>> You're missing the fact that most of the purchase price is not
>> financed by those dollar-for-dollar, public-private equity
>> investments. Most of the price is financed by *non-recourse* loans
>> from the Treasury, secured by the bad assets.
>
> Not in this program. Leverage on the Legacy Loans program comes from
> debt issued by the PPIP, backed by the joint capital, guaranteed by
> the FDIC (after they they do an inspection to see how much they'd be
> willing to guarantee, with a limit of 6-1 leverage.)
>
> In the Legacy Securities program, the Treasury provides loans up to 2
> or 3-1, and then the program can use TALF from the Fed (terms yet to
> be assigned).
It doesn't matter which agencies are being wheeled out to do the official lending. If FDIC or the Fed take huge losses, they have to be bailed out by the Treasury, so the money comes from the Treasury.
> This is what everyone says, but I don't understand it at all. If
> there's an upside, we share it 50/50. If they go bad, then (a) at
> least we've removed them from the banks, which is huge plus for the
> economy, and largely solves the banking crisis; and (b) we've conned
> hedge funds into taking a multi-billion dollar hit with us on
> something that normally we'd have to take ourselves.
>
But if the government took ownership of the banks, then we'd get 100% of
any upside. And if the assets went bad, we'd have removed them from the
banks instantaneously - much faster than this Rube Goldberg scheme. And
there's no question of conning hedge funds into taking a multi-billion
dollar hit "with us." If things go bad, the *vast* majority of the
losses accrue to the Treasury. (See Jordan's numerical examples.) And in
this scheme it's not even certain that all the assets will even get
sold, and thus removed, in the first place!
SA