Treasury invitation to screw taxpayers

My previous post explained that the latest Treasury plan — to have government agencies lend private parties up to 97% of the cost to buy troubled bank assets — unfairly lets private parties take all future profit and stick taxpayers with almost all future losses. Remarkably, there’s an even bigger problem:

Imagine that a hypothetical Citibank-held asset with a face value of $100 million is actually worthless and the market knows this. At the government-subsidized auction, if people bid honestly, the asset would not sell for even $1. But participants have every motive to scam the government’s idiotic 97% subsidy.

Someone could bid $100 million and pay $3 million. Over the next few years, a grateful Citibank — $100 million richer thanks to the purchase of its worthless asset for $100 million — could then show its gratitude by shoveling, say, $35 million to the worthless asset’s buyer. Citibank’s $65 million richer. The asset’s “buyer” is $32 million richer ($35 million minus its $3 million loss). And taxpayers eat a $97 million loss (our 97% subsidy of a $100 million purchase).

Heck, if Citibank is allowed to bid, it buys up all of Bank of America’s crappy assets for 100 cents on the dollar and BofA does the same for Citibank. Problem solved. Bank balance sheets are in wonderful shape. Except taxpayers have massively overpaid trillions of dollars for garbage assets.

Posted by James on Saturday, March 21, 2009