Everyone knows what the problem is. Banks and Tim Geithner think toxic waste is worth more than the anyone is currently willing to pay. Hedge funds, vulture funds, even new funds small investors might be able to buy into, all of them think the prices will go lower. This is a standard practice: if someone is headed for bankruptcy, wait until they file to buy their assets. Of course, you might have to bid against other people, but in this case, there are so many assets that you don’t really have to worry about that. How many of these vultures are AIG counterparties who have already been paid off by the Treasury?
Just how greedy are these people? Consider John Paulson. Last year he made huge returns, 36% after fees in one of his hedge funds, mostly from shorting Fannie Mae and Freddie Mac, Lehman Bros. and other financial institutions early in 2008. What is he doing now?
The biggest opportunity Mr. Paulson sees this year is in buying distressed debt, and the firm has targeted about half the Advantage Fund’s assets to that strategy. …
Paulson estimates that the total size of the distressed debt market at close to $10tn, counting mortgage, corporate, financials and even sovereign debt. This includes about $2.2tn in mortgages. Paulson thinks he knows about a bunch of CDO pools because he shorted them over the last few years, and to do that, he developed proprietary techniques for valuing pools of mortgages by examining their performance. His target price would provide a return of 28% in the best case, 24% in a medium case, and 15% worst case. Of course, Paulson will use leverage to acquire these pools, and it isn’t clear if that is taken into account in his figures.
Dalton Investments, led by Steve Persky, is also interested in this junk. Persky thinks there is about $1tn in toxic mortgages out there. He and his team have software to analyze the performance of pools of mortgages, and have developed models to govern their acquisitions. The fund is averaging 22% return so far.
The Paulson/Geithner plan was to overpay banks for toxic waste, thus recapitalizing them without acknowledging it, and getting nothing for taxpayer money. The new plan is to let private interests use public money to profit from toxic waste. To mollify taxpayers, maybe we get out money back plus a bit of interest, but if the private people overpay, we eat the loss on the loan .
Making it crystal clear, Paul Krugman explains
…the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.
The WaPo tells us
The government is seeking to attract private investors to manage and put their own money into these funds by offering to cap their losses and share in the risk of buying the troubled assets.
These investors would likely include hedge funds, private-equity firms and other wealthy Wall Street financiers, according to market analysts and industry executives.
The administration is worried that there might be political fallout over this plan, and I have to admit this plan makes me feel pretty hostile. But that’s not the only reason this is wrong.
Taxpayers are pouring money into the shadow financial system day after day through AIG. The money we poured into save AIG is flowing right back out into the bank accounts of counterparties. We have a short list, but that information is being leaked to serve AIG’s purposes. One of those purposes is to show that if we let AIG fail, there would be world-wide consequences to the financial system.
The short list doesn’t answer important questions like:
1. How many of those counterparties are going to be making mountains of money out of the toxic waste pool?
2. How many of them are going to insist on ludicrous rewards without risk using even more of our money?
3. Why is the US Government such a patsy?
Maybe Jon Stewart could ask?
It’s well past time Congress demanded some answers. Please sign the petition: No More Dough Till We Know Where It Goes.