re: above, I was referring to “Derivatives” in specific, though, the whole de-reg craze was, actually, started under J.E. Carter Jr., aka #39..

it was, indeed, ol’ Claytie, in his run against Ann Richards–who, at the time was so far back in the pools, people thought she was running for Mayor of Austin..

The public puts up the capital and cheap financing. Another trillion dollars? What is the private contribution or their downside? Profits are implied but not guaranteed and how are they “shared”? Better yet, who is in charge of this oversight? These are indeed historical moments, as we watch our government continue to devalue this country.

I am capturing for my files, that SAC scenario you played. This stuff is … simplification needed.

I copied the line above to point as I see it .. nationalized = propped up .. not nationalized in the strict definition …. and “fiction” is a false injection because they are still “functioning private concerns”

I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

It’s just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You’ve also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.

Folks, this IS even worse than I thought, and you know I have a constitutional predisposition to take a dim view of things (although it was clear from the get-go that the introduction of private parties to give air cover to the Treasury would make the exercise more costly without adding any value).

I suggest you write/e-mail your Congressmen, and more important, any of you who have MSM media contacts, call this to their attention. There will no doubt be useful further grist on this thread and onthe post on which this comment first appeared. But the analysis above is damning on its face. I’d like to have someone have Geithner try to explain why it WON”T work like that, and how this abortionsolution is in our collective best interest.

AIG bonuses are a sideshow (as offensive as they are, don’t get me wrong on that one, the symbolism is awful). It is diverting attention from the real crimes and serving to get nay-sayers branded as populists, which is code for “jealous of their betters”.

But this sort of thing in reality, as Paul Krugman points out today, is not a class issue (otherwise, why would the member of SAC Capital be so appalled) but a recognition that the program is so heinous that it represents a fundamental danger to an already damaged economy:

… that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Krugman’s comparison to the S&L crisis is actually too favorable. The losses then were only $100-$120 billion in total. The damage (as in losses to the taxpayer) on this one program are almost certain to be greater if the Administration gets its hoped-for take-up.

Now that level of loss (ex the unnecessary subsidy) might well be warranted IF it were putting the markets on a sound footing, by providing a backstop while investors did price discovery on bad assets. Price discovery is a necessary part of this process. One could argue the reason the offer in the illustration above is $80 million and the bid is only $30 is that no one is interested in bidding when the sellers aren’t serious. If the banks really were to start unloading assets, the initial buyers would get a steal, but more capital would come forward. You might not see bids rising to the “fullness of time” $50 million level, but you would see bidding rise above the current level.

With price discovery (or the equivalent via more realistic marking of their books), some banks would be toast and need to be put in a form of receivership. But pretending these banks are viable, keeping the incumbents in place (who have incentives to take risk with taxpayer money, if nothing else so they can try to show profits and slip the leash) is the worst of all worlds. Some of the big banks already have been nationalized from an economic perspective, yet we keep alive the dangerous and costly fiction that they are functioning, private concerns. The Japanese did a variant of this program via letting zombie banks grossly overvalue dead loans, and look how well it served them.

There may also be a Constitutional issue, as another reader alleged:

Geithner/Summers are willfully evading Congressional oversight. After the Tequila/Mexico financial crisis, the banks wanted 20 billion and Congress wouldn’t give it, so Summers/Geithner under Clinton evaded that buy misusing the government’s ESF, argually illegally. Now, given that Congress doesn’t want to authorize more money, Summers/Geithner are trying to misuse Fed/ DIC authority to hand out cash. This is illegal because the FDIC and Fed are authorized to lend, but not to hand out gifts/grants. Lending non-recourse undercollateralized is a gift/grant.

I know we are all suffering from outrage fatigue, but this is a worthy target for your ire. I hope you find a productive outlet for it.

Which is so ironic since he actually stepped in and saved Harley Davidson from the japs dumping their bikes here.
Anything over 750cc was slapped with an import tax.
He gave Willy G the cash to reorganize and held off the japs till the big V-Twin could compete.

Strange times my friend.