After the Treasury Department released the refurbished plan to buy up “legacy assets” (formerly known by the less tasteful moniker “toxic assets”) Wall Street responded with two thumbs up. Treasury Secretary Tim Geithner has gone from goat to hero in one day:
But the stock market’s first-day verdict went in the right direction for Mr. Geithner this time, up nearly 7 percent and 500 points, in contrast to the precipitous slide after Mr. Geithner’s first effort, when his inability to explain in any detail how the program would work left Wall Street jittery about whether the administration had a workable plan.
Mr. Geithner’s plan aims to help banks sell their “legacy/toxic assets” at prices much higher than the market is willing to pay by providing government subsidies/guarantees to entice a small investment from private investors. With most of the money and practically all of the downside risk on the shoulders of the American taxpayer this is a win-win for the selling banks and the buying investors.
Now that the federal government will buy up about $1 trillion in “legacy/toxic assets” at inflated prices, this offers a great opportunity to make some more money from this financial debacle. This is where the credit default swap (CDS) becomes a derivative trader’s best friend. The savvy Wall Street types should load up on buying CDSs on every “legacy/toxic asset” the government purchases from the banks. If these overvalued “legacy/toxic assets” default, and the sellers of the CDSs are unable to make the buyers whole, the US government can step in with another cash infusion to bailout the sellers of these CDSs. The American taxpayer can continue to be a hapless ATM machine for Wall Street’s Masters of the Universe.
Of course, the above assumes that buying “legacy/toxic assets” at inflated prices comes with substantial downside risk. However, the Obama Administration is telling us that these assets will go up in value and everyone will make money. I just wonder if Geithner and company actually believe what they are saying or just want us to believe it.
Either way, I see another payday for Wall Street financed by American taxpayers.
