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Remember how Tim “Oh, I have to pay taxes on that?” Geithner proposed a plan to provide liquidity for the “toxic assets” on the balance sheets of financial institutions. The plan, called the Public-Private Investment Program (PPIP), is set to begin at the end of July and will likely fleece the American taxpayer of billions of dollars (if we’re lucky, it will only be billions).
If you don’t know what I’m talking about, here’s a quick lesson. A “toxic asset” is an asset that is no longer worth what you owe on it. For example, if you bought a property for $100,000, but the value dropped to $50,000, while you still owed $80,000, that asset would be toxic. If you needed to sell, you could never get what you owe.
So, these toxic assets are now the problem of countless banks, because the owners of the assets defaulted, which now make these properties the problem of the banks. Geithner wants to remove these assets from the books of the banks by partnering with private investors to bid for the assets. Here’s how it would work… A private investor and the government each pay 7% for an asset. The remaining 84% is borrowed from the Federal Reserve. This gives the bank 100% cash of the asset that’s on their books. If the value of the asset recovers, great. The private investor and the government are now in the clear. But, if the asset fails, the investor is out his 7% and the tax payer is on the hook for the remaining 93%. The idea is that the assets that succeed will be able to cover the assets that fail and we all finish in the black.
However, (this is where it gets complicated) the banks are currently trying to figure out how they can legally buy their own assets. Lets say a bank bought an asset for $100. The value of that asset then fell to $50. The bank is now down 50%. So, the government is going to buy their asset. The bank, itself is not allowed to buy its own asset, so it might set up a new company, as a “private investor.” The “private investor” puts down $7, the government puts down $7, and the $86 is loaned from the Federal Reserve. That gives the bank $100, minus their $7 investment, and a clean book. If the asset doubles or triples in value, the bank is way up, because their $7 investment is now doubling or tripling, plus they don’t have their toxic asset. But, if the asset fails, the bank is down only $7, instead of $50, but the American taxpayer is down $93.
In the linked article, the author says “the maximum price of a bond is whatever the stupidest investor is willing to pay for it.” The American taxpayer, with the help of Wonder Boy Tim Geithner, is about to become the stupidest investor. And no, you don’t have a say. The US Government has already decided to spend your money on worthless things. This plan is only going to help the uber-rich remain uber-rich and thrust the United States further and further into debt.
(If my explanation confused you (it actually confused me), watch the video. It’s very helpful and informative.)