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alstry (35.02)

K. Denninger gets it!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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43

March 23, 2009 – Comments (12)

The government is bailing out Madoff and leaving its people out to dry!!!!!!!!!!!!!!!!!!!!  It is almost as if they are asking for anger and agitation to build up to such a level that an uncontrollable society is the desired outcome......F me as the FU virus spreads parbolicly.....it is not much longer now.....

Now that the Treasury Plan to "cleanse" the market of "toxic assets" has been put forward, I have noted that The FDIC is the entity that will both guarantee the debt issued and vet the bidder list.

I also note the following quote from The FDIC:

The FDIC will provide oversight for the formation, funding, and operation of new public-private investment funds (“PPIFs”) that will purchase loans and other assets from depository institutions. The Legacy Loans Program will attract private capital through an FDIC debt guarantee and Treasury equity co-investment. Private market equity investors (“Private Investors’) are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, and hedge funds. The participation of mutual funds, pension plans, insurance companies, and other long term investors is particularly encouraged.

There is a potential problem here.

Let's say that I am a bank ("financial institution") with $100 billion in "toxic assets".  I have them on my balance sheet at 80 cents on the dollar.  The market has them marked at 30 cents.  We do not know what the held-to-maturity performance will be, since that requires knowing the future, although for the moment let's assume that they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them at 30 cents I take a monstrous loss - perhaps enough to force me under Tier Capital limits and thus render me subject to an FDIC enforcement action.  I therefore will not sell for 30 cents so long as I have any belief whatsoever that the cash flow - or any government subsidy - will exceed that value.

If I, as a "financial institution" can participate as a bidder in these auctions I can foist off my loss onto the taxpayer.  Here is how I can rig the game so as to avoid an otherwise-inevitable loss:

I become a "bidder" and "bid" on my own assets at 75 cents.I am providing 5 or 10% of the money.  The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.The loan, ex my contribution, is non-recourse.  That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.

Now the "assets" (a passel of CDOs?) turn out to be worthless.  I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that's all. 

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these assets are allowed to bid either directly or indirectly as it provides a means for banks to intentionally dump bad assets at a certain loss that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or more in losses onto the taxpayer, not through the operation of "bad luck" but rather through what amounts to a bid rigging operation.

Be aware that I, along with many others, have figured this out.  Also be aware that as taxpayers and your ultimate boss, we do not intend to sit still and allow the public treasury to be looted in such a fashion. 

The FDIC's job is to prevent that sort of looting operation by prohibiting the sellers of these assets from having any financial interest in the bidding side of the equation, directly or indirectly, and I along with many others intend to hold you to that obligation.

I like the outline of this program if and only if it cannot be gamed in this or similar fashion.  Provided that does not occur, this program has the potential to provide great benefit to both the banking system and our economy.

If, however, the financial institutions that created this mess in the first place are allowed by the FDIC and Treasury to use it as a looting operation to intentionally shift their bad assets onto the Taxpayer you can expect that we the people will hold our government to account.

http://market-ticker.denninger.net/archives/894-Open-Letter-To-The-FDIC-Ombudsman.html

 

12 Comments – Post Your Own

#1) On March 23, 2009 at 1:42 PM, StatsGeek (29.46) wrote:

Rec, rec, rec, rec, rec, rec, rec, rec, rec, rec, rec, rec, rec, rec, rec!

Bend over again, taxpayers.

Plutocracy excerpt from Wikipedia:

Modern political

The second usage of plutocracy is a pejorative reference to a disproportionate influence the wealthy are said to have on political process in contemporary society. Positive influence includes campaign contributions; negative influence includes refusing to support the government financially by refusing to pay taxes, threatening to move profitable industries elsewhere, bribes, and so on. It can also be exerted by the owners and ad buyers of media properties which can shape public perception of political issues. Recent examples include Rupert Murdoch's News Corp's alleged political agendas in Australia, the UK[2] and the United States or the oil industry oligarchy, and billionaire Richard Mellon Scaife, which may back right-leaning political action committees (PACs), as well as billionaire George Soros' efforts to influence US politics by backing left-leaning PACs.

