Here's a Wall Street type explaining in plain English how the Geithner system works. This is the first few paragraphs from David R. Kotok's explanation. If you read the whole thing, you will arrive at Kotok's assessment of Geither's plan: "As a private citizen concerned about my country and its policy direction, I think this reeks and stinks."
Dear Reader: Please give me 8 minutes to explain the $1.1 trillion federal government Public-Private Investment Program (PPIP).Read the whole thing.
Start here with this simple example. It’s a coin toss. Heads you win $100; tails you get nothing. How much would you pay to play? You can play as many times as you wish. Answer: not more that $50. For less than $50, you would play as often as you can. $50 is your breakeven; only a fool would pay more.
Now add Tim Geithner as your partner. He matches what you invest but you, and only you, get to set the price to play. Answer: you put up no more than $25 as the investor and that means he matches your number. At under $25 you play as much as you can. $25 is your breakeven as the investor; $50 is still the breakeven for the coin flip.
Now let’s add some of the leverage from the FDIC. ...
2 comments:
Is this the 1.1 trillion US dollars that has been spent in silence while everyone was raging about the AIG millions? Or is this just a proposal so far?
Thanks,
Elli
This is a new commitment. The PPIP is the Geithner "bank plan". So this is money beyond the TARP, beyond the stimulus bill, beyond the previous commitments by the Federal Reserve.
On the other hand, the $1.1 trillion is the total of government plus private money (and still a bit of a guess since the government hasn't given details of the program).
Private money is to make up something like 8% of the total, so this leaves around $1 trillion of taxpayer money being committed under this plan. (Private money is 8%, government matches as an "investor" at 8%, and the government "loans" up to 6 times or the other 84%. This 84% is "non-recourse" loans, i.e. the private person can walk away and not repay the loan!)
Those who favour this plan point out it isn't an "expense", it is an "investment", i.e. there is a chance that it isn't all thrown away. Depending on who you read, it will make money, break even, lose, or lose badly. My guess is that it is somewhere between lose and lose badly. I think the fair market value for the toxic assets is really down around 30 to 40 cents on the dollar. This plan is a way to sell them at 80 to 90 cents on the dollar. The difference is probably the loss that the US government will swallow as their effort to stabilize and re-capitalize the banks.
The PPIP was announced on March 23 and the details have not all been spelled out. Try looking at this: NY Times article
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