Government of, by and for the megabanks

I’ve blogged several times since my March 21 post “Treasury invitation to screw taxpayers” about the massive collusion problem with Geithner’s plan to lend “buyers” of toxic assets up to 97% of the cost of their purchases using non-recourse loans the “buyers” can walk away from.

I was recently thrilled when an inspector general warned about this threat, and I’m now happy Bloomberg is reporting on the inspector general’s warning:

“In both the Legacy Loans Program and the Legacy Securities Program, the significant government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit,” the report said.

One example from the report: Say a bank and a private- equity firm both agree that a group of the bank’s loans is worth $600 million. The private-equity firm, however, agrees to overpay for the loans and bid $840 million at auction. The private-equity firm invests $60 million, which the government matches with $60 million of TARP money, and which is leveraged by a $720 million loan guaranteed by the Federal Deposit Insurance Corp.

After the auction, the bank secretly pays the investor a $120 million kickback, or half the difference between the auction price and the real value. Even if the private-equity firm’s $60 million investment is wiped out, it still would get a $60 million profit because of the kickback. Meanwhile, the bank would make a $120 million profit, at taxpayer expense.

If I didn’t know the U.S. Treasury and U.S. Federal Reserve are both currently being run by and for the megabanks, it would simply amaze me that the U.S. Treasury would propose a plan potentially allowing banks to sell virtually worthless paper for trillions of dollars, with taxpayers picking up almost the entire cost to buy the nearly worthless junk. And it would amaze me far more that the Treasury has not (to my knowledge) altered its plan following very public alarms about collusive price manipulation to rip off taxpayers.

Posted by James on Friday, April 24, 2009