>> Consider a toxic asset held by Citibank with a face value
>> of $1 million, but with zero probability of any payout and
>> therefore with a zero market value.
>>
>> Suppose, however, that Citibank itself sets up a Citibank
>> Public-Private Investment Fund (CPPIF) under the Geithner-Summers
>> plan. The CPPIF will bid the full face value of $1 million for
>> the worthless asset, because it can borrow $850K from the FDIC,
>> and get $75K from the Treasury, to make the purchase! Citibank
>> will only have to put in $75K of the total.
Note that Citibank "put in" $1M in the first place ...
>> Citibank thereby receives $1 million for the worthless asset,
>> while the CPPIF ends up with an utterly worthless asset against
>> $850K in debt to the FDIC. The CPPIF therefore quietly declares
>> bankruptcy, while Citibank walks away with a cool $1 million.
>> Citibank's net profit on the transaction is $925K (remember that
>> the bank invested $75K in the CPPIF) and the taxpayers lose
>> $925K.
No, Citibank's "net profit" is a loss of $75K.
It's true that the government spends $925K, but it's not being paid as a profit to Citi: it's going to whoever took out the loan in the first place who isn't going to pay it off. And let's not forget that the vast majority of the assets we're talking about aren't worth $0 ...
/jordan