Tuesday, March 24, 2009

Figuring out Geithner's Plan

A while back I posted about my Paradigm Shift.

At the time I pondered:
Suppose my Rite Aid stock purchase was instead a $500,000 house. Suppose further that I borrowed every bit of money (100% financing) to purchase my Rite Aid stock. Also suppose that the lender is willing to have my Rite Aid stock as full collateral on the loan I used to purchase the stock. And lastly of all, suppose that I am completely flippant and dismissive of debt, other than as it relates to my month-to-month carrying costs. My HOME is essentially a "casino investment".
There are some other less obvious consequences of 100% financing in a casino-environment. One of the consequences is that you are willing to bet more (i.e pay more for the house). Why not? It's financed with other people's money!

With easy access to borrowed money (also called leverage) you end up with bidding wars and overinflated prices. In short, a housing bubble.

Treasury Secretary Geithner's plan is to allow certain well-connected institutions to use up to 97% financing to purchase toxic assets from banks. From an outsider's perspective, it appears that the INTENT is to create a financial bubble in toxic MBS.

Taxpayers will provide the leverage, and investors will reap the profits. Should this program fail to produce a MBS bubble, taxpayers will shoulder 97% of the losses.

I read that to invest in the Treasury program, one must have a minimum of $10 billion in assets. So truly only a handful of firms can drink this Treasury-provided champagne. The rest of us will be picking the grapes and trimming the vineyards.

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