> The Treasury will match the equity the private hedge
> funds put in dollar for dollar. And all leveraging is
> applied will apply to both equity returns proportionately.
> So whatever upside they make, we'll make.
Well, not exactly. In the example they give (6:1 debt-to-equity, $84 auction price), each of Treasury and the private investors contributes $6 and the PPIF (nee FDIC) issues (and guarantees) debt of the remaining $72. If the final value winds up being, say, $90, then PPIF gets their $72 back, and each of Treasury and private investor get $9.
This is a 50% return for the private investor (9/6 - 1); it's a 3% return for the US government (81/78 - 1). If it winds up being $72, the private investor takes a $6 loss; the USG takes a $78 loss. If it winds up being $50, the private investor takes a $6 loss ... The USG takes a $30 loss. If by some crazy chance it all pays off $100, the private investor makes a 133% gain (14/6 -1) and the USG makes about a 10% return ...
So the leverage is significant here. All that being said, I still don't think it's a terrible plan.
> The private investors will have an incentive to bid as low
> as possible to make the most amount of money, and we'll make
> the same.
Sorta. I presume that the *high* bidder will win, but I haven't seen details of the auction yet.
/jordan