Monday, March 23, 2009

Zombie Banks 2: Dead by Dawn

So Geithner has rolled out the latest version of the 'get rich (again) quick' scheme for the bankers - a plan for treasury to drop a trillion dollars on crap to get the banks balance sheets back in line. For example... Bob, a hedgefund manager from Ft Stockton, buys a house for $2m that he intends to flip. Housing market collapses - and since Bob bought the house with a very small down payment the best thing for Bob to do is tell the bank 'not my problem' and walk away. So the Bank now has a house on it's books that, on paper, is worth $2m. Now the govt is going to take the house off the banks books - but in partnership with private investors... Let's say they hold a reverse auction and, for the sake of argument, the house sells for 2m (in a normal market environment it wouldnt sell for this much, but there's a reason the price would be so high). So first off the FDIC comes in and insures 5/6ths of the value of the 'low interest loan' to buy the thing. So just as when you go to a bank to buy a house and they want 20% equity - the govt is running a similar scheme (slightly less than 20%, but you get the picture). So now the investor has to come up with 333k.... but wait! Now the govt comes in again - writing the investor a check for 1/2 the 333k - meaning the investor need only pony up 161k. What's the downside for the investor? The govt owns half the house (if it sells at a profit).

How does this work in practice?

You take 10m in cash, it leverages to 120m in houses, you take the best half of the houses and sell those to your brother at a loss for 1/2 the actual market value (say 1/4 what they were) losing your 10m along the way by defaulting on everything else. Now your brother owns $30m (120m at 50%) in houses for which he paid $15m... you lost $10m... he sells those houses at the new market rate and walks away with $5m.

The banks get all their money. The rich people get more money. Only the taxpayer gets burned.

This is RTC all over again.

Happy monday

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