Politics of the Bank Bailout

The Banks are sitting on a ton of "toxic assets" .....they are "clogging" the lending process according to everyone and their mother

The problem is the extension of credit (lending) over the past decade has changed from a one pillar (traditional bank lending) to two pillar system for debt creation/extension (Securitization). You know all those 3 letter packaged debt obligation....Cdo's MBs's Siv's....blah blah that is the securitization side.......that HAD blossomed to Rival the traditional bank lending as far as credit creation goes (as of 06/07)...this credit creation via securitization was also referred to as the "shadow banking system". .....This is what collapsed and hasn't been revived since Bear Stearns went down........Traditional Bank lending has not fallen much in the last year (although with employment rising quickly and the gov't crowding out the private sector (which has poor earnings in the near term at least) this tradional pillar of lending appears to fall at a steeper pace....

So the main reason the Artificially high Level of credit that was supporting our bubble economy and many people's Mc'mansions and Credit lines was thanks to this financial wizardry known as securitization and now that has collapsed....and the Bank Plan may try to revive this process although that appears very difficult and surely not sustainable...because the greater fools who bought this debt (trusting the AAA) ratings will not be fooled again......perhaps the Gov't/ Taxpayer will be the buyer of last resort in an attempt to revive this unsustainable financial alchemy but long enough that they will just try to transfer the liabilties from the banks balance sheets to the Taxpayers/Gov't thru some highly leveraged Public Private partnership that has so many goodies for the private sector that the public sector is sure to get bent over. and aHHEEM foreign BOND holders Will be made whole....my guess is foreign buyers of treasury's hold lots of Bank bonds and the U.S gov't does not want to upset them (like with Fannie...Freddie)

So in this bank plan the limited details so far say.......Private investors can borrow up to 95% of the funds to purchase....these toxic assets .....yet should the investors book a "loss" then they only have to pay back the 5% capital they put down.....this was arranged so that the BANKS would be willing to sell the toxic crap in a act of price discovery but they are only willing to sell for a higher price than they are worth (otherwise they would hold them ..less they fear otherwise (selling for their current mkt value) they would advertise
to the world they are "officially insolvent" and be forced into full nationalization/bankruptcy..(b.c The toxic stuff is worth about 30C on the $ ....per Bear stearns debt prices ) .

So the die has been cast....Private investors / banks/ media can pretend the "artifically high price discovery" that occurs when you give an investor 95% of the money they need to buy some toxic crap from banks is the CURRENT FAIR MKT price......Months later unless a Gigantic Mortgage forgiveness program is enacted (think 2 trillion or more) these securities will still be worth crap...and the private investors could say......GEE we know these products have lost value since the time we purchased them ...(because when they try to sell them later) the people buying them will NOT BE getting 95% "risk" free financing so the prices offered will be more realistic like .30-.40 $ on the dollar ....and then WHAM.....the GOV'T step's in and says "WEll we agreed should these toxic assets lose value you don't need to pay us the 95% of financing /leveraging that we provided you back....the generous taxpayer will back you up after these "surprising losses"....and then the kicker is the private investors will pay the gov't back the 5% (of the purchase) since they booked a "loss" ...but they will make money because they can sell for 30 cents on the dollar.....(when they only put down .05 cents on the dollar for the purchase of their own money) ...remember the borrowed gov't money that went toward the purchase will be covered by you and me......to help LET washington GAME another profit making opportunity for private connected investors.....help banks clense there balance sheets (i.e transfer liabilites over to taxpayers/gov't) and all the while help make foreign bond holders happy by valuing the bonds they hold at a over mkt price......so they can keep buying treasury debt)........This is what i see happening ........should the plan be "succesful" ........will it?.........who knows ...wether the private investors lining up will take part in a limited cherry picking "investment" or a giant scam like the one i post.....we shall see. If it's the former....odds would favor the gov't bailing out the banks should the private investors not scoop up enough debt to cleanse the banks balance sheets....

[edit on 24-2-2009 by cpdaman]

Transcript of Conversation between Geithner and Volker 2/9
brucekrasting.blogspot.com...
(I like the part about parking funds at the Fed...which he side stepped today & said recovery from this recession will take more than two or three years)???

Makes you wonder who is asking for this money ??

"NEW YORK (CNN) -- There's a growing sense among some bankers that Troubled Asset Relief Program known as "TARP" has become toxic. As a result, they want to bail out of the bank bailout program.

"It should be called 'TRAP,' not TARP," said Brian Garrett, chief executive of Bank of the Bay in San Francisco, who is trying to return bailout funding. "Giving it back is harder than getting it."

Source

Because they are afraid of the free money now.