Let’s see if we’ve got this right. Yesterday FDIC boss lady Sheila Bair said that she was open to banks taking equity stakes in the public-private partnership funds that will buy their crap assets from them. The banks would also be allowed to pay for their stakes with the very loans they are selling into the partnerships.
It’s mind boggling. Let’s try this once again.
- Let’s say Citigroup has a bunch of commercial backed securities that have become toxic assets because Citi insists they are worth 87 cents on the dollar but the market thinks they are worth 30 cents.
- Along comes Bair, offering loans to buyers willing to pay much higher amounts for the assets because most of the purchase price will be paid with government subsidies.
- The bank then sells the assets to a special vehicle set up to pay for the assets, and it gets an ownership stake in that vehicle in exchange for the assets.
- So the bank will trade the assets themselves for ownership in a special purpose vehicle that owns those assets.
You might be wondering why any bank would want equity in a fund that is buying assets it is desperately trying to get off their balance sheet. That’s because you haven’t realised that this program involves a huge subsidy for the buyers, allowing them to make money even if half the assets they buy are worth nothing at all. Essentially, the deals allow banks to move their risk off-balance sheet, with much of it taken by the government.
It’s hard to believe that after all of this, the Obama administration is convinced that off-balance entities are the key to prosperous and healthy banks. What could go wrong?
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