Monday, March 23, 2009

Geithner plan

1. 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.

2. The next day, the hedge fund re-runs the model and realizes that they overpaid the bank. Turns out, it was only worth $20 — which was where the market had been, sans-government leverage.

3. The hedge fund loses it entire $2.40, and the taxpayer loses its entire $77.60.

4. BUT! The bank buys the asset back from the hedge fund at $20, while paying it a $5 million fee for its trouble.

5. The upshot: The banks sells high, buys low. The hedge fund collects a fee for holding the asset. And the taxpayer is screwed.

IMO: I'm afraid the true scenario may be something like the above. Obama needs to do better, so does Geithner.

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