“I posted the following on this topic at Yves Smith’s site:

” So, say CITI has a $100 million MBS on its books at $80 million, given the risks and uncertainty, its market price is $30 million, but held to maturity it will yield $50 million. So CITI makes a deal with a hedge fund, which will bid $75 million for the MBS, of which only 3% is its own money, $2.25 million, and out of another branch of CITI, the latter writes a $!0 million CDS on the MBS to the hedge fund for a modest consideration and with cash settlement. SO CITI ends up taking a $5 million write-down and a $5 million CDS loss, the hedge fund ends up making a $2.75 million profit on a $2.25 million investment, about 120%, and the U.S. government ends up with a $20 million loss. Is it really that simple?”

Someone else responded correcting my math and sharpening my point, (though I get why the U.S. gov. loss is $22.75 million, I’m not quite sure why the CDS loss doesn’t have a counter-balancing 50% recovery):”

“John C Halasz,

Apologies, but I thought your post was so important I wanted to clean up a little math and amplify your point.

Again, apologies

I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant(BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

Its just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You’ve also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.”

Thank you John and SAC Capital!  Let’s watch which criminals step up to participate…