Public-Private Partnership Bamboozle Goes National (Part 1)
Posted by Jeff Pruitt - 3/24/09 @ 11:21 pm - Filed Under Featured, National Politics
The citizens of Fort Wayne know exactly what to do when government officials start talking about public-private partnerships - grab your wallet. What that phrase means is that government has decided to privatize the potential profits and subject the taxpayer to all the downside risk. See Harrison Square, Renaissance Pointe and the Public Safety Academy for examples.
But now the entire nation will get a firsthand look at these “partnerships” since the Obama administration has issued their plan to solve the problems affecting our financial system. The gist of their plan revolves around forming public-private partnerships to buy up the toxic assets weighing down the banks’ balance sheets.
Let me start by explaining what the Treasury Secretary, Tim Geithner, has proposed:
The proposal has two phases to it. The first is to buy up troubled loans and the second is to buy up “illiquid” securities. I’ll focus on the first part for now since that’s the only one that has any real details associated with it. The way this will work is the banks will notify the FDIC if they have assets (pools of mortgages) they want to divest, and the FDIC will then auction these assets to private investors. Doesn’t sound too bad right? Well there’s a catch of course and the catch is who will actually be spending the money to buy the assets. As I’m sure you can guess it ain’t the private investors.
The FDIC is going to offer non-recourse loans for 86% of the purchase price. Yes you read that right, 86% will be guaranteed by your tax dollars through the FDIC. But it actually gets worse. The remaining 14% of the money will be split evenly between the treasury and the private investors. That means the private investors will only be putting up 7% of the actual investment.
What do you think will happen when the private investors get to enjoy all the upside of their potential investment but only risk losing their initial 7%? Think there might be a few people out there making foolish decisions that end up costing us in the long run? Me too.
The administration announced that this could potentially be a $1 Trillion program which means the FDIC would be on the hook for roughly $860 Billion - where would that money come from? Well just recently Senator Dodd introduced a bill that would allow the FDIC to borrow up to $500 Billion from the Treasury. Of course once again we were lied to in regards to what the money would be used for:
FDIC spokesman Andrew Gray said the idea behind increasing the credit line is to give the agency additional flexibility in funding, and is unrelated to its ability to meet obligations to bank depositors.
Sorry Mr Gray. Looks like the money will be used for yet another round of bank bailouts. But this time we’re not only bailing out the bozos that created the mess but we’re also allowing their Hedge Fund buddies to take a cut of the action.
More on this in Part 2…
Comments
4 Responses to “Public-Private Partnership Bamboozle Goes National (Part 1)”
Leave a Reply
Jeff,
You have researched this more than I have, but even though 86% is GUARANTEED through FDIC- isn’t that insurance? Meaning it is only paid if the mortgages default? So, in essence, the investor could have to cover 93% of the total?
Kevin,
It’s not insurance; it’s a loan to finance the purchase of these mortgage pools.
The investors will form a public-private partnership with the treasury and the FDIC will finance 86% of their purchases.
Here’s the key part. Down the line, if the investors end up selling these purchases for a profit then the treasury and the private partners split the profit.
However, if they sell at a loss then the private investors will eat the first 7% with the treasury eating the other 7%. But if the loss is greater than 14% then the FDIC will eat the rest.
The FDIC is putting themselves in a position that has a tremendous amount of downside risk with little-to-no upside potential.
Jeff,
You beat me to this post.
This is another terrible idea from Washington DC.
Last year the Bush Administration and the Democratic Congress wasted well over a trillion dollars and now it seems the Obama Administration wants to “double down” on the policies of the last twenty - thirty years.
What a joke.
Mike Sylvester
The question, of course is: “Why is all this legerdemain necessary?” Originally, TARP was designed to allow the government to purchase toxic assets in order to free the lending institutions from the contingent liability for any nonrecoverable investment. Everything was going to be wonderful because the property behind the mortgage had some value, especially since the bundled mortgages are not all toxic.
Now comes the “public/private” plan that ignores market values and puts all banks back into the black at taxpayer expense and, at the same time, bails out the stockholders (who always lose in bankruptcies). The government does not need the private “bidders” . . . unless Jeffrey Sachs, writing in the Financial Times is correct:
There will be no explanations or hearings. The first lesson to be learned here is that there can be no free lunch. Someone has to suffer these irresponsible losses and the politicians have selected us. To paraphrase Thomas Sowell, in economics there is no solution, there are only tradeoffs.