[SeaGypsy]

http://news.yahoo.com/s/ap/20090323/ap_ ... ld_markets

Asian Markets picked up solid gains up to around 2% today in response to the Latest US Bailout Package. Europe seems to be following suit.
Is this the 'New Bubble'?.

[peripato]

The plan is to save the world with smoke and mirrors.

[SeaGypsy]

The plan is to save the world with smoke and mirrors.

I've just spent 6 months solid in Provincial SE Asia; I have honestly been completely unsure my flight back to work would ever take off.
So now it looks like I get to fly back to my fat paying western decadent job for a wee bit longer. That's a great deal of confidence. I'm excited.

[3aidlillahi]

Details of the plan

[AlexdeLarge]

Isn't this plan similar to Paulson's original plan for the TARP last September? Then the gang decided it would not work and decided to recapitalize the banks instead??

[Plantagenet]

China announced today it would buy more US debt.

Thats why the Asian markets are up. China will subsidize the US a bit longer to buy more cheap plastic crap made in China and the rest of Asia.

[Cynus]

I found this explanation on Calculated Risk from poster "nemo" at https://self-evident.org/

The details of the “Geithner Put” have been released. It has two parts: One to deal specifically with bad loans, the other to deal with other legacy assets (securitized yadda yadda). In this post I will discuss the first part, dubbed the “Legacy Loans Program”.

The Treasury helpfully provides an example, which I reproduce here:

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.

Let’s flesh this out by repeating it 100 times. So say a bank has 100 of these $100 loan pools. And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which. (These numbers are made up but the principle is sound. Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece. Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those. But the other half wind up worth $100 each for a $16 profit. $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury. So the investor gains $400 on these winning pools. A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400. So the private investor gained $100, the Treasury gained $100, and the bank gained $3400. Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless. But no worries. As long as the FDIC has more expertise in valuing toxic assets than the entire private equity and banking world combined, there is no way they could be taken to the cleaners like this. What could possibly go wrong?

[NoWorries]

The real question now is: How long before the market realizes this plan is a bust? 3 months? 6 months? ....1 year?

[Plantagenet]

I found this explanation on Calculated Risk from poster "nemo" at https://self-evident.org/

The details of the “Geithner Put” have been released. It has two parts: One to deal specifically with bad loans, the other to deal with other legacy assets (securitized yadda yadda). In this post I will discuss the first part, dubbed the “Legacy Loans Program”.

The Treasury helpfully provides an example, which I reproduce here:

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.

Let’s flesh this out by repeating it 100 times. So say a bank has 100 of these $100 loan pools. And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which. (These numbers are made up but the principle is sound. Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece. Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those. But the other half wind up worth $100 each for a $16 profit. $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury. So the investor gains $400 on these winning pools. A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400. So the private investor gained $100, the Treasury gained $100, and the bank gained $3400. Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless. But no worries. As long as the FDIC has more expertise in valuing toxic assets than the entire private equity and banking world combined, there is no way they could be taken to the cleaners like this. What could possibly go wrong?

What private investor would be stupid enough to enter into such a contract with the feds? The Congress and the administration are railing against dividends, high salaries, bonuses, etc. etc. on Wall Street and passing regulations and laws to limit salaries and bonuses.-----how is the private investor supposed to make money without breaking any of the rules the government has to limit the amount of dividends, bonuses, salaries, etc. that companies that get federal money can have?

[alokin]

What happened that China buy more depth?

[Tanada]

What happened that China buy more depth?

From what I have been able to gather China never stopped buying debt, they switched from buying long term debt to buying short term debt. That scares the Treasury because short term debt come due soon and has to be repaid soon, they want to sell 30 year or longer term bonds. Now they are playing this game where the Fed is buying 30 year bonds to give the appearence that things are OK again.