Geithner Plan Puts Taxpayers on the Hook
Toxic assets in our pension funds. Just where we'd want them.
The phrase "taxpayers will share in any upside" always makes me shudder.
And with good reason: Last September, as Fannie Mae (FNM) and Freddie Mac (FRE) crumbled under the weight of their massive loan portfolios, the US taxpayer ponied up $2 billion to rescue them, along with $200 billion in guarantees for future losses.
We were told that our investment would be well-protected, since the companies barely played in the subprime space: Their $5 trillion portfolios consisted of only the finest prime mortgages. One Wall Street Journal columnist even called Fannie and Freddie "a gold mine."
Six months later, Fannie and Freddie have chewed through almost half their taxpayer-funded safety net. With delinquencies on prime loans rising, and home prices tumbling in high-end markets, losses are likely to keep growing - as will the taxpayer's obligation.
Then, just a week after the Fannie and Freddie rescue, insurance giant American International Group (AIG) took the national stage. Federal Reserve Chairman Ben Bernanke promised he had struck a hard bargain with AIG, and that taxpayer money had been shrewdly invested. The company was strong, we were told, and it was being unloaded at a bargain.
Three bailouts later, we're collectively out almost $200 billion - and public outcry has reached a fever pitch.
$13 billion to Goldman Sachs (GS), $12 billion to Deutsche Bank (DB), and hundreds of millions to AIG executives: Not exactly what we signed up for.
Yesterday morning, in a long-awaited announcement, Treasury Secretary Tim Geithner said his Public-Private Investment Program "will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments."
According to Geithner, private investors, alongside Treasury capital and Fed leverage, will jumpstart the market for the so-called "toxic assets" clogging up the financial system. Many hope the initiative will place a floor beneath the loans and securities that banks are unwilling to sell at prevailing market prices.
Geithner is encouraging private investors -- including pension funds -- to aggressively participate in the program. The assumption is that these distressed assets are trading well below their intrinsic value, and that buying delinquent loans and esoteric mortgage-backed securities at pennies on the dollar is an astute investment.
To be sure, certain well-connected private investors and the money managers chosen to coordinate the trades will make out famously. Meanwhile, Americans are being asked to blindly toss their tax dollars and pension money at the riskiest, most leveraged, least transparent securities the financial system has ever dreamed up.
If the federal government's track record as a steward of public funds is any indication of future performance, I'd welcome an opportunity to take the other side of whatever investments my tax dollars are about to be thrown toward.
The information on this website solely reflects the analysis of or opin=
=3D =3D3D ion about the performance of securities and financial markets by =
the wr=3D iter=3D3D s whose articles appear on the site. The views expresse=
d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi=
a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web=
site is intended to con=3D stitute a recom=3D3D mendation or advice address=
ed to an individual investor =3D or category of inve=3D3D stors to purchase=
, sell or hold any security, or to =3D take any action with re=3D3D spect t=
o the prospective movement of the securit=3D ies markets or to solicit t=3D=
3D he purchase or sale of any security. Any inv=3D estment decisions must b=
e made =3D3D by the reader either individually or in =3D consultation with =
his or her invest=3D3D ment professional. Minyanville write=3D rs and staff=
may trade or hold position=3D3D s in securities that are discuss=3D ed in =
articles appearing on the website. Wr=3D3D iters of articles are requir=3D =
ed to disclose whether they have a position in =3D3D any stock or fund disc=
us=3D sed in an article, but are not permitted to disclos=3D3D e the size o=
r direct=3D ion of the position. Nothing on this website is intende=3D3D d =
to solicit bus=3D iness of any kind for a writer's business or fund. Mi=
ny=3D3D anville mana=3D gement and staff as well as contributing writers wi=
ll not respo=3D3D nd to em=3D ails or other communications requesting inves=
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter