Jackson Jambalaya

Earlier this week I warned you about a little provision in the bailout bill allowing the Secretary of the Treasury to pay an institution 100% of the purchase price it paid for an asset regardless of what the actual value of the asset might be!!! In case you think lil' ole Kingfish doesn't know what he is talking about, here comes Fox Business News to verify my post:

"A little understood but very important accounting rule being blamed for the $523 bn in losses and writedowns at financial companies around the globe is now being retooled by market and accounting regulators, in a last-ditch attempt to stop the steam pipes bursting and to get banks lending again.
However, the move matters greatly to taxpayers, because analysts now say that banks who own severely damaged mortgage-backed bonds may be able to use the changed rule to get higher prices for these securities if they auction them off to the government as now planned in the $700 bn rescue bill......"

"Loophole Dangerous to Taxpayers in the Rescue Bill
And check out this sentence I’ve highlighted in italics in section 101 of the new bill, entitled “purchases of troubled assets”–it could also mean even higher costs to taxpayers:
(e) PREVENTING UNJUST ENRICHMENT. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in Conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.
This section “probably indicates that JPMorgan Chase can sell the troubled assets of WaMu to the US government and make windfall profits,” notes market analyst Richard Suttmeier. “Same for Citigroup with regard to Wachovia’s troubled assets. Other future deals as well. That is a direct bailout of Wall Street on the back of taxpayers........"
http://emac.blogs.foxbusiness.com/2008/10/01/a-new-rule-change-that-could-hurt-taxpayers/

What did my earlier post say?

"(Kingfish note: Bill says (Secretary shall take steps) "preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset." In my opinion the bill is poorly worded in this section and shows an intent to keep firms from profiteering off of the sale of assets. However, Denninger is correct in that the Secretary could buy the assets for their original purchase price, not current market value. One can see the opportunities for financial mischief here. Remember, under the proposed judicial review provisions, any injunctive relief is AUTOMATICALLY STAYED until the Secretary can appeal.

The taxpayers will undoubtedly get ripped off because of this provision. The government will purchase mortgages that are based on overvalued appraisals. Lenders such as Countrywide OWNED the appraisal companies used for their mortgages, creating an egregious conflict of interest as it led to the widespread problem of these lender-employed appraisers creating fraudulent or bogus appraisals. Even worse, Fannie Mae had a program for several years that WAIVED appraisals altogether. Unfortunately, that is not the end of it as there is the second mortgage market that has completely collapsed. Second mortgages usually did not depend on appraisals at all or if they did, the lender relied on a "drive-by appraisal". Citi originated stated income second mortgages. GMAC underwrote 125% second mortgages, i.e. an unsecured loan based on an overvalued property. The Secretary could thus be forced to buy most of the second mortgages that are toxic while the lender actually gets full value for the bad debt. Nice deal if you can get it. This section is bad news for Americans. Period. Banks will take advantage of this clause to dump bad or fraudulent mortgages on the government, leaving it to figure out how to modify the mortgage or help the homeowner.)'
http://kingfish1935.blogspot.com/2008/09/bailout-bill-analyzed.html

Don't believe so-called experts on t.v. telling you this bailout is good. The government will be purchasing assets which are grossly overvalued. How will the government make money, as we are told it will, selling properties for which it paid a grossly inflated purchase price having no relation to its actual value? This is nothing but another taxpayer ripoff.