The details of the Treasuries much anticipated toxic asset plan to "cleanse" the banking system and restore financial stability are now public. My reaction posted on Twitter as I was reading it.
@timu_matt: Reading the Treasuries new toxic asset plan. Everytime I think they can't get more hell bent on destroying this country they surprise me again.
Yeah, that pretty much sums it up. In a nutshell the plan revolves around the Treasury and FDIC loaning private investors money to buy the toxic assets from the banks. These loans would be made at almost no money down, when you combine the Treasury and FDIC incentives these (non-recourse) loans would account for up to 97% of the purchase price. The treasury is essentially trying to create a whole bunch of private "hedge funds" operating on insane amounts of leverage (33x), overpaying for toxic assets.
Wait, isn't excess leverage one of the main causes of this mess? At 33x leverage, 3% drop in the value of the assets blows up the investor, but hey the US taxpayer the one taking taking the loss on 97% of it, so who cares. This scheme basically opens the door for wide scale gambling in the financial system at the taxpayers expense. Now, you want to know the truly sick part?
The biggest gamblers in this system will be the big banks themselves. They will practically be fighting each other to grossly overpay for each others (and their own) toxic assets. Hey, they make money either way no matter how much they overpay, it's the tax payer on the hook. Seriously, we might as well pass some new legislation so that any federal taxes we pay go directly into the coffers of the big banks just to formalize the whole arrangement, because that is what we've been doing informally for months now.
Others finance bloggers react (similarly):
Paul Krugman: Despair over financial policy
Calculated Risk: Geithner's Toxic Asset Plan
Naked Capitalism: Private Public Partnership Details Emerging
Karl Denninger: Toxic Assets: Promise, But Also Peril