be sent to the taxpayer.
Posted by: Methinks | Mar 24, 2009 9:14:14 AM