Geithner Plan 2.5발음듣기
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Geithner Plan 2.5
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In the second Geithner video, I lay out a scenario where a bank could - let me draw its balance sheet.발음듣기
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So it could hold some toxic asset A, and we lay out a scenario where, what the bank could do, right now it has 100% exposure to A.발음듣기
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So now the hedge fund owes this money to our bank and it now has the cash on its balance sheet.발음듣기
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And now it has this cash, and then it could use this cash to invest in essentially the Legacy Loans Program, the public-private investor Legacy Loans Program that Geithner talks about.발음듣기
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The Fed would contribute $84, and then they would have $100, and I know this is kind of messy, but they would have $100 that they can then use to go buy these assets.발음듣기
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And the net effect of this is that this bank went from having 100% exposure to this toxic asset to having only $7 exposure through this loan to this hedge fund, or this special-purpose entity, or whatever you want to call it.발음듣기
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And I got a couple of emails, even from some colleagues, to say, well, can this really be done?발음듣기
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And my kind of knee-jerk reaction was, well, if this can't be done, they'll figure out a way to do it, because there's billions of dollars at stake, and really, the incentive here is structured to do it.발음듣기
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And frankly, the Government probably wants them to do it, because on some level, even though this would be a massive transfer of exposure and wealth from the taxpayers to the banks, it would on some level solve the problem.발음듣기
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And if people really aren't aware of it, everyone will be happy about it, because all of these banks, Citibank and Bank of America, will just survive, and they can just kind of say that all's well.발음듣기
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So what I wanted to do, just to answer those questions, is get a little bit particular about the wording.발음듣기
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Leigh Logan actually emailed me, and she highlighted one clause in the Legacy Loans term sheet that seems to address what I talk about in that second video there.발음듣기
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It says: "Private investors may not participate in any PPIF" - so this is that Private-Public Investment Fund - "that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF."발음듣기
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And I looked it up in the Securities Exchange Act of 1934, and there are multiple definitions.발음듣기
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It says: "The term affiliate means any company that controls, is controlled by, or is under common control with another company." And that's an area that I just outlined.발음듣기
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They just essentially gave them a loan with very little stipulations on it, and then the hedge fund can go do it.발음듣기
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But, you could say, oh, well, you know, there's nothing that this bank could do to force this hedge fund to buy these assets, so maybe this plan won't work.발음듣기
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Frankly, when I think of private capital, I think more in terms of equity investments, but maybe the definition of private capital also includes debt investments, although, I doubt it.발음듣기
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So in this video I want to lay out a scenario that, essentially, it can do the same thing economically,발음듣기
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and in fact, the exact behavior that they want in other parties without being in any way an affiliate of the counterparty and in no way giving capital directly to them.발음듣기
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And this is what I thought of after kind of thinking about it for about five or ten minutes.발음듣기
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You could imagine what the banks will come up with when they have billions of dollars and careers on the line.발음듣기
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So if you have a scenario where you have this toxic asset A, and you economically want to do what I describe,발음듣기
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but you don't want to be an affiliate and you don't want to give the appearance of self-dealing, what you do is you sell credit defaults on A that become supercheap, so you have essentially $7 exposure of credit defaults.발음듣기
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So your liability right here, is a seven-dollar CDS exposure, and I'll go over the economics of how this works in a second.발음듣기
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You normally just have to - if you're insuring $7 worth of credit default swaps, your liability isn't $7.발음듣기
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You do the probability of default and all that, so your liability will probably be - I don't know, $1.00, whatever it is, and you get some income stream for it.발음듣기
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But the general notion is that you sell credit default swaps on this toxic asset, on A, for really cheap.발음듣기
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And just so you know what a credit default swap is, I've made a couple of videos on it, it is essentially an insurance policy on a loan or on a company,발음듣기
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and if that company or this loan defaults, you say that you are going to pay up essentially the insurance amount.발음듣기
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And just so you know, most of these toxic assets that these banks hold, these are assets that they were the originators for, and so, they're very particular to the individual banks.발음듣기
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So a bank can definitely say I'm selling a credit default swap on A, and they know that, in the end, when I kind of outline this whole thing, they'll be the main beneficiary of it.발음듣기
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I have a $7 investment in the TALF - sorry, in this Geithner Plan, and then I also have this credit default swap, this insurance contract.발음듣기
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So if that bank did it, then the hedge fund's assets would have the $7 investment in this Geithner program, and then it'll have $7 of credit default swap protection.발음듣기
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In the world where asset A is worth a lot, they get all of the upside through their investment in the Geithner Plan.발음듣기
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You have $86 from the Fed, and they use this to give the cash here, and then that goes back here, and you're holding toxic asset A.발음듣기
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Now if toxic asset A ends up being worth a lot of money, then this is worth a lot, and this is worth nothing.발음듣기
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And that's OK, because the hedge fund essentially paid nothing for it or paid next to nothing for it, in which case, everyone kind of works out well in that scenario.발음듣기
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So it's economically the exact same thing that I outlined in the Geithner Two video, but in this situation, these guys, it's almost an arms-length transaction.발음듣기
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But this bank can make that behavior happen by essentially going into the market and selling credit default swaps for this exact asset for really, really cheap.발음듣기
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let's say you owned all of the shares of the bank or a good percentage of the shares of the bank, then you would also have an incentive to go out there and use the Geithner Plan and lever up and buy these assets.발음듣기
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Another thing is - I don't want to get too technical --if you kind of hold one of the fulcrum pieces of debt, the pieces of debt that are trading at a discount,발음듣기
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because you're afraid that this bank is going to fail, if you hold a bunch of those assets, you still would want to participate in the Geithner Plan and funnel money and use the Government money to essentially buy this asset A.발음듣기
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I mean, the general theme here is, if you have two people, if this is the private world and you have a scenario where person A, if a transaction can make $100 or he gets rid of $100 exposure, and person B essentially has a potential loss of minus $7 of exposure,발음듣기
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So this is a huge subsidy of exposure, and it depends what these are really worth, if this thing is really worth $30 and it's a $63 exposure, but any time you have this, the private sector is going to figure out a way to make this subsidy happen.발음듣기
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And everything I've outlined so far is if A is the bank that has 100% exposure, all they have to do is, through whatever back-door scheme or financial product or insurance or whatever they want to do, or loans that have very little stipulations on it,발음듣기
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they just have to give this guy essentially $7 of compensation somehow that gets around the Government rules, and then this transaction will occur.발음듣기
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And I hope it doesn't occur, and it's very possible it won't, because maybe I'm missing something here,발음듣기
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but I'm just saying that everything I understand about the Geithner Plan is that there's a huge incentive for this to occur,발음듣기
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Because, as I outlined in the other videos, for a private investor who's not incentivized in this way, the put option that the Government is giving them still is not enough of a rationale to go from paying $30 for an asset to going to pay $60 an asset.발음듣기
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