Geithner Plan Loopholes

As with most anything, especially government anythings, there are unintended consequences. As Theo Francis and Mara Der Hovanesian point out in their Business Week article

With their balance sheets restored to health, goes the theory, the banks will lend again. Investors who team up with Uncle Sam get a chance to make a fortune with very little risk: The government will provide half the equity, and the partnerships can juice returns by borrowing more funds on attractive terms from the Federal Reserve or by securing private-sector loans whose repayment is guaranteed by the Federal Deposit Insurance Corp.

Besides the generous terms, the partnerships have loopholes big enough for an investment banker to drive his Ferrari through. The basic problem: Everyone gets to play. Banks selling dubious assets can finance their sale to the partnerships, investors can buy debt from banks in which they own shares, and on and on. Strictly speaking, there's nothing wrong with much of this. But many of the strategies to exploit the partnerships increase the chance that the feds will overpay for the debt, sticking taxpayers with the bill.

The authors then go on to describe the machinery of the following five "loopholes":

  • SELLER FINANCING
  • PUMP AND DUMP
  • PASSING OFF THE LOSS
  • PORTFOLIO SWAPPING
  • LAYERS OF LEVERAGE
Loopholes?  Some sound more like "Final Four" play strategies.

Whatever, there will probably be more than just a few making a profit of off your $163k share of the Obamabucks debt.

As with most anything, especially government anythings, there are unintended consequences. As Theo Francis and Mara Der Hovanesian point out in their Business Week article

With their balance sheets restored to health, goes the theory, the banks will lend again. Investors who team up with Uncle Sam get a chance to make a fortune with very little risk: The government will provide half the equity, and the partnerships can juice returns by borrowing more funds on attractive terms from the Federal Reserve or by securing private-sector loans whose repayment is guaranteed by the Federal Deposit Insurance Corp.

Besides the generous terms, the partnerships have loopholes big enough for an investment banker to drive his Ferrari through. The basic problem: Everyone gets to play. Banks selling dubious assets can finance their sale to the partnerships, investors can buy debt from banks in which they own shares, and on and on. Strictly speaking, there's nothing wrong with much of this. But many of the strategies to exploit the partnerships increase the chance that the feds will overpay for the debt, sticking taxpayers with the bill.

The authors then go on to describe the machinery of the following five "loopholes":

  • SELLER FINANCING
  • PUMP AND DUMP
  • PASSING OFF THE LOSS
  • PORTFOLIO SWAPPING
  • LAYERS OF LEVERAGE
Loopholes?  Some sound more like "Final Four" play strategies.

Whatever, there will probably be more than just a few making a profit of off your $163k share of the Obamabucks debt.