The market rose over 300 points to welcome the Tim Geithner plan. Bank stocks like Citi and BofA rose over 15% on the news. Because the market saw Tim stagger in with bags and bags of free money for the banks. Here's why:
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.
Let Karl Denninger explain this to you.
Here's how the rigging process would work:
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.
The banks can enlist any number of third parties through whom to route these transactions. Any bids for this program are suspect, since we may never know the degree of collusion among the players involved. Given our experience in how "rescue money" for AIG made AIG into a big funnel to route the money to Goldman Sachs (of Paulson fame) and friends, we can be confident this will be coming soon.
The entire SCHIP program, which expanded medical care for indigent kids, and which George Bush vetoed for two years was about $30 Billion:
The $31.5 billion legislation will preserve coverage for as many as 6.7 million children enrolled in the Children’s Health Insurance Program, and will provide coverage to 3.9 million additional uninsured, low income children in the U.S.
If Karl Dennninger is right, the American public just got played for another $500 Billion or more!