More Bad News about the Public-Private Investment Program: Because Stealing 93 Percent of Taxpayer Money is OK. Fraudulent Minds already gearing up to Scam the System.
We barely knew you PPIP. It is amazing how little airtime the Geithner monstrosity, otherwise known as the Public-Private Investment Program (PPIP) is being talked about in the mainstream media. You would think that a plan with a low range price tag of $500 billion and a final bill that will most likely reach $1 trillion would garner a little more attention. Yet it hasn’t. As more and more people pour over the plan, it is becoming painfully obvious that it is an ill-advised program that tilts the scales heavily in the favor of banks and Wall Street. The PPIP is the ultimate taxpayer soufflé served on a silver platter to the banking system, which coincidently is the same banking system that brought us to the brink of depression. The plan is a farce. The U.S. Treasury had to concoct an elaborate plan because creating a plan called, “Toxic asset enema to taxpayers” just didn’t have the nice Orwellian ring of legacy assets. Calling these things “assets” is like calling a Ford Pinto a vintage automobile.
As more time passes by, the line of people calling this an utter waste of taxpayer money grows. Stripping away the legalese gold gift-wrap of the plan, what this program boils down to is a bait and switch to the American taxpayer. It has all the drama of kabuki theatre but once the fog disappears, what we are left with is a shifting of toxic assets to the American public. Let us draw a diagram and then explain:
So how do we go about setting this up?
“(Jeffery Sachs) Here’s how. 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. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.
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.
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. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.”
Here we go again with special investment vehicles. Keep in mind that these funds will be specifically designed to fail in a contained format once they are obsolete. That is, even if the new investment vehicle files for bankruptcy the bank has already shifted the problem to another entity while the loan now sits with the American taxpayer. In fact, this is even more costly than nationalization, which I and many others have been calling on for months. Why? Well first, that $1 trillion we are going to flush down the system would go to make up the difference on these loans in the market place. Let us run a quick example with PPIP and a full on receivership:
$1 billion toxic loan
Bid:Â Full face value via special investment vehicle
$850 million FDIC non-recourse loan
$75 million U.S. Treasury
$75 million bank
So even at this point, the bank has done well even if the asset is worthless. But let us assume it goes for 30 cents on the dollar. How does this break down?
Bank:Â Already received $1 billion
SIV:Â $1 billion
Asset in SIV only worth $300 million
$700 million total loss born by U.S. Treasury and FDIC because the bank has already sold the toxic asset off for $1 billion. What do they care if the SIV falls apart? For $75 million, (7.5%) they were able to unload a $1 billion toxic asset. That is a cost of doing business, not even a loss. As we mentioned when the plan came out, it was looking incredibly suspicious that they were requiring participants to submit applications by April 10th, 2009:
From the U.S. Treasury website:
“Deadline Extension
To better accommodate increased participation, the deadline for email submission of applications has been extended to 5 p.m. ET on Friday, April 24, 2009. Treasury now expects to inform applicants regarding preliminary qualification on or prior to Friday, May 15, 2009. The Treasury Department requests that all applications be submitted via email only.”
Bwahahaha! So they extended the application deadline via e-mail. Can you imagine that e-mail application:
From:Â Bank of Chum
To:Â U.S. Treasury
Cc:Â Bank of Chum Investment Incorporated
Subject: Yo Tim! Time to open up the purses babyyyy!
Hey Timmy boy. Just wanted to say this application was a piece of cake. It was as easy as making all those loans to all those credit worthy people. Anyways Tim, I’m itching to get some of these “legacy assets” as you call them off my balance sheet. Since I am unable to do it myself, I’m Cc’ing a company that is interested in bidding in our, I mean my legacy loans. They have nothing to do with us, promise. The loan appz looked simple so I filled it out for them if you don’t mind??? Heehehe. They are a good match and ready to go! They’re ready for this public-private partnership like Thelma and Louise baby! So if we can make this happen I’d really appreciate it.
Thanks,
Joe Chum
CEO, Bank of Chum
P.S. Good luck Tim! I know these assets are worth every penny.
Excellent. Give them one more month to figure out a way to run ancillary investment vehicles that skirt the law within the plan so everything looks above board. Not like the Treasury ever changes their mind right? Oh yeah! The initial TARP was supposedly going to go to buy toxic assets but ended up being capital injections into banks. After all, once the money is in the hands of banks, good luck getting it back. Heck, we are having a hard enough time getting a few million back from AIG. Can you imagine trying to get $1 trillion back?
Now why would it be better and more efficient to simply nationalize? Well first, we would stop this bread and circus act. Can you believe that as we cross the Rubicon, making this the longest recession since the Great Depression only one major player went down and he had nothing to do with banking or mortgages! That was Bernard Madoff who basically made crap up! This financial crisis started in August of 2007 and we have yet to see anyone brought to trial. Instead, we are gearing up to give them more money!
