Diary

Toxic Asset Scam. Bailed out banks will be allowed to bid on toxic assets sold by other bailed out banks. It’s The Sting III.

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Toxic Asset Scam. Bailed out banks will be allowed to bid on toxic assets sold by other bailed out banks. It’s The Sting III.

the stinge

No really – we can file this one under the category of even Hollywood can’t make this stuff up.  In The Sting part III we find Barry Obama Gondorff, brother of Henry and Fargo, setting up the taxpayers for the next sting.

The Financial Times reports that bailed out banks which are sitting on “toxic assets” will will be allowed to buy … toxic assets. From…other bailed out banks!

As it stands currently under Timmy “the Shakedown” Geithner’s new plan the banks can just unload toxic assets onto each other and the government, meaning the taxpayer, will pick up the tab for the loss.

Link to FT’s story here.

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans.

Rortybomb has a great diagram of the potential sales.

Let’s do a thought exercise. Let’s say you are a bidder for Bank A. You know your banking asset is worth $50, and you also know the asset Bank B has is worth $50. You call your buddy up, the trader at B, and make a deal. Happens all the time. You go to bid, and you bid $80 for B’s asset. Then you wait. If B doesn’t come through, you are screwed out a lot of money. And hey, isn’t this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your asset – $80 from B. You have each bid up each others assets and traded them. And now the government is screwed. Let’s chart out that payment:

toxic asset sale

Yup. Bad news. Bank A pays $6.50 for its new asset because of the leverage , and it loses all of that. It also loses the $50 from not having the asset anymore. However it gains $80, net profit – same as Bank B. The government has paid $73.50 for a $50 asset, twice.

Now you would think that those Ivy League geniuses, you know – the smartest men in the room, would think ahead and stop such Enron type transactions. But then again why waste the next potentially great crisis by limiting such purchases? Suckers.

We all need to get new bumper stickers. The new ones will say “I paid for my neighbor’s mortgage – twice.”

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