This is an incredibly disturbing blog post explaining how the the Treasury department’s new plans can be gamed in a similar way to how Enron gamed the electricity system before its collapse. God help us all if this is even close to correct. Here is a snippet:
Before we go there, what will happen with these banks when they can bid on each other’s assets? Let’s do a thought exercise. Let’s say you are a bidder for Bank A. You know your banking asset is worth $50, and you also know the asset Bank B has is worth $50. You call your buddy up, the trader at B, and make a deal. Happens all the time. You go to bid, and you bid $80 for B’s asset. Then you wait. If B doesn’t come through, you are screwed out a lot of money. And hey, isn’t this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your asset – $80 from B. You have each bid up each others assets and traded them. And now the government is screwed.
Yup. Bad news. Bank A pays $6.50 for its new asset because of the leverage , and it loses all of that. It also loses the $50 from not having the asset anymore. However it gains $80, net profit – same as Bank B. The government has paid $73.50 for a $50 asset, twice. (See previous for how the levered non-recourse loan turns into a put option.) We tend to call this collusion if you and I did it.
Here is the link: Banks as Enron?