A Bad Bank By Any Other Name Still Smells Like A Bad Bank

Let me start this off by saying that it was nice yesterday to see confidence return to some people's faces.  Stocks blasted off, investors rejoiced, CNBC studios had a Mardi Gras feeling to them, and the local news anchors were nothing but smiles.  Most importantly, Tim Geithner finally handed in his semester term project and no one yelled at him for being late.  He has to be relieved!

However, I believe that what we were given yesterday was a fantastic piece of marketing that could have only been produced in this country.  This is what we do.  We take things that are distasteful, put a nice package around it, set off a great advertising campaign and then sell it as something tasty.  Sound familiar?  Like a CDO perhaps?  The government knew that creating a bad bank and buying bank toxic assets at inflated prices was a political "Dead-on-Arrival".  It was a transparent transfer of taxpayer dollars to the banks shareholders and bond holders.  So instead we have what we got yesterday morning.

1. We buy troubled or "legacy" loans from banks at prices higher than market prices
2. We "share" half these assets with private investors 50/50
3. We lend those investors 84% of the inflated purchase price.
4. We stop the investors losses at the 16% of capital that they deploy, there bye taking the loss after 16%
5. We do the same thing with toxic or "legacy securities", with the amount of leverage and hence, the stop loss price for the investor yet to be determined.
6. We sell it to the nation as a "partnership" with public and private money that protects taxpayers and actually allows them to participate in any upside.

What is the difference between those six steps and;

1. U.S. Government creates "bad bank" to buy toxic loans and securities from banks at prices higher than market prices.
2. Bad Bank sells half the assets to private investors at inflated price.
3. Bad Bank lends the purchasers up to 85 cents on the dollar, for the term of the asset at the risk free rate the Treasury borrows at.
4. Bad Bank stops investor losses at a certain price (from the inflated price mind you) through the non-recourse provision in the funding.
5. Bad Bank utilizes large money manager expertise to manage it's bad assets.

Is there a difference?  I don't see one.  You want to know what was scary yesterday?  All the big banks, after watching our version of "mob-rule Congress" last week said, "Umm, we'll see if we want to participate in this program and we'll get back to you."  They know they are getting a GREAT deal being able to offload their crap at inflated prices and they don't want the government coming back on them later on calling them bailout cases.

This game isn't like today's Little League.  Everybody can't be a winner.  It's like when you play poker with four of your buddies.  There's the big winner, the two guys in the middle and then there is the big loser.  In the deal put out yesterday

• The big winners are the money management firms that are buying these assets with super cheap financing and super cheap put back options.

• The moderate winners are bank shareholders, bond holders and probably bank management.

• The moderate losers are the current players in government because they finally did something and if all goes well, can defer the problem to later years, but not late enough for it not to come back on them.

• And of course the big loser is who the big loser was going to be all along.....The taxpayer.  The only good thing I guess is that it has been sugar coated a bit and might not feel so bad....at first anyway.

www.foxnews.com  "The Strategy Room" today at 9am!!