Imagine a scorpion waving cash…

Posted by Marc Hodak on March 24, 2009 under Invisible trade-offs, Unintended consequences | Read the First Comment

Shall we dance?

The market reacted to Geithner’s asset sale plan yesterday the way you would expect, if you expected a massive transfer of wealth from taxpayers to large publicly-traded banks. The banks are basically waiting to sell assets at above-market valuations, and Mr. Geithner is delivering the buyers.

But how good of a deal is this for the buyers of the assets? Consider a casino advertising a new game that pays out 2-1 for a game with odds of 4-1. That’s a lousy game on a straight bet. But this guy with a high forehead and curly hair is offering to loan you money on the bet. And you don’t have to pay all of it back if the bet goes sour. So your willingness to play this game depends on how much Curly is willing to lend you.

Now, Curly seems like a reasonable guy. But standing behind Curly are a couple of big guys who just recently beat the sh*t out of a recent winner, shaking him upside down until his winnings dropped out of his pocket.

Now, how willing are you to play with Curly?

“If it’s structured correctly, it could really be a very attractive opportunity for private investors, but it also could actually have the government get its money back,” Canning said.

The heavy criticism by lawmakers of the compensation at giant insurer American International Group (AIG.N), which was bailed out by the U.S. government, is the reason he would prefer to avoid public-private partnership.

“I don’t need the government’s help in structuring my compensation,” Canning said. “I get all the help I need from my partners.”

…says the partner in a $5 billion fund.

Kat said,

The current plan is incredibly bad. Basically, due to the adverse selections in the auctions and the partnership deal the unaccountable government wonks are proposing, all gains will go to the private partners and the bill for the losses will be sent to the taxpayer.

Given what’s happened at AIG, the deal will have to be incredibly favourable for private partners and unfavourable for taxpayers to encourage anyone but Bill Gross (PIMCO is already so big that it has considerable influence with government) to come to the table.

In fact, this deal is worse than the government’s original plan to buy and hold the assets itself. Yes, the assets will be bought at a premium to fair, but that will happen with this plan too as overpaying for assets will recapitalize banks. At least if the government held the assets, any gains would offset the losses for taxpayers.