Saturday, March 21, 2009

Miserable Lie: or, why aren't we all furious?

First, read this.
Key quote:
Like feudal lords claiming the economic surplus for themselves while administering austerity for the population at large, the wealthiest 1 per cent of the population has raised their appropriation of the nationwide returns to wealth – dividends, interest, rent and capital gains – from 37 per cent of the total ten years ago to 57 per cent five years ago and it seems nearly 70 per cent today. This is the highest proportion since records have been kept. We are approaching Russian kleptocratic levels.

Did you get that? The top 1% of Americans has SEVENTY PERCENT OF THE WEALTH. We no no longer have a middle class, thanks to Reagan, Bush, and Bush, and a bit of Clinton, too. We are, officially, a banana republic, and headed, with the new treasury plan, deeper into third world territory.

The new wall street - bank bailout plan has been disclosed and it is totally totally off the rails. It allows companies to pay 3% of the price of an asset, and have the government loan them the other 97%, at very good terms.

Here's the pithiest summary that I could find of what's so terribly wrong with this, from a poster named anonymous at naked capitalism here. Basically, we, the poor wage earner taxpayer give even more hunka-hunka-burnin' money to the filthy rich hedge and other financial funds that got us into this mess; the money continues to flow upward.

I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant(BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

Its just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You've also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.

How did we get into this mess? Rachel Maddow has an excellent 7 minute summary of the deregulations that culminated in the current financial meltdown.

Commenter Nick at naked capitalism has another, even more bleak take on what is going to happen to the american taxpayer under the new treasury plan.

Say Bank A has already marked down a portfolio of toxic mortgage securities from its $100M face value down to $80M. Under TALF 2.0 provisions, Hedge Fund B buys this portfolio for $80M with a 3%, or $2.4M, equity stake. The rest comes in the form of non-recourse loans and "gifts" from the Treasury Dept. Bank A gets these toxic mortgage securities off the books and makes a cool $80M.

In reality, on the open markets, a similar portfolio of mortgages recently sells for about 20% of face value. The execs at Bank A know this.

The following week Bank A comes to Hedge Fund B and offers to buy the MBS portfolio from the hedge fund for $20M. Initially, the hedge fund's 3% equity stake would now only be worth $600K. However Bank A offers to pay the hedge fund, say, a $3M "transaction fee" or some other shady payment/purchasing method to go through with the deal.

Hedge Fund B's equity stake is essentially bought for $3.6M ($600K+$3M). In only a week's time, Hedge Fund B has made $1.2M on its initial $2.4M investment. It pays the Feds back the principal on the non-recourse loan it took out and has made more than enough $ to pay whatever miniscule amount it owes for a week's worth of interest payments on the loan.

Bank A has now not only bought back this MBS portfolio actually worth 20 cents on the dollar, it only had to pay $3.6 million or 3.6 cents on the dollar to Hedge Fund B to get it back. Bank A nets $16.4M dollars and has a sweet party. As an added bonus, Bank A believes the portfolio will in time be worth 50% of face value when it matures/the markets recover and makes Vegas money on that 30-point spread.

Meanwhile, the taxpayer gets the epically-sized shaft. The Fed facilitates enormous losses for the taxpayer by making up the vast majority of the differences between current and/or eventual actual market prices and the paid fake/inflated auction price of 80% of face value--or approaching $60M for this portfolio. Add a whole lot of zeros to this number and that’s where taxpayers will be at when all is said and done. Meanwhile the banks make astonishing profits on what could become the greatest bait-n’-switch in modern history and taxpayers wonder why they have to pay $10 for a loaf of brad.

On the plus side, I hear beachside huts in Palau are cheap these days.


steampunkpainter said...


kerfuffler said...

Can I pay ten dollars for a "loaf of brad"?