Is there anything in this auction plan that prohibits the sellers to finance the buyers? After all, the sellers are big banks and that's what they are designed to do: finance profitable enterprise.
What if a bank A enters a contract with a financial entity B, such that for every dollar that B spends at the auction, A offers it a free dollar in credit with loose return requirement. Then B carries practically zero risk and is interested in gobbling as much of the toxic asset as possible, driving the auction price way beyond the fair value (whatever that is). For every extra dollar that is spent at the auction, bank A collects 12 dollars from the government, so the dollar it gave away (to B) is not a factor. Both sides are pulling an arbitrage of a lifetime, at the expense of the taxpayer. The price could easily go even above 100 cents on a dollar. Of course, this would attract unwanted scrutiny and public outrage, so the parties (banks and government) instead would just agree on mutually acceptable prices. To make it a “success”, Geithner would have to agree on banks' asking price, just like the initial TARP plan: direct subsidy to the banks, only under the cover of the “auction-fair-value” fig leaf and with fewer strings attached, it seems.
So what would preclude such a scenario? Even if banks are prohibited to finance the buyers directly, isn't there always a way to create the same contract through multiple intermediaries and complex derivative instruments? Too difficult? As long as it's legal, with hundreds of billions of free dollars on the table, the smart people of Wall St. will surely not miss the chance.
Watch this video particularly towards the end:
Monday, March 30, 2009
Saturday, March 7, 2009
Is the financial community double dipping the Bail Out money?
One of the central themes of the current financial crisis is the mismanagement of Credit Default Swaps (CDS). CDS policies were issued indiscriminately without setting aside adequate reserves to cover potential claims.
CDS’s are insurance contracts that enabled banks to acquire the assets, collateralized debt obligations or CDO’s, which now supposedly have all become toxic. A CDS was supposed to protect the banks against a default of a CDO. If a CDO went bad/toxic the issuer of CDS insurance would pay the bank the full value of the CDO.
AIG is the biggest issuer of these insurance policies (CDS) for which it had insufficient reserves to be able to cover if all the claims started pouring in.
Well, unfortunately the claims started pouring in due to the defaults of CDO’s (toxic assets) that these CDS policies covered.
To stop AIG from going bankrupt on account of its inability to pay all these claims, the government bailout so far has given them $300 billion of tax payers’ money with no end in sight.
This $300 billion is rapidly used to satisfy the claims that financial institutions, including banks have on these policies.
Unless of course the banks were so stupid not to insure their risky Collateralized Debt Obligations CDO’s by taking out CDS policies,these CDO’s are covered. So why are so many of these CDO’s toxic?
So if the now roughly $300 billion bailout of AIG is used to pay the claims on credit default swaps to the banks. And those same banks are being propped up by a trillion dollar government bailout package because initially the banks would not be able to collect the credit default swap claims from a bankrupt AIG when in fact they can because the government is paying AIG the money to do so.
Is someone here double dipping? Or is something more sinister going on, like the AIG money going somewhere else?
Bou van Kuyk
CDS’s are insurance contracts that enabled banks to acquire the assets, collateralized debt obligations or CDO’s, which now supposedly have all become toxic. A CDS was supposed to protect the banks against a default of a CDO. If a CDO went bad/toxic the issuer of CDS insurance would pay the bank the full value of the CDO.
AIG is the biggest issuer of these insurance policies (CDS) for which it had insufficient reserves to be able to cover if all the claims started pouring in.
Well, unfortunately the claims started pouring in due to the defaults of CDO’s (toxic assets) that these CDS policies covered.
To stop AIG from going bankrupt on account of its inability to pay all these claims, the government bailout so far has given them $300 billion of tax payers’ money with no end in sight.
This $300 billion is rapidly used to satisfy the claims that financial institutions, including banks have on these policies.
Unless of course the banks were so stupid not to insure their risky Collateralized Debt Obligations CDO’s by taking out CDS policies,these CDO’s are covered. So why are so many of these CDO’s toxic?
So if the now roughly $300 billion bailout of AIG is used to pay the claims on credit default swaps to the banks. And those same banks are being propped up by a trillion dollar government bailout package because initially the banks would not be able to collect the credit default swap claims from a bankrupt AIG when in fact they can because the government is paying AIG the money to do so.
Is someone here double dipping? Or is something more sinister going on, like the AIG money going somewhere else?
Bou van Kuyk
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