RSS Feed for This PostCurrent Article

Public-Private Partnership? or “Won’t You Be My Neighbor?”

By Larry Doyle on March 23, 2009 at 9:20 PM in American Consumers, Banking Institutions, Congress (House & Senate), Economy, Housing & Housing Crisis, Sense on Cents (Larry Doyle blog)

An oversimplified view of the proposed private-public partnership for investors to purchase toxic assets from banks is as follows:

A couple (private investor) looking for a home finds a piece of property (toxic asset) that seems very appealing. A mortgage broker (the government) is indicating that he can preapprove some very attractive financing terms. The mortgage broker also indicates that he can fortuitously provide a large cushion against potential losses on the property. The buyers inquire how that cushion may work. The broker informs them that he has access to funds from all the other homeowners (taxpayers) in town to offer as incentive to sell this property and others like it.

The couple’s interest increases, but they start to wonder what’s the catch as the property has been on the market for a while.

Upon further review, the prospective buyer discovers that the property may have structural issues. On hearing that, they think about scaling back a potential bid on the property. The broker pressures them to the point where the couple starts personally disliking the broker.

The broker further pressures the buyer to reveal more personal financial details over and above what may be necessary to make the purchase. The couple’s personal dislike of the broker grows, but they remain intrigued by the potential value in the home. The broker then informs the couple that he intends on moving into the neighborhood.

The broker descriptively envisions how close a relationship they can develop. Backyard cookouts, wiffle ball games, sleepovers, carpooling.

The buyers wonder whether this property is really worth the potential headache of a business relationship and then neighbor so closely meddling in their life.

The buyers start to wonder how quickly they can grow a row of extremely tall hedges.

Welcome to the world of the public-private partnership proposed by Treasury Secretary Geithner to help clean bank balance sheets of a lot of stale, if not toxic, loans and securities.

In conjunction with this developing dynamic, as well as the three ring circus playing out in Washington on the topic of taxing executive bonuses and compensation, I reread and resubmit my piece from February 3rd, Be Careful What You Wish For…

LD

  • Doc99

    Another Test for Hopey One.

  • Ferd Berfle

    three ring circus

    That’s no three-ring circus. It’s a carnival side show complete with a two-faced barker, man-eating chickens, snake handlers, and card readers.

    • oowawa

      Ferd, you forgot the 69,000,000 clowns piling out of the little clown car . . .

  • WhatNow

    LD – Thanks for explaining this to us in simple terms. Maybe a bot or two will understand.

    What’s the saying? “If it’s too good to be true……” The AIG executives should have also said that about their bonuses.

  • http://deleted Aaron

    I love how the buyer puts up $7, the government puts up $7 and then finances $86 for the buyer. (This is out of $100) If the purchase goes bad the government is on the hook for $93, If all goes well the buyer splits the profits, that is if the Congress allows them to. But nevertheless this is a good deal for the buyer which is why the market took off today. The government is giving private equity a very cheap option. I mean please PIMCO loves the plan so it can’t be a good deal for any counter party, PIMCO always wins and wins big. PIMCO makes Goldman look like a gang of toddlers. I was on the opposite end of quite a few of their trades at the CBOT and I always lost unless they were only buying insurance on their primary trade.

  • Peggy Sue

    That’s a great analogy, LD. Simple and withering!

    Thanks for putting the situation in simple terms. And you’ve been a prophet with this point from your previous article:

    ‘“Be careful what you wish for!” I make this statement because if government is actively involved in establishing compensation practices throughout an industry, then do not be surprised if they look to use that precedent across other industries and other situations. Some may view that as unlikely, but I have already been hearing about situations that would question the validity of contracts, the belief in private business, and results of corporate negotiations. If government intervenes in areas they deem as in the public interest, where does one draw the line? ‘

    And now, this is exactly what we’re hearing from the DC wonks and the President–putting their fingers into private business and setting limits on executive compensation, turning contracts upside down, decreed by the power and wisdom of Caesar!

    Not good. Be careful what we wish for indeed. And the beat goes on.

  • barry bums a ciggie

    LD, don’t the banks have a say about the “broker’s” pricing of these homes (toxic assets)? Meaning, if the broker price too low, the banks wouldn’t be interested in selling them?

    • http://deleted Aaron

      If the banks don’t sell at the price the broker, (The Fed), wants them to sell at then treasury will say the bank failed the stress test and FDIC will take them over. Don’t you just love intimidation?

    • Linda C.

      I believe there is a commission paid by the government somewhere in the mix. I am starting to get all of the rescue plans confused with one another

    • http://www.senseoncents.com LD

      Barry….what do the banks need? Capital…who do they report to? Regulators….those regulators can and will pressure them in this process. Starting with Citi, whom we (govt) effectively own anyway.

  • oowawa

    I knew something smelled fishy. After reading your article, LD, the fishy form is starting to take shape: a great big bottom-feeding sucker . . .

  • lark

    The people of the 22nd. Century (the children of our grandchildren and great grandchildren) will read about these governmental contraptions and wonder how their enslaved status could be back traced to the first black president.

    • lark

      Hey but who cares, no? What are we, stupid? The hell with those who come after us.

    • oowawa

      The people of the 22nd. Century (the children of our grandchildren and great grandchildren) will read about these governmental contraptions and wonder how their enslaved status could be back traced to the first black president.

      What beautiful irony! Lark, fess up: you’re an English professor, aren’t you?!?!?

  • need to know

    “After me, the deluge”.

    • oowawa

      apres moi, le deluge

      There seems to be quite a bit of disagreement as to whether or not Louis XV of France ever said this in the years preceding the French Revolution. It doesn’t matter. The phrase has entered the collective unconscious, and I think that it is certainly resonant in this context. It means: “I really don’t care. These are great times. If chaos ensues, it’s your problem.”

      I’m soooo apprehensive.