How to get even richer gaming the Obama/Geithner Plan

[Voegelin]

Or why the plan is a bad idea.
by me

First Paul Krugman on how the plan will apparently work:

. . .the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets . . .more

Investors need to put up only 3% to buy in (it might be 5% but let's suppose 3%).

Important to note these are non-recourse loans. The deal goes sour, all the investor can lose is 3%. Taxpayers pick up the rest.

So...lets begin on how to get richer than we already are.

A bank has $200 million of toxic paper on its books.

Banker calls a friend and says..."$100 million of that is worthless. Absolute junk. Do me a favor and buy it".

His friend says "sure pal" pays $3 million and paper is junk as he was told. The friend takes a nice tax deduction and walks away. Taxpayers are on the hook for $97 million.

Bank just wiped $100 million of debt off its books for nothing.

But of course the friend wants something in return. He wants a taste of the good stuff. The $100 million of paper that is producing income.

The friend and the banker have discussed that.

The friend pays $3 million for $100 million of the good stuff with the agreement he sell it back to the banker for $30 million after he's made $25 for himself. Held a while, the paper is worth $100 million maybe more.

Bank does great. Friend does great. Taxpayers once again are on the hook.