The Latest Bailout Proposal

Either I am daydreaming, reading this wrong, or heading off to get money for investing. The program sounds too good to be true for an investor with money.

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

If I am not reading this very wrong, with a $6 investment one stands to win $100 in return if the securities have the value assigned by the government. The risk:return ratio is unbelievable. There is something very wrong with this idea. Or this is one more gift to the very rich as they prepare to become even more rich.

Even if the securities fail miserably, with a total risk of 6% of face value the investment is very attractive for an investor. Since taxpayers are backing the financing, the losses will be sustained by those of us who pay income tax.

Update 1: Dean Baker said it best.

It's not clear that most of the public should be happy about seeing more of their tax dollars going to Wall Street.

Peace.