Today’s new public-private partnership bailout scheme is very similar to the TALF, the Fed program that will let hedge funds lever up their purchases of distressed assets. It’s the same deal: The banks get to dump “toxic” assets, the hedge funds set a price, and taxpayers get their money back if anyone makes a profit.
But it looks like the TALF could easily be scammed, resulting in huge losses for the taxpayer.
Zero Hedge explains the process.
- First the hedge fund buys an asset with a face value of $100 for $80. The hedge fund puts up $2.40, while the Fed contributes the rest, $77.60. Huge leverage.
- The next day, the hedge fund re-runs the model and realises that they overpaid the bank. Turns out, it was only worth $20 — which was where the market had been, sans-government leverage.
- The hedge fund loses it entire $2.40, and the taxpayer loses its entire $77.60.
- BUT! The bank buys the asset back from the hedge fund at $20, while paying it a $5 million fee for its trouble.
- The upshot: The banks sells high, buys low. The hedge fund collects a fee for holding the asset. And the taxpayer is screwed.
Good deal, eh!?