Wednesday, May 27, 2009

Public Private Investment Plan: Is The Government Helping Investors Get Rich?

With the US government desperate to get "toxic assets" off the books of US banks, they are planning to entice investors with very generous terms to help banks get rid of these problematic investments. There is even resistance to the government's Public Private Investment Plan, not because it won't help revive the nation's banks, but because of fear that investors will profit too much with the help of tax payers. Tom Dyson from Daily Wealth discusses why this situation is similar to the S&L crisis of the 1980's when investors made huge profits by investing in failing banks.

It's the late 1980s. The savings and loan industry has collapsed, and the government has a big mess of failed banks on its books...

The Federal Savings and Loan Insurance Corporation (FSLIC) insures S&L deposits. Whenever an S&L collapses, the FSLIC seizes and then auctions its assets... just like the FDIC does for banks today.

By 1988, the FSLIC has more than 100 failed S&Ls on its books and is close to insolvency. It is so desperate to get these busted S&Ls off its books, it's offering huge tax breaks and federal assistance to anyone who buys them.

So Gerald Ford buys more than 30 of these failed S&Ls...

Ford then restored the S&Ls he bought from the government back to profitability. He built these banks into two large retail banking chains in Texas and New Mexico. He sold one chain to Norwest – or Wells Fargo today – and the other chain to BankAmerica.

According to American Banker, Ford's $300 million investment generated $1 billion in profits in five years.

Today, with a fortune of $1.3 billion, Gerald Ford is No. 559 on the Forbes list of the world's richest people. He has a football stadium named after him, the Gerald J. Ford stadium in Highland Park, Texas. And he races thoroughbred horses. He won the Breeders' Cup in 2003 and the Dubai World Cup in 2004.

Buying distressed banking assets from the government is one of the fastest ways to make a fortune. The government's political agenda is often stronger than its desire to get a good deal for the taxpayer. So it gives tax breaks, low-interest loans, and below-market prices to investors who buy these "toxic assets."

The S&L crisis is one of the best examples of this phenomenon. The government rescued the entire industry, eating $125 billion in losses to get the industry back to solvency and profitability. I can name half a dozen investors like Gerald Ford who made fortunes from the S&L collapse.

In 2008, we experienced a true "credit crunch" and "banking panic." At the height of the crisis, it looked like there might be a run on the entire banking system. The situation was so bad, the Fed created the world's single-largest government intervention in the free market.

These actions simultaneously prevented a run on the entire banking system... while making the perfect situation for profiting at the government's expense.

Remember the FSLIC I mentioned above? Well, now the FDIC insures bank deposits. When a bank fails, the FDIC auctions off the remaining assets to other banks.

In the S&L crisis, some 745 institutions went bankrupt. So far in this crisis, Obama's band-aids have held the system together. Only 60 banks have folded since January 1, 2008. So the big opportunity in buying busted banks is probably still in the future...

The FDIC is also administering the Treasury's toxic asset disposal program. The official name of this program is the "legacy loan program." The government has designed this program to clean bank balance sheets of toxic assets, like distressed loans and junk mortgage securities.

So far, the details of this plan are pretty sketchy... The FDIC isn't sure how the plan will work out. It's set up a section on its website where members of the public can offer suggestions for issues the FDIC still hasn't resolved...

But one thing's for certain... some investors will soon make a fortune from this program.

I'm keeping my eye open for ways we can profit off the banking boondoggle... Even the FDIC wants individual investors to participate in the auctions. It just haven't figured out how to do it yet.

You should keep an eye on the FDIC's website for this announcement. Also, the FDIC publishes a list of all the failed banks since January 2000... When you see more banks failing, you'll know there'll be more FDIC-insured profit opportunities coming.

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