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Mar 25, 2009

The latest bank bailout plan is a gamble—but the players get to use house chips.

By Alan Stoga

Welcome to the Pot of Gold Resort and Casino, a.k.a., the Treasury’s latest effort to solve the financial crisis.
The way it works is simple. Buy chips with $7 of your own money, and the house—that is, the government—will give you $93 more to play.
Those government chips come in two flavors: first $7 to form a partnership with you and then $86 as a loan.
In the game room, you have a chance to bid on bad loans and toxic assets that the banks don’t want, but haven’t been willing to admit aren’t worth very much.
Why would you want them if the banks don’t? Because Uncle Sam thinks you should make a lot of money—at least if you are a big investor.
O.K., let’s say you start bidding for a bundle of loans that were originally worth $200. If it was your money, you might start very low or probably not play at all. But what the heck, you’re playing with the house’s money.
So you bid—and your winning bid is, say, $100. Congratulations.
That deals you into the game. The rules are simple: sell for more than you bought.
Remember, there are real houses, condos and apartments underlying the loans you just bought. Most of the owners are still paying their mortgages—or will soon get government help to pay. If you’re lucky, the loans might turn out to be O.K.; even if not, the real estate could be sold when the market recovers.
So, let’s say your luck holds. In a few years, when the recession is over and the housing market is healthier, you sell the loans to other investors for $140.
Time for the accounting.
First, you have to repay the $86 loan. That leaves a profit of $54. Then you split the profit with your partner (the government)—which leaves you with $27.
Yep, you’ve turned your $7 into $27. Even if that takes a few years, not bad for a hard day’s bidding—especially since in real life there would be six or seven zeroes after those numbers.
But what about the downside? Perhaps the underlying properties are in the middle of a swamp in Florida. Or the recession really does turn into a depression, and drags on for many more years.
Here’s the good news: the most you can lose is your $7. The rest is the government’s money.
Unlike Atlantic City or Las Vegas, where the house always wins, the Pot of Gold Resort and Casino prides itself on making sure the gamblers win—or, at least, don’t lose much.
Unfortunately, for most of us, the Casino has a bouncer at the door. You can only get in if you’re a big investor, hedge fund or—why not—a bank.
What goes around comes around.


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