The Toxic NCAA Bracket

As a professional economist, you oppose the plan. But now tell me, can ordinary people like you and me invest in this plan? I would realy like to buy me some Geithner puts.

If I put up a nickle to buy your bracket with forty-five cents put up by the government, then over time the bracket becomes more valuable, and I sell it for profit, who is to say the rules will not change to allow government to grab that profit?

The scary part of this Congress is that it seems to be willing to go after whatever it wants by punitive taxation.

Suppose you borrowed the $10 for your bracket entry fee from Bill Gross of PIMCO.

Bill Gross is eligible to borrow from Geithner/FDIC. He does so and uses that money to bid far above 15 cents to buy out your entry. He bids $10.

Your bracket still loses, but Bill doesn't care. With the Geithner subsidy, he only lost 30 cents.

But in the process you repaid Bill's $10 loan in full so PIMCO is a winner afterall.

Seems like individuals might get a chance to play:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEM3sqS8r6HM

Philosophically I'm sympathetic to these arguments but think they (or I) am missing the crux of the valuation problem which Geithner's plan is attempting to solve.

These toxic assets are essentially portfolios of mortgages, each of which has a principal amount owed, an interest payment stream, and a property value which can be recovered to some extent in foreclosure and resale.

These portfolios have buyers at 20 cents, say, because their component principals, interest streams, and property values are all in doubt and surely worth a lot less than 100 cents -- if sold now. If held longer, or all the way to maturity, they might be worth more, if recovered cash flows hold up somewhat.

The future is highly uncertain, and nobody knows what cash will eventually be recovered. The banks have them on their books now at 80 cents, say, assuming a relatively optimistic recovery scenario.

The Geithner plan essentially finances, with taxpayer money, private-public bids for these portfolios. The key question is will any portfolios actually be sold in the gaping hole between 20 and 80 cents.

Will a bank take 60 cents, say, and write off 20 cents? Will that writeoff make them insolvent, or require them to raise more capital? Will a Gethner plan buyer project a future profit at 60 cents? Will that buyer eventually get 70 cents of cash recovery, driving a high, leveraged, return to private and public partners, and repayment of public loans?

If a market actually emerges we will know if the Geithner plan is working. I doubt any money will change hands without both sides seeing a profitable trade.

If trades are indeed made, the banks get cash for a highly uncertain asset, take writeoffs, raise capital or restructure as required (or mandated). Banks which refuse to sell have new Geithner plan market values established for these assets, which regulators will use to force subsequent restructuring.

Finally, buyers will have portfolios to manage and try to make a profit. If they do, everybody wins. If they don't, taxpayers if effect subsidize part of the original bank losses, along with their private partners (albeit to a much lesser extent).

In the end this is an attempt by Geithner to create a market where none exists given the size of the toxic assets on bank balance sheets. It takes two to tango...let's see if anybody dances!

But now tell me, can ordinary people like you and me invest in this plan? I would realy like to buy me some Geithner puts.

Wouldn't this be good? If people really want in on this, that will bid up the price, right? And thus reduce the costs to the government?

"But in the process you repaid Bill's $10 loan in full so PIMCO is a winner afterall"

There lies the flaw in your logic. Arnold can't back Bill back. That is what started this whole thing.

So back when this all started, I recall being told we needed the bailouts in order to prevent having to pay as much as $2 trillion in FDIC-insured deposits. We now appear set to exceed that number by other, less clarifying means.

How much is out there in senior debt? I appreciate that bank secured debt is held mostly by widowed grandmothers and disabled WWII vets, so we're stuck making them whole. I just want to know how expensive this scam has to get before it becomes worse than just taking our medicine straight at the beginning.

As a business owner and entrepreneur, this whole thing makes me violently ill. The thought that these too-big-to-fail institutions will emerge from this in one piece makes me contemplate rooting for Barney Frank, as thoughts of him being on the compensation committee seems to be the only thing that gives these rent-seekers a moment of pause.

The stock market would also go up if they showed up at everyone's door with a suitcase full of cash. I fail to see why that is the appropriate metric. More importantly, the USD went down and oil went up. Following the stock market is yet another false metric that will lead us to ruin.

It seems like the stock move due to the plan was only a percent or two that morning. The big move came later when the data about housing sales came out. Perhaps that's the news that drove the market and people are reading too much approval of the toxic asset plan into last week's run-up.