We all know these legacy loans are practically garbage. And we are not talking about a handful of loans but an entire system that existed to make crappy loans as if it were its destiny. Right now, we are going to dump $1 trillion into these loans and give private investors a put option while the public is buying a $1 stock for $100 hoping it turns out to be worth $30. If things go well the private investor can be up 2, 3, or even 4 times their initial investment. That is the icing on the cake. But as we are now pointing out we can have elaborate schemes setup where a loan is bid up to full value simply because the bank wants to off load it and it would be extremely profitable to the bank. So all we are doing is taking junk off the hands of banks and letting them go back to lending on our dime. Henry Paulson, we hear your echoes.
If we temporarily nationalize, we do a “good bank” and “bad bank” model where shareholders are wiped out including bond holders. We separate the legacy assets and create a market by selling them on the market, not a subsidized taxpayer flea market for banks and Wall Street. Why are we continually pouring money to protect these investors? They made horrific bets and lost. If the premise of this argument is to get lending again, instead of paying off banks we can clean up the loans, wipe out management and put them back on the real market. Forget about the argument about our 8,000+ banks. A handful make up 70 percent of our banking system. This is a recipe for a Japan like lost decade. Let us recap Japan:
-Stock market bubble
-Real estate bubble
-Stock crash
-Real estate prices collapse
-Massive fiscal stimulus
-Low interest rates
-GDP did increase
End result? Massive underemployment with one-third of workers being part-time thus making the employment numbers look healthy. Real estate down for nearly 2 decades. Stock markets moving sideways for over 20 years. Why? Because no one wants to admit how much toxic-waste there is in the system. The thesis of the Geithner plan is wrong. Their assumption is that the only reason these assets aren’t moving is because the credit markets are frozen and panic is causing investors to shy away. Absolutely not. Investors are shying away because they don’t want to buy crap. Even if the market was booming, you’re not going to pay $500 for a Chia Pet. Yet this is what the program does. It will cause toxic assets to be sold at much too high of price either through massive subsidies or more nefarious designs such as special purpose vehicles.
It is absurd to think the taxpayers are going to get a good deal here. How did that Troubled Asset Relief Program turn out? Great use of money there. Ironically TARP 1 was suppose to do what the PPIP is now doing! That is, getting rid of some of the toxic assets. So not only have we injected billions of capital into banks, here we are again designing a program that will now take all those toxic assets off the books on the dime of taxpayer. There is nothing remotely resembling a partnership here. A partnership connotes a shared risk/profit in a venture. Again you realize how powerful language is here. “Partnership” or “legacy assets” or “investments.” It is all backwards. Remember Paulson’s bazooka comment? Seems like the bazooka was aimed at taxpayers.
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18 Responses to “More Bad News about the Public-Private Investment Program: Because Stealing 93 Percent of Taxpayer Money is OK. Fraudulent Minds already gearing up to Scam the System.”
i think that if these were biblical times, we would all take our children to Washington and slit their throats on the steps of the Capitol before immolating ourselves in the rotunda. That way, we get this huge, national ass-rape over with in one fell swoop.
There is a long list of people who need to be arrested, tried, and executed for treason starting with the top job all the way down to trader level on Wall Street.
Ha, ha! Justice! Ha ha! Who am i kidding?
Why would shady bank only bid full face value (1 million) when it could bid 10 times as much, 100 times as much, etc, and have the govt come up with the 93% of the price? So what if shady bank loses out on the 7% upfront money? It is selling it’s worthless asset for the bid price and getting that cash handed to it. It loses 7% of the price as it’s investment but gets to keep 100 % of the price as the purchase, so shady bank will make 14 times whatever it’s 7% purchase money investment share is. It should bid the price to the moon, then walk away from the non recourse loan and let the taxpayer hold the empty bag while keeping trillions.
The goy are screwed, so what’s new?
It’s looking more and more like bloody revolt is the only option here.
Tim Geithner should never have made it through the confirmation process! Obama had his pick and this was the guy is the best of the best???
I voted and support Obama. I just wish that his economic team was led by a better individual.
Obama is just another POS, owned by the banksters.
It’s hilarious to debate with any dumbass partisan now. If you haven’t
figured out that Wall St. owns both parties, then you’re a bigger douche than they are.
I’ve written letters, emails, made telephone calls, all to no avail.
I think that we need to take it to the streets in masses, and start threats if necessary.
They are guilty of treason and should be hanged…
Tim is about what we could expect from Obama who has spent his entire adult life in cronyism. Problem is by the actual election the only real other option was nearly as bad (and possibly just as bad economically).
Bloody revolt no, but we do need a voters revolt instead of people talking about how bad the other guy is without looking at their own guy.
Good point by LA-Architect. Obama had his choice and chose a tax evader in the pockets of the banks. So much for hope and change. Pretty soon we will all be beggars on the street hoping for some change.
The longer our problem goes, the more the bankers take from the general public. Let’s be real, none of us will revolt, the system is rigged to prevent us from doing anything about it. Our only hope is for this problem to go away fast, so we can stop being robbed. The gov. knows this, both parties?, it is only one party, but some are label with different names to give us (waek minds) falso hope!!
Robin Thomas :
remember some kindness in your posting!
