Investors may bail out financial system
The U.S. government is developing a plan to give wealthy investors the chance to buy securities that finance consumer lending, without the risk of massive losses. Dan Grech breaks down how the plan could work.
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BILL RADKE: The Washington Post reports this morning the U.S. government is preparing a plan to give wealthy investors the deal of a lifetime: A chance to make a killing, without the risk of massive losses. The program could have the government loaning almost a trillion dollars.
Marketplace's Dan Grech explains.
DAN GRECH: The government has turned to these wealthy investors for a simple reason -- they're the ones sitting on the biggest pile of cash.
Here's how a deal would work: A hudge fund ponies up a million dollars. The Fed loans it another $9 million. The hedge fund then uses that $10 million to buy an asset-backed security. An asset-backed security is used to finance things like student loans, car loans and credit cards.
The hedge fund would have to hold on to that security for three years. If its value rises to $11 million, investors get to keep that million dollar profit, basically doubling their money. If the value drops, investors may lose their initial investment, but nothing more. Taxpayers are on the hook for the rest.
The government is considering the sweetheart deal to coax money back into the credit markets. It thinks this may be the only way to do it.
I'm Dan Grech for Marketplace.
Comments
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From Tampa, FL, 03/06/2009
And if the value rises to $20 million the hedge fund gets to keep 10. I think it is called leverage and isn't that how the pooch gotr screwed in the first place?
Best of all the hedge funds will be taxed at, what, 15%? Good thing we're worried about taking care of the rich. We really wouldn't want them to suffer.
03/06/2009
Wow... so the government, in effect, is saying that these asset-backed securities are only worth one-tenth of what they were originally? Ouch.
I also do not like the idea of hedge funds, being largely unregulated, given such access to taxpayer dollars. This is a ridiculous idea.
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