Tuesday, March 24, 2009

Give Me Some of Dem Non-Recourse Loans--How the Toxic Asset Scheme Works

Duh, I want in. I want some of dem non-recourse loans.

You might be thinking what the heck? What is a non-recourse loan?

It is what you got when you took out a subprime mortgage. You put up a tiny down payment, zero. You purchased a $500,000 house (hopefully you did this in 2004, not 2006) for no money down and you now controlled $500,000 of real estate. If the value of the home went up, to say, $550,000 and you sold it, you made a gigantic return on your investment. Infinity, actually, since you put up nothing. What if the value of the home went down? Well this was the non-recourse part of your loan. You threw the keys on the table and walked away, and left the problem to your not so friendly neighborhood banker.

Now let's get to the non-recourse loan feature of the brand spanking new--Tim GeithnerToxic Asset Disposal Plan for Banks. These numbers are a bit bigger and the terms while fantastic are not quite as good as a zero down subprime loan.

Let's say you and your buddies decide to buy about $100 million of the sub prime crap that is laying around in your favorite neighborhood bank. The bank can't find buyers for this stuff at a real price, so your Uncle Sammy is going to give you the opportunity of a lifetime.

Now let's say you decide those $100 million of subprime loans are now worth $70 million (at this point your banker is out having a $600 lunch and thinking once again--there is a sucker born every minute). Little note here: I am going to round off the numbers to make this easy to understand.

To get control of those $70 million in subprime mortgages you will need to put up 5 million bucks. Uncle Sammy is going to put up 5 million bucks right along with you--you are now partners with Uncle Sammy (dig that).

Here is the good part--Uncle Sammy's little brother, the FDIC, is going to lend this partnership 60 million bucks. And guess what, if things don't work out, you throw the keys on the table, walk away, and tell the FDIC--eat a banana. Just like the subprime borrower. In other words, you don't have to pay back the loan which was non-recourse.

Now let's say those $70 million of subprime loans you bought actually go up in price. Walla. Windfall profit. Let's dream big and say they go all the way back up to $90 million. Here is what happens.

The little brother FDIC gets his $60 million back (and a tiny amount of interest so he doesn't feel like a complete fool). The remaining $20 million is split equally between you and Uncle Sammy. You got it. You risked $5 million and you made $10 million. A 200 percent return.

On the other hand--if those $70 million in sub prime loans you bought go to zero--the most you can lose is your original $5 million. In other words, Uncle Sammy losses $5 million, you lose $5 million, and the dumb banker, in this case the FDIC, losses $60 million.

I am going to stop here because I learned a long time ago that it is hard to get anyone on the Internet to read more than 600 words in one bite. But, I promise you there is more to this that I would like to discuss with you. So come back later for part two.

While you are at it, email this to someone you know that likes to make comments. We need some comments in here. And remember, Don't Fight the Tape.
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1 comment:

  1. So hook me up. Let's put together an investment pool and go get some. Perhaps the FDIC is the only last lender actually lending, it just turns out they are lending on bad assets. Perfect.

    Can this actually be sliced up so that smaller amounts can be made available. In general, this stuff is done on large scales.

    I guess we'll have to see how TG survive's today's slaughtering over the AIG bonuses to figure out if his plan will continue without being re-scrutinized.