Tuesday, March 31, 2009

Real World Examples of Geithner's Bank Plan

As insanely complex as some of this financial stuff is, it's nice to have real world examples to give us an idea of what's going on. Here is the Geithner bank rescue plan, described by Tom Edsall using the metaphor of a poker game:

Normally, a poker player has to pay full value for every chip, $1 for a $1 chip, $100 for a $100 chip, and so forth. In the Geithner game, the rules are different. A player acquiring $84 worth of "chips" only puts up $6. Of the remaining $78 which S/he owes, the FDIC would provide - in the form of a nonrecourse loan --- $72, and the US Treasury would put up $6.

Let's say the player has a good night, and makes $200 over and above his/her original $84 "investment" with a total stack of $284 (his/her $200 profit and his/her initial $84 buy-in). Our happy camper then takes $84 off the top out of which s/he pays $72 back to the FDIC, and $6 dollars back to the Treasury. S/he would pocket the original $6 investment.

The remaining $200 would then be split between our talented player and US Treasury, each getting $100, good news for one and all. There are no limits on the upside: if the player has an extraordinary night and makes $10,000, s/he will get $5,000, all from an original investment of $6.

If, however, our player has a terrible night, and loses the initial stake of $84, the downside is just $6. S/he gets to gamble $84 with the worst possible outcome being the loss of $6 -- not a bad deal.

. . .

Columbia economist Jeffrey Sachs, an outspoken critic, took the poker image one step further, telling the Huffington Post: "It's as if the taxpayers, banks, and hedge funds are playing poker, but the hedge funds get to use the taxpayer's chips."

Anyone else want to go to vegas with Tim Geithner? In a much less complex but funnier way, John Cole describes the Bank rescue plan as if it were a medical report:
The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.
Something to keep in mind anytime you hear a news anchor talk about how much Wall Street approved of Geithner's plan because the stocks soared the day it came out.

Uhh... if you were the ones getting to gamble with other people's money, wouldn't you like this plan too?

No comments:

Post a Comment