Bad Bank in Drag

by: Jacob Freeze

Wed Mar 25, 2009 at 12:16

We buy a humongous amount of toxic assets from AIG and its playmates, and pass all their possible losses along to ourselves! What's not to like?

A bad bank makes you and me the patsies for the meltdown. We get the bad stuff. Banks keep the good stuff.

Booooooooo!!!

But in order to save our dear little friends at the banks, all those toxic assets must be bought and sold again somehow, and nobody wants to buy them, except at prices that trigger yet another unimaginably huge crash of derivatives.

Those things are still alive, and they are very, very big. How big?

Bigger than the world!

The notional value of outstanding financial derivatives is more than $600 trillion. How big is that?

The total value of traded securities (debt and equity) denominated in U.S. dollars is estimated to be more than $50 trillion, and the global value of traded securities is about $165 trillion.

Financial derivatives can eat the Planet Earth!

So the monster must be quelled, and "bad bank" is made out of simple monosyllables that even the public can understand. Me no like 'em!

Tim Geithner won't give us bad bank. Bad bank went bye-bye. What we get instead is bad bank in drag!

We get a "partnership" of public and private money, and the only real problem with this particular "partnership" is that we lend our partners almost all the money they need to buy in.

We lend our partners 84% of their half of our "partnership," and guarantee that all they can possibly lose is their 16%. No further exposure! All the rest of the risk of those monstrously risky "toxic assets" belongs to you and me.

So private investors get 50% of the possible upside, and if the wheels come off, they can only lose 16% of their half, which is 8% of the package, but we can lose big time! Toxic assets are toxic because they entail obligations that nobody thought they would ever have to pay... and they didn't! We paid instead.

But under all that pancake make-up and all those petticoats, this is still a "bad bank," except a whopping 8% of the capital supposedly comes from private investors, with limited risk, if they go for it.

But what if they don't?

What if bailout number three is a total non-starter, like bailouts one and two? And this is the beauty part of Tim Geithner's beautiful dream!

There is no back up!

Thanks to public outrage about AIG bonuses, the other $250 billion that Obama wanted for a backup is not in the budget!

There is no back up, and if "bad bank in drag" goes down, we all go down with it.