Geithner plan 2발음듣기
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Geithner plan 2
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So just to get us back up to speed where I left off in the last video, we have a bank sitting on an asset that it maybe originally paid $100 for.발음듣기
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And the problem that we said from the beginning of the banking crisis is, that the banks can't sell these assets to pay off its liabilities, its deposits, or other debtors, for the price that it wants to sell them at.발음듣기
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If this whole thing became $30, then the liabilities become worth much more than the asset, than the $30.발음듣기
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And the bank is bankrupt. And so as I outlined at the end of the last video, the current incarnation is for, you have a public private partnership.발음듣기
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So let's say that you have - and I'll do the number slightly different - so you have $5. from a private investor.발음듣기
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And I'm doing this a little bit differently, so the numbers match up exactly with what they're going to pay for the asset.발음듣기
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When it gets capitalized. We'll do that in green. And what they can now do, is they can give that $60 to the banks.발음듣기
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And just as a real quick review, if this thing ends up being worth - let's say it ends up being worth $100.발음듣기
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What's their down case? Their down case is - let's say that toxic asset really is worth $30.발음듣기
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But a lot of people, if you thought that there's an equal chance of this and this happening, you would take this bet.발음듣기
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If you had a 50% chance of making five times your money, and only a 50% chance of losing your money, the expected value here is, it would be 0.5 times 25 plus 0.5 times zero.발음듣기
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The market, if they thought that there was any chance that these things are worth more than $60, any chance, they'd be trading at higher than $30.발음듣기
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So given where the current market is, before government intervention, clearly no-one thinks that there's a really good chance of them being worth $60.발음듣기
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And if you make this probability high enough relative to this one, then of course the expected value is still going to be less than $5.발음듣기
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Even though Paul Krugman is out there saying, you know, this is one of those heads I win, tails you lose type of scenarios.발음듣기
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And that is true. In the positive scenario, the private investor makes the bulk of the money, alongside the Treasury.발음듣기
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While in the negative scenario, most of the hit is going to be taken by the Federal Reserve with their loan, and then the Treasury who's an equity investor alongside them.발음듣기
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But I'd say, that even if that, an intelligent investor, just because the risk soon. reward is disproportionately weighted to the other guy, they still wouldn't want to invest it, if this is the more likely scenario.발음듣기
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What the bank does is it takes some extra money, and they could raise equity, or for all we know they could raise money.발음듣기
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And this is happening. I mean, the government is giving loans to these major banks, to Citibank and Bank of America, et cetera.발음듣기
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In this new Geithner plan. So the bank takes that $7 that they essentially might have just borrowed from the government.발음듣기
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Or even get one of their hedge fund clients to do it, by giving them good terms on something else.발음듣기
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They're controlling this entity here. They're controlling entities that control that entity.발음듣기
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It doesn't matter. But they essentially set the price for which this entity is going to pay for its own assets.발음듣기
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Well, think about it. In this reality, before any of this happened, the banks had 100% exposure to these toxic assets.발음듣기
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And then the rest of the loss is going to go to the taxpayer; the Treasury and the Federal Reserve.발음듣기
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Because in this reality when there was a hit, if this was worth $30 the bank would have to take a $70 hit.발음듣기
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While in this reality, if this toxic asset now is only worth $30, the bank's only going to take a $7 hit.발음듣기
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So my fear is, and frankly since there's nothing to prevent it, it's almost a self-fulfilling prophecy that's going to happen.발음듣기
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Because if you are the seller of the security, you are Citibank, you're going from 100% exposure to only 7% exposure, and you're going to be staying solvent.발음듣기
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But the net effect of this is that the Treasury and the Federal Reserve, they got $100 for something.발음듣기
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So the difference, the $63, it essentially would be a check that's being written from the U.S. taxpayer to these banks.발음듣기
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The right answer is, you take that $630 billion, make the banks wipe out their shareholders, and then you recapitalize the banks with the money.발음듣기
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And then you start, instead of writing the $63 or the $630 billion check directly to the management and the shareholders who got us into the mess, you essentially recapitalize the new banks.발음듣기
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And you get the same effect without this hugely negative repercussion of providing a huge wealth transfer to the very same people who got us in the mess.발음듣기
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