Posts Tagged ‘non-recourse loan’

Geithner 2.0

23 March 2009

The fleshed-out Financial Rescue Plan hit the streets today, and the stock market loves it (Dow, Nasdaq, and S&P all up about 7% today).  As Dean Baker points out, why wouldn’t they? The plan is a huge gift to dodgy financial institutions, as the Treasury, Fed, and FDIC will be subsidizing gross overpayments for about $1 trillion (by Treasury Secretary Tim Geithner’s estimate) in toxic assets (or “legacy assets,” the latest euphemism.  I preferred “troubled assets” — sounds like a Capitol Steps number waiting to happen).

Paul Krugman has some unpleasant arithmetic about the plan, which takes as its starting point the way the plan would subsidize the private institutions (not individuals) that would buy those toxic assets.  Reportedly the subsidy would take the form of “non-recourse loans” in which the borrower (and toxic asset buyer) would only have to put up 15% of the price paid for the asset, the asset itself would be the collateral for the loan, and if the asset went bad the lender could default and owe only the bad asset.  Just like a 15% margin loan, except some margin loans allow the lender to demand repayment of the whole thing.

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