Monumental Scam

The Geithner plan:

Yesterday I wrote about the outrageous bank bailout plan that Treasury Secretary Tim Geithner will propose to Congress. As the details of the plan continue to be analyzed by folks that enjoy dissecting legislation like this it is becoming more evident that taxpayers are going to pay a heavy price for the Obama administration's scheme.

In pushing their proposal, the Obama administration is anticipating that voter's eyes will glaze over as they attempt to wade through the arcane financial language in the legislation. Fortunately the blogosphere is providing some clarity on this important policy by reducing the complex proposals to a style Hemingway (and the rest of us) would appreciate.

Tyler Durden, the pseudonymous blogger at Zero Hedge, has broken down the public/private component of Geithner's plan and revealed it to be something everyone can recognize: a bait and switch game.

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...

In short, just one aspect of the Obama/Geithner plan may cost taxpayers over $700 billion dollars, not counting the eventual cost of the moral hazard this policy will create by allowing the banks and funds (and their stockholders and bondholders) to remain out of bankruptcy or receivership. By giving these parties a free pass on the ugly consequences of their actions the administration (and Congress, if they allow it) is almost guaranteeing that this mistake will be repeated. As I have noted before, and as the linked article makes clear, hedge funds that overwhelmingly supported Democrats and Barrack Obama in 2008 are going to make a killing on this administration's proposal. It is without question the Greatest Heist in History.