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Public-Private Partnership? or “Won’t You Be My Neighbor?”

Posted by Larry Doyle on March 23, 2009 9:22 AM |

An oversimplified view of the proposed private-public partnership for investors to purchase toxic assets from banks is as follows:

A couple (private investor) looking for a home finds a piece of property (toxic asset) that seems very appealing. A mortgage broker (the government) is indicating that he can preapprove some very attractive financing terms. The mortgage broker also indicates that he can fortuitously provide a large cushion against potential losses on the property. The buyers inquire how that cushion may work. The broker informs them that he has access to funds from all the other homeowners (taxpayers) in town to offer as incentive to sell this property and others like it. 

The couple’s interest increases, but they start to wonder what’s the catch as the property has been on the market for a while.

Upon further review, the prospective buyer discovers that the property may have structural issues. In hearing that, they think about scaling back a potential bid on the property. The broker pressures them to the point where the couple starts personally disliking the broker.

The broker further pressures the buyer to reveal more personal financial details over and above what may be necessary to make the purchase. The couple’s personal dislike of the broker grows, but they remain intrigued by the potential value in the home. The broker then informs the couple that he intends on moving into the neighborhood.

The broker descriptively envisions how close a relationship they can develop. Backyard cookouts, wiffle ball games, sleepovers, carpooling. 

The buyers wonder whether this property is really worth the potential headache of a business relationship and then neighbor so closely meddling in their life. 

The buyers start to wonder how quickly they can grow a row of extremely tall hedges.  

Welcome to the world of the public-private partnership proposed by Treasury Secretary Geithner to help clean bank balance sheets of a lot of stale, if not toxic, loans and securities.

In conjunction with this developing dynamic, as well as the three ring circus playing out in Washington on the topic of taxing executive bonuses and compensation, I reread and resubmit my piece from February 3rd, Be Careful What You Wish For…

LD

  • thinkaboutthis

    Larry, why are the stocks going so high this am — so early out the gate?

  • Larry Doyle

    Knee jerk reaction that this plan by Geithner will prove beneficial for banks. It is WAY too early to tell if it will be successful but the short answer is that banks will be able to sell assets at higher prices so that helps their bottom line.






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