 

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#2) On March 23, 2009 at 2:36 PM, icuryy4me (< 20) wrote:

"This program has the potential to shift literally $500 billion or more in losses onto the taxpayer".

 I don't think that's an accident. I beleive that is the real agenda. Just rob the savings of the innocents seems to be the strategy.

 

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#3) On March 23, 2009 at 2:53 PM, weg915 (< 20) wrote:

What the plan is for when people default on assets owned or partially owned by the government?

Will they start foreclosing and kicking people out of their houses?

 

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#4) On March 23, 2009 at 3:21 PM, alstry (35.02) wrote:

More Inflation???????????

[PFG] Principal Financial Group: Salary cuts range from 2%-10%

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#5) On March 23, 2009 at 3:57 PM, SuperPicks (29.18) wrote:

To anyone that understands basic mathematics & simple arbitrage (difference in prices), this is probably the MOST eye-opening political-financial post we've seen in our lifetimes.

This only underlines how arrogant & confident our central bank, US Treasury, and our Congress has stolen & is stealing & will steal from the wallets of the poor, double-job working middleclass, our mothers, grandmothers, and children. Victimizing the most sensitive of our populations in such an obvious manner is criminal behavior.

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#6) On March 23, 2009 at 7:36 PM, TheGarcipian (54.17) wrote:

Excellent find, alstry!  One BIG Rec for you.

PPIFs -- sounds like so much warm air passed by a Treasury Secretary with Irritable Bowel Syndrome... I think this is going to be a huge mistake with us being left holding the (gas) bag...

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#7) On March 23, 2009 at 8:58 PM, fewl10 (< 20) wrote:

I'm not a high scorer on caps.  I only come here for the blogs now.  I used to invest, but hung up the hat a while ago.  And NO, I don't regret not being invested now.  You have 100K, and it is reduced to 40K and then you're happy you made 6% on your 40K?  What does that work out to? 

I'm writing to mega-rec this.  I've been reading denninger for over a year now.  This guy is sharp as a knife and we need people like this in our government.  But it won't happen.  Too many jackasses in this nation now.

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#8) On March 24, 2009 at 4:28 AM, pjani06 (29.77) wrote:

Wall Street Banks says to Gov't....FU!!

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#9) On March 24, 2009 at 6:24 AM, jester112358 (28.97) wrote:

Its hide the "assets" under the taxpayer shell game.  This is likely exactly what they plan to do.  Bid on their own "assets",  no wonder the huge rally in the financials today! 

Great post as usual.  Denninger and Mish should be put in charge of the program oversight with various CAPS players like you helping out. 

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#10) On March 24, 2009 at 7:43 AM, Xciteddon (68.85) wrote:

This amounts to nothing more than big boys white colar fraud. We should insist that the FBI Investigate fraud alligations against all parties concerned. I wonder.....if enough people called the FBI and reported possible fraud...would they look into it if enough people called? Could we actually get enough clout to insist the FBI look into it? Could we actually get a government institution to do its job?          Any thought?

D

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#11) On March 24, 2009 at 10:43 AM, EverydayInvestor (< 20) wrote:

Am I the only one who sees the problem with this whole argument? The simple way to stop such 'big-rigging' is to prevent banks from bidding on their own assets. Come on, that is basic ebay-level vetting ... and if this is some grand conspiracy on the part of the Treasury to get this outcome then it would be pitifully easy for muckraking reporters to expose.

Next!

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#12) On March 24, 2009 at 11:03 AM, jgseattle (32.44) wrote:

I was interested in attempting to bid.  I could raise about $100m, I think.  I have been waiting for this doing the leg work.  However, the requirements are $500m to invest and $10b in assets under management. 

I am confident banks will not be allowed to bid on their own assets unless they form a seperate corporation and fund that corporation to meet the minimum requirements.  That takes a few buck and will not work for most banks.

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