Monday, March 23, 2009

Poker For Profit

The reviews are in and Treasury Secretary Geithner's newest plan to rescue the economy has been met with near universal disdain. The political left would rather see the banks nationalized, and object to the public/private aspect of the plan. The political right can't be in favor since, well, it's not their plan. It's essentially the same plan we had, but now that the other side is in charge, and have changed its name from TARP to TALF, we're against it. For a more non-ideological pedestrian view, we need to turn to the capitalists.

Tyler Durden writing for Seeking Alpha lays out the case in 8 logical steps. Better yet, in the comments section he gives insight into the mind of a true capitalist. The "non-recourse nature" he speaks of means that once the public/private entity buys an asset from a bank, the private investor has control of the asset.

Posted by Tyler Durden at 2:14 AM
The greatest bait and switch of this generation in all its visual splendor. As a result of the TALF's non-recourse nature, a hedge fund X can buy Bank X's MBS Portfolio which is marked on the bank's books at 80 cents on the dollar (but has a market price of 20 cents) for the marked price with a 3% equity check and TALF filling the balance. A day later, Bank X repurchases the portfolio from hedge fund X at the 20 cent market price, pays a $5 million fee for the "trouble" and waits for the portfolio to appreciate to 50 cents on the dollar by 2014. Hedge fund X takes a 75% loss on its nominal equity stake but more than makes up in transaction fees. The TALF portion takes a 75% loss with no recourse and no margin to fall back on.

As a result Bank X takes no writedown now, and in 5 years may book an equity profit of as much as $25 million (net of transaction fees paid to the Hedge Fund X), while Hedge Fund X books a profit of $3.2 million for one day's work...

Lastly the U.S. taxpayer loses $54.3 million on a $77.6 million TALF Investment, or 70% (net of 5 years of interest income).

Note: the maximum TALF size is $1 trillion. Will U.S. taxpayers suffer $700 billion in losses from the TALF? Ask your congressman.

And if you want to know why government intervention never works as advertised, or how the rich get richer, ask someone who stays up 'til 2 in the morning figuring out how to make $3 million a day.

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