Today Treasury Secretary Tim Geithner unveiled his plan to save the financial system. The response has been predictable: bankers and Wall Streeters love it, normal people don't understand it, and a sliver of taxpayers with the fortitude to check it out are outraged.
Count me among the latter.
The deal breaks down like this: The government will lend, at minuscule interest rates, several hundred billion dollars to qualified investors who wish to bid on the many insolvent banks' "toxic assets" (In its "fact sheet," the Treasury calls them "legacy assets"). In addition, the government will come in with its own equity investment, partnering with the private money guys. The ratio breaks down like this:
80-85 percent borrowed taxpayer money; 13-16 percent taxpayer cash investment; 3-5 percent private equity = Profits.
The taxpayer loans will be paid back only if the assets bought with the money can be sold at a profit, which the taxpayers and the private investor will share, at about 80-20.
The amount of real private money demanded by Geithner is shockingly small. Basically, investors in the deal will be receiving a 20 percent equity stake for only a 3 to 5 percent investment, all of it backed by sweetheart government financing that effectively leverages the private equity at breathtaking levels. The "private partners" will, in effect, enjoy a 33-to-1 leverage ratio on their upside, with no downside risk. The proposed deal is stunningly similar to the one given to George W. Bush when he invested in the Texas Rangers.
Bush invested about $150,000 and made about $15 million on that deal. Heh heh.
So what's in it for us taxpayers? The stated reason for this whole business is to "get the banks lending again."
But if we taxpayers lend rich guys hundreds of billions to buy the bad bank loans, why not just have the government itself make the loans needed for productive businesses? Why not cut out the middlemen?
The answer: Those middlemen are "the system" Geithner is trying to save.
The system we're saving is not the It's a Wonderful Life system of mortgages for normal people. That system died in the 1980s. The new system is akin to a big casino where rich people get to bet using poor folks' money. That's the system we're saving.
That's why the chatter all weekend about how these "private investors" were worried about how the government might allow populist anger to stain their ties, and might later tax them, or might limit their "executive pay" and all that nonsense.
As the New York Times noted, Obama's people want it known that these rich people are not like the others. They're our friends: