This is from this morning's New York Times. It succinctly lays out the brilliant plan our leaders have put together.
The government plan in effect involves insuring almost all losses.
Since the private investors are spared most losses, then they primarily value their potential gains. This is exactly the same as being given
an option.Consider an asset that has a 50-50 chance of being
worth either zero or $200 in a year's time. The average value of the
asset is $100. Ignoring interest, this is what the asset would sell for
in a competitive market. It is what the asset is worth. Under the
plan by Treasury Secretary Timothy Geithner, the government would
provide about 92 percent of the money to buy the asset but would stand
to receive only 50 percent of any gains, and would absorb almost all of
the losses. Some partnership!Assume that one of the
public-private partnerships the Treasury has promised to create is
willing to pay $150 for the asset. That's 50 percent more than its true
value, and the bank is more than happy to sell. So the private partner
puts up $12, and the government supplies the rest at $12 in equity plus $126 in the form of a guaranteed loan.If, in a year's
time, it turns out that the true value of the asset is zero, the
private partner loses the $12, and the government loses $138. If the
true value is $200, the government and the private partner split the
$74 that's left over after paying back the $126 loan. In that rosy
scenario, the private partner more than triples his $12 investment. But
the taxpayer, having risked $138, gains a mere $37.
Shoo-eee, the taxpayer is getting suckered horribly on this one.
