Geithner’s Non-Recourse Gift That Keeps on Giving to Bill Gross

[girl gone mad]

Geithner’s Non-Recourse Gift That Keeps on Giving to Bill Gross
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKm0M7RHXDoQ

April 2 (Bloomberg) -- Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.

The plan may reward investors with 20 percent annual returns on “really toxic” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

(snip)

Congressional Skepticism

Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said in an April 1 interview that the distribution of half of the profits to the investor “does bother me.”

“But even beyond that, what bothers me even more is it’s taxpayer money,” Bachus said. “What you are doing is artificially inflating the price of those assets because at the present prices the financial institutions won’t sell them.”

Geithner signaled he’d oppose any attempt to claw back profits from investors participating in the program. Investors and banks “need to have confidence that the rules of the game are going to be clear, consistently applied in the future,” he said in an April 1 Bloomberg Television interview in London.

‘Taxpayer Loses’

Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.

“The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”

Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.

[MannyGoldstein]

1. I Continue To Be Mystified By Obama's Backing Of This

It's astounding on the face of it. And since Summers and Geithner have such crushingly bad track records over the past 16 years, I'm not thinking that there's some subtlety to their genius that we're just not understanding.

[truedelphi]

4. Where is the mystery? For years now, Corporate America has known that

Lobbyists who are perky, attractive, preppy and gentle in manner can pull one over the legislaure and the public.

So why is it such a puzzle that Corporate America would let this man Obama be our President? Especially at a time when the Repulicans are anything but perky and attractive.

I mean, at least Obama is not lobbing nukes at Iran, as McCain would be doing right now if he had gotten in.

The above thought is the one thing keeping some of the hair on my head from being pulled out.

[ixion]

2. A non-recourse loan... a.k.a. money for nothing, essentially

from wikipedia:

http://en.wikipedia.org/wiki/Nonrecourse_debt

A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply paid out the difference. Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.

emphasis mine.

[girl gone mad]

3. And when the lender really doesn't have any stake in it..

like when they're spending other people's imaginary money, then the sole usefulness of non-recourse loans evaporates.