April 10, 2009
Heads They Win, Tails We Lose

Am I missing something? The newest wrinkle on the politic/private derivatives bailout, outlined in yesterday’s New York Times, is a new plan to include the everyday Main Street investors in the action.

Several hedge funds are involved. They would purchase a bundle of “toxic assets” and resell them in small lots to average investors. If the assets prove to be more valuable than the price paid, the small investors will, theoretically, profit. If the “toxics” prove to be worth less than the big funds paid, then the little investors lose.

Hold on now. As part of the plan to lure Wall Street’s big players to the game, the United States is guaranteeing the loans the big guys will use to leverage their investments in “toxics,” so they can buy more. If the deal turns sour, the big firms are to be held harmless on their loans and the taxpayers eat the losses.

How about Main Streeters? If they borrow, say $500 against $500 in cash to buy some of the small lots, and the underlying deal goes South, they get no such protection from the U.S. Treasury.

Frank Partnoy in his book Fiasco says, “…the history of finance is: Wall Street bilks Main Street.” Unless I’m missing something, this time the U.S. government is helping out Wall Street to achieve its primary purpose: to screw the little guy. Maybe we should ask Obama aides Lawrence Summers and Robert Rubin, major defenders of derivative trading. Perhaps they will help?


Posted by Bill Doolittle at April 10, 2009 09:02 AM
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This average investor thinks she'll pass on that particular investment, thanks.

Posted by: Joyful Alternative on April 11, 2009 11:03 AM
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