It Just Keeps Getting Worse [? Updated.]
I wondered why, if these steaming piles "legacy assets" are so great and going to make so much money, why the taxpayer would need to guarantee them. And, further, if they're so great, then why couldn't Joe six-pack get in on the action. Especially if the following is true:
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. ...
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.
If I were the banks, I would not want the public involved either.
We are so screwed.
Update: It seems that the above analysis may have crossed paths with a revised term sheet on the same day of its publication. In other words, it was based on an older construct that permitted this kind of self-dealing, but seems to have been closed by the 4/6 term sheet that was released on the same day. (I say "seems" b/c I haven't seen the underlying docs.
