Obama: Economic crisis 'not as bad as we think'

[nathanm]

That the current Treasury attempt to handle the "Toxic Assets" situation.... would be to sell them at a rate of 7%... Through a private / public investment fund.

That's not quite accurate, unless the actual loan performance is far worse than even the most pessimistic are forecasting.

Basically, the banks are making loans to the hedge funds that buy the so-called 'toxic' assets. The money the hedge funds are putting up is the down payment on the loan. FDIC then guarantees the performance of said loan, limiting the downside to the banks and the hedge funds in the process, and hopefully returning the price of those securities to a rational level.

This crisis is almost entirely manufactured by stupidity. If you read investment boards and blogs, you'll see that there are quite a few people pumping money into these things already because they are fairly certain they will make an absolute killing at the current prices of the MBS and CDO assets. The crisis of confidence is limiting the number of people willing to jump in, thus causing the current pricing stupidity that makes buying so profitable, even without government support.

Of course, the number of people who can do this is also limited by the complete inability to finance such a purchase, even if you're putting in a lot of your own skin.

And there you have the rationale for the Geithner Plan.

Fundamentally, it's a good idea. Everything I've seen so far points to a monumentally stupid execution, ripe for gaming by the hedge funds and banks. One idea that seems to be making the rounds is that the hedge funds will collude with the banks to borrow the funds used for the 'down payment,' sell the purchased securities at a paper loss back to the bank (or to a different bank) and make FDIC pay the difference, thus leaving the hedge funds with a tidy profit for little work, and the bank with the money and the assets.

However, if it ends up working, it may be worth the price we end up paying. Not that I'm at all enamored with the idea of making the rich even richer at our expense.