On Apr 6, 2009, at 6:29 PM, Jordan Hayes wrote:
> There's someting wrong with the math here:
No there isn't.
>>> 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 ...
No it didn't. The CPPIF paid $1 million. It got the million from US
Treasury (75, capital), Citi (75, capital), and FDIC (850, nonrecourse
loan)
>>> 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.
Loss on the *original*, now worthless, loan--for which $1 million has
now been paid by the CPPIF. Without the CPPIF the net loss would be
$1 million, now its $75K. Foregone loss is the same as net profit.
> 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.
It went to them long ago. Now its gone. Nothing now is going to them.
> And let's not forget that the vast majority of the assets we're
> talking about aren't worth $0 ...
But even that fraction of the total ain't worth nearly as much as
Obama proposes to pay for it.
Shane Mage
> This cosmos did none of gods or men make, but it
> always was and is and shall be: an everlasting fire,
> kindling in measures and going out in measures."
>
> Herakleitos of Ephesos