Geithner Plan Puts Taxpayers on the Hook

This post first appeared on Minyanville.


The phrase “taxpayers will share in any upside” always makes me shudder.

And with good reason: Last September, as Fannie Mae (FNM) and Freddie Mac (FRE) crumbled under the weight of their massive loan portfolios, the US taxpayer ponied up $2 billion to rescue them, along with $200 billion in guarantees for future losses.

We were told that our investment would be well-protected, since the companies barely played in the subprime space: Their $5 trillion portfolios consisted of only the finest prime mortgages. One Wall Street Journal columnist even called Fannie and Freddie “a gold mine.”

Six months later, Fannie and Freddie have chewed through almost half their taxpayer-funded safety net. With delinquencies on prime loans rising, and home prices tumbling in high-end markets, losses are likely to keep growing - as will the taxpayer's obligation.

Then, just a week after the Fannie and Freddie rescue, insurance giant American International Group (AIG) took the national stage. Federal Reserve Chairman Ben Bernanke promised he had struck a hard bargain with AIG, and that taxpayer money had been shrewdly invested. The company was strong, we were told, and it was being unloaded at a bargain.

Three bailouts later, we’re collectively out almost $200 billion - and public outcry has reached a fever pitch.

$13 billion to Goldman Sachs (GS), $12 billion to Deutsche Bank (DB), and hundreds of millions to AIG executives: Not exactly what we signed up for.

Yesterday morning, in a long-awaited announcement, Treasury Secretary Tim Geithner said his Public-Private Investment Program “will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments.”

According to Geithner, private investors, alongside Treasury capital and Fed leverage, will jumpstart the market for the so-called “toxic assets” clogging up the financial system. Many hope the initiative will place a floor beneath the loans and securities that banks are unwilling to sell at prevailing market prices.

Geithner is encouraging private investors -- including pension funds -- to aggressively participate in the program. The assumption is that these distressed assets are trading well below their intrinsic value, and that buying delinquent loans and esoteric mortgage-backed securities at pennies on the dollar is an astute investment.

To be sure, certain well-connected private investors and the money managers chosen to coordinate the trades will make out famously. Meanwhile, Americans are being asked to blindly toss their tax dollars and pension money at the riskiest, most leveraged, least transparent securities the financial system has ever dreamed up.

If the federal government's track record as a steward of public funds is any indication of future performance, I'd welcome an opportunity to take the other side of whatever investments my tax dollars are about to be thrown toward.