The media aren’t covering it because their newsdroids don’t understand it. They were hired to grab eyeballs for their Web portals’ or cable networks’ advertisers, not cover important and complex current events.
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We have a simple choice: dump the bankers off our backs. We can start by refusing to vote for any still-in-office Congressdroid who voted to disembowel Glass-Steagall in 1999. Both parties agreed to do this. Look at the roll calls.
~
House/362 Yeas (153 Democrats)
http://www.govtrack.us/congress/vote.xpd?vote=h1999-570
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Senate/90 Yeas (38 Democrats)
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00354
~
More likely people will whine, blame, use rape metaphors, etc., but still keep hoping to come out at least somewhere better off than most other people. That’s the poison the bankers sell.
~
rose
~
Nobody wins unless everybody wins.
But Obama and congrees still get 63% approval from the public. People don’t act against the government until they don’t have food to eat. The real problem is not the government and bankers, it is us who are afraid to lose job, lose house, and be in dark of the great drepession II. Ironically, If we are unwilling to experience the feelings of fear, the conditions force us to fear more.
The Crony Captialists were in full gear looting the treasury when the curtain came down. Some of them were caught in between swindles and need to be made whole. What is amazing is that it is all being done in plain sight – no curtain needed. They are borrowing from future generations to complete their swindle.
Everyone who has a 401k has toxic assets too… How about the taxpayers buy these and hold them?
Has the FDIC even started charging banks premiums yet???
Obviously the inmates are in control of the asylum. We have been exposed as a full-scale empire and there is no going back.The rest of the world is just trying to figure a way to mitigate the collateral damage from the collapse.
This will also be a formidable lesson on moral hazards: If you have no morals, there are no hazards. Madoff was just a microcosm of the entire global system of finance. this really doesn’t look to end very well.
Just roll over and take it like a good hamster. We were born and bred to consume, not think….much less question. The majority will never understand, nor want to even know about the fleecing.
The more and more I see the two parties fight over the red, stinking herring the more I realize we are expected to inhale it’s rotting smell and follow its trail.
We live in a two party(class) system: .gov/banking industry (the rest of big business is small-fry) and us, the consumer.
I think many have seen these quotes before… Not much need to update the quotes in terms of more “modern” times…
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered.â€
“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”
Thomas Jefferson
Dr. HousingBubble,
I would really like to see your opinion on what I asked above. If there is a flaw to my thinking, I’d like to find out. Thanks.
I’ve been reading a lot of negative commentary about the PPIP and the many ways it could be abused. The problem is that there just isn’t enough transparency to know if this program is going to have adequate safeguards against fraud through related party transactions. That’s what a bank selling it’s own assets to another entity it controls is, a related party transaction. Disclosure of all buyers and sellers would go far toward solving this problem. The lists could be scrutinized by the experts, political opponents, and general public for incestuous financial relationships. This is the best guarantor of honesty in these transactions.
However, I don’t think this will be possible unless a great public out-cry happens to demand this. There are many incentives at the policy creation level and bank management level against such disclosure. Banks don’t want to publicize their errors. Government doesn’t want to make things worse and have to nationalize a large part of the banking system. And even in the best case, there will be constant criticism, conspiracy theories, and idiot talking heads trying to take advantage when they really don’t have a clue.
Speaking of making things worse, what happens if (insert name of Least Favorite Bank here) can’t sell their “legacy” assets at any price above zero through the PPIP and it becomes obvious they really are insolvent? You’ll have a run on LFB. LFB shares are suddenly worthless. The FDIC immediately seizes LFB wiping out all account balances over 250K, LFB shareholders, and LFB bond holders. What if LFB turns out owe huge amounts to other banks who in turn become insolvent? It won’t be a creeping nationalization for inter-connected banks, it’ll be fast.
What does that then do to the other PPIP participants who don’t have claims on LFB or any bank connected to it? Does it make them look bad and does it cause runs on them too? Do bank stocks hit the floor again, or do they just go directly through that and into the basement and sub-basement?
With the ability to keep things hidden, Treasury, the Fed, and the FDIC have the ability to clean up the mess behind a curtain. This curtain can hide many things. Global investors my never know exactly how rotten the US banking system had gotten. Daisy chains of insolvency can be wound up in a controlled manner. This might be a good thing for the average US citizen even if they take a tax hit. Also, it may allow the PPIP auctions to be rigged to cheat the taxpayer as Dr. Housing Bubble and others have suggested.
Keeping your efforts hidden is the natural tendency of egotistical, self-important people in charge of cleaning up messes whose careers depend on how well they can clean up. If you do a great job, you can pull off the curtain and yell “ta-da”. If you don’t, you can leave the curtain on and walk away whistling and hoping no one notices in time to hammer you for it.
The organizational problem with keeping the curtain up, is that you rely only on your own abilities to ferret out people abusing the system. Opening everything up for scrutiny recruits every interested party in monitoring the system. With a non-transparent system, Geitner and the PPIP management team are the only ones monitoring for fraud. If they are corrupt, incompetent, or both, this will end badly, maybe very badly.
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