Finally, a Brilliant Idea on Toxic Assets


On Simon Johnson’s excellent blog, the Baseline Scenario, this morning, I came across the best idea I have seen to address the toxic asset issue while taking into account the populist sense that the little guy is taking all the pain and getting none of the potential gain.
In short, a reader to Simon’s blog suggests that, if the US Government is going to subsidize private capital to entice it with the prospect of outsize returns on these illiquid/toxic assets, then they should not limit these enticements to hedge funds, private equity funds and the investment banks themselves, but rather the government should create an investment vehicle to make these very attractive investment subsidies available to the individual investor. If these assets are, in fact, currently undervalued because of market mechanics, and not their intrinsic value, then let’s give everyone the opportunity to buy low and sell high – with the majority of the risk and financing costs borne by the government. If it’s good enough for KKR, it should be good enough for everyone.
The idea by this individual (known by his initials “PK”) is set forth as follows:

“If Geithner’s taxpayer subsidized toxic public/private plan goes forward, I think it would be fair if the federal government allow non-institutional investors to participate via a no-fee investment vehicle. I think if Americans had the option of investing in this program (without having to pay the egregious fees to the investment advisors/PE shops), it would be much easier to swallow since they would at least get the same deal the sharks are getting. There is probably more money on the sideline with individual investors than all these institutional investors. Maybe they could set up some ETF equivalent for it. I think the willingness of the administration to do such a thing would tell us a lot about whose for whose interest they are really looking out.”

Bravo. This may be the best idea I have heard through the entire financial crisis. It truly aligns the interests of the individual investor (who has suffered mightily over the past year) with those of the government, big investors and all participants in the global financial system.
As the writer suggests, let’s see if this gets any traction – it will be a great indicator of whose interests are actually being taken into account here.
— Douglas Rediker


11 comments on “Finally, a Brilliant Idea on Toxic Assets

  1. Michelle says:

    I think it’s a great idea. I have rental units and am currently in the
    market to buy. I absolutely would like the government subsidized
    funding of the toxic assets. It’s a win/win IMO.
    Matter of fact, please update if you find more information. I found
    this blog because this is exactly what I am looking to do.


  2. chophouse says:

    You miss the point that these things basically are worthless, value = 0. That’s precisely why no one will buy them on the open market. Creating an ‘opportunity’ for the little guy to invest is just leading him to slaughter.
    The Geithner plan is just a way to bail out the holders from bad investments they have made, without having to take the loss. It’s Trillion Card Monte (TM), nothing more


  3. Thomas Price says:

    An excellent idea. The government is already forcing the taxpayer to burden a huge portion of the risk. It almost seems if the government is using taxpayer dollars to make the rich even richer, by guaranteeing (and subsidizing) outsized returns to the hedge funds with taxpayer dollars. If the people are shouldering the risk, let them also participate in the success (or failure) of the fund if they decide to do so.
    Make the gains tax-free for the individual investor as an inticement!


  4. erichwwk says:

    In fact the reluctance of the market to clear without government intervention, when so much money has been made (and withdrawn from speculation from the pool over the last 8 years, much into private Cayman Island and Swizz accounts, should tell folks “in the know”, with access to these withdrawn funds,think about what these assets are worth.
    Of course the other possibility is that Hank Paulson is an “oil sand” type of guy, bluffing that he can buy these assets with the public putting 94 cents into the pot for every six his friends put up, with the pot being split 50-50.
    Hey someone who can create the illusion that the financial sector created 20-40% of GDP, knows how to empty the other guys pocket. He did not graduate with honors, excel at sports, and develop the reputation as a “trader” capriciously.


  5. erichwwk says:

    I remain dubious.
    My $0.02 why it wont’ work.
    Asymmetry of information.
    This is the George Akerlof, Joe Galbraith issue of the market for used cars. The previous owner knows the car in infinite detail, the potential buyer is clueless, with very expensive costs required to become as informed as seller, especially when it is easy to mislead (withold) information, to perform cheap, legal (but of questionable ethics under “buyer beware” contract rules) presentations for market auction.
    A similar situation is at play w/ Mutual Funds, of which only a small (hard to identify with foresight) percentage beat an index fund. It takes someone with the funds of a Warren Buffet to have company and sector control to consistently come out ahead.
    An old rancher that taught me much about the real world of contracts once had a group of us ride an ornery mule til he was so tired he “appeared” docile. On his wall hung a cowboy cartoon of a cowboy sitting with cross legs facing backwards on the ass end of a horse, an old in joke of that principle. He started out owning only his saddle which he put on the train in a gunny sack, to go from job to job. He ended up with 9,000 deeded acres, and 6,000 leased. He introduced me to an oil man whose first big break as realizing folks were looking for a certain type if sad in the dry well tailings. His purchase of carloads of that sand to deposit in the tailings paid huge dividends. Nothing was ever mentioned by either party re. the sand, as the purchasing easterner thought he had put one over on the “hayseed”,
    As Warren Buffet once said, “In a poker game, the game is essentially about separating the one sucker in the game from the stake he brought to the table, for which the others compete. If you don’t know who the sucker is, it’s most likely you”
    To think that a private individual, shut of from the secret world of derivative trading, that has no window into the details of a specific financial asset, cannot possibly compete with an informed competitor. Even the Chinese or Japanese, with a history and accumulated expertise in shrewd trades, were fooled. As was Warren Buffet, despite his recognition that these trades (assets) were timer bombs, weapons of mass destruction in 2002. In 2008 he thought he was smarter than the market. Now he uses the Washington Post to convince others to support plans that will recoup his losses.


  6. JohnH says:

    A truly GREAT idea…for those wealthy enough to participate in the looting of the Treasury. After all, why limit the looting to just a few insiders?


  7. Steve from Boulder CO says:

    I think this is a GREAT idea! The Feds need to (re)securitize all these assets, like happened originally, and sell these as “Bailout Bonds”. Like war bonds from WWII, but appropriate to these times.


  8. Ben Rosengart says:

    “PK”, eh? I’m sure it’s not Krugman, but it’s an amusing thought.


  9. Max says:

    I don’t think many people would take advantage if this system is
    put into place. As the previous post says, “most of the them go
    with a mutual fund, or some sort of institution that does the
    thinking for them”
    Saw a good video explaining toxic assets here,


  10. ... says:

    people are like sheep.. when it comes to investing most of the them go with a mutual fund, or some sort of institution that does the thinking for them… i think this is easy to offer as not many will take up the idea, and those that do will need to take the time to look more closely at what they are doing.. the chances of that are slim…


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