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Toxic Asset Plan Will Leave The Same Amount Of Toxic Assets In The System, But With the Taxpayers Now Liable For Most Of The Losses… Ingenious!

The most succinct description of what is wrong with Geithner's PPIP toxic asset plan comes from the Financial Times: "Critics say that that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans. That's exactly right. American banks that have received billions in bailout funds, including Citigroup Inc, Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co, are considering buying toxic assets to be sold by rivals under the Treasury's trillion dollar plan, and Bank of America— another big bailout recipient— is already buying those toxic assets."

The total amount of toxic assets isn't going to be meaningfully reduced— the assets will just be shuffled from one 'bailout buddy' to another. But with that 'movement' [[aka, 'fast' shufffle: normxxx]], the government is guaranteeing 85% of the value of those toxic assets. [[That is, the banks themselves have materialized as those willing 'private' investors who are supposed to 'provide the banks' with 'additional' capital funds (with the government taking virtually all of the risk)! Isn't this very like 'group' m-----b----n!?! : normxxx]]

So the taxpayers (who anteed up for the bailout funds which the banks are now using to purchase the assets) will also pick up the tab when the assets turn out not to be worth as much as the banks are paying for them[!?!] But why would the banks overpay for the other guy's toxic assets? Some financial writers have speculated that these banks are giving each other kickbacks under the table. But we don't even have to go there.

If all of the big banks holding the lion's share of toxic assets (about 5 banks, as noted below) have a 'gentleman's agreement' to 'bid up', i.e., overpay, for the other guy's toxic assets [[at least to the extent of the amount of toxic assets that they themselves are hoping to get rid of: normxxx]], then they will all end up in the same relative position [[with respect to each other: normxxx]]. You overpay for mine, I'll overpay for yours [[and the 'market price' soars, leaving behind most other [non-bank] buyers…: normxxx]] But since they can then say that they have only paid 'fair market value', i.e., 'naively overvalued' the assets, the government will pay them back for their "losses".

Get it?

It is well-known that JP Morgan, B of A, Citigroup, HSBC and Wells Fargo have by far the largest derivatives holdings (and see this). Their derivatives exposure— especially credit default swaps— are the 'core type' of toxic asset (and one of the main causes of the financial crisis). These are really the players which would need to agree to play this game for it to work.

[ Normxxx Here:  Want to bet that all of Wall Street and most of the US financial community will willingly go along with the 'con'[!?!] (See Time Magazine: "Those revelations were greeted on Capitol Hill with stunned silence by Republicans and barely suppressed joy by Democrats.") Who would blow the whistle?  ]

Time: "Nouriel Roubini, the hard-headed pessimist who foresaw the financial crisis, wrote Tuesday in the Wall Street Journal that the overall positive message of the stress tests 'would be good news if it were credible, but it's not.' He points to the recent IMF report that estimated $2.7 trillion in U.S. loan and security losses, and his own estimate of $3.6 trillion for the same potential losses. 'The financial system is currently near insolvency,' he concluded. Bernanke disputes the numbers, saying banks have 'taken significant write-downs, they have reserves and there are substantial earning capacities.' But Roubini is not alone in questioning whether the government used appropriately pessimistic assumptions in conducting the stress tests, especially as the financial sector faces a potential flood of commercial real estate losses that could mirror the residential market's recent woes."

[ Normxxx Here:  Get ready for a 1970's style near hyper inflation, as soon as the 'deflation' is over with. It's the only way to spread the several trillion dollar losses across the entire economy, since we "can't raise taxes". I guess I was right; AGAIN! I predicted periods of inflation/deflation alternating with periods of deflation/inflation! Bondholders will be wiped out in the period(s) of inflation following shortly. But, as in the '70s, most stock holders will seriously lag inflation; so stock selection is paramount! Also, if I am right, many stocks (and companies) will further suffer in the following deflationary periods regularly imposed to keep the inflation from 'running away'! All in all, I think the next eight years or so will be 'interesting', as in that famous Chinese curse. ]

  M O R E. . .