3/25/2009. Government Partnership on toxic assets - Sounds like big profits for Wall Street
Today's Zinger:
How fortunate for governments that the people they administer don't think.
Adolf Hitler
Morning Briefing:
- The Treasury just announced a Partnership proposal with private industry/citizens to buy up the toxic (now called legacy) assets on the books of major financial companies.
- We can count on more big profits for Wall Street and more big losses for the American Taxpayer.
The Facts:
- The House of Representatives recently passed legislation adding a 90% income tax back-dated to March 2008 on individuals that are paid bonuses in Financial Services companies that took "bailout money" from the Federal Government.
- The Congress is looking to tax "excessive" Executive compensation.
- The government will guarantee the downside of these toxic assets which means that individuals and investors can only lose a maximum agreed amount.
- Most of these investors will come from Wall Street, remember them the greedy bunch.
- The Treasury will lend the money to the investors to buy the assets.
- There is no upside limit.
- Any smart businessman or economist can game the system and make a lot of money while minimizing their downside risk.
Discussion:
Not a day goes by that we don't hear of another major buyout, bailout, tax scheme, etc. War, what war. The only war I hear about is the war on Wall Street and the war on the "privileged class". There is no war in Iraq or Afghanistan. There's no need to report on the dead bodies in Kabul or Baghdad since there are plenty of dead bodies, called investors, in this country.
The Treasury Department has come up with a new shell game. Enter a "Partnership" (with the very people they have vilified over the past several weeks) to buy the toxic assets. (sorry- now they are called legacy assets because that sounds better-- and my we are into sounding better these days-- its' part of the President's I'll tell you what I'm really thinking campaign).
Announcing what appears to be a shared risk/return should keep the voters happy. After all, its' not going to be perceived as a bailout. But that is close to what it will be and here's why.
The Government and Investors will split the dirty assets (50/50). The investors may borrow the money to purchase the trash. I am sure they will set up separate holding companies in case something goes wrong they will only risk the borrowed money and nothing else. The Investors compete to buy the trash. The hope is they will pay a "fair price". The Government guarantees that the losses will be limited (to an agreed to amount) but the Wall Street Investors will have unlimited profits.
As Nobel prize wining economist Paul Krugman points out in his New York Times Op Ed, any good businessman can calculate the price he or she is willing to pay for the trash without risking a loss and having unlimited upside potential. Here is a link to Professor Krugman's article. Krugman on bank plan. Click here.
Others have also jumped on the bandwagon over the bailout as bad for the American taxpayer. It exposes us to too much risk. Nobel economist Stiglitz on plan.
It doesn't take a genius to figure out that the American taxpayer has been placed at greater risk in this deal. Politically it will be easier to sell as a Partnership. Its' hard to believe that anyone on Wall Street would want to Partner with the Government given the way the Government has illegally tried to tax and break contracts. However, if there are many dollars to be made with little risk, you can count on Wall Street to swallow its' pride and Partner with the Tax Man.
When the laws were passed that allowed for financial instruments like these, many lawmakers knew this was going to lead to problems.
Why doesn't the government just do a workout on their own and save the profits for the taxpayer?
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