Creative Destruction

self-evident » The “Geithner Put”, part 1.

Half of the pools wind up worthless, so the investor loses $300 total on those.  But the other half wind up worth $100 each for a $16 profit.  $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury.  So the investor gains $400 on these winning pools.  A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400.  So the private investor gained $100, the Treasury gained $100, and the bank gained $3400.  Somebody must therefore have lost $3600…

Here we see another way by which the banks and private investors can get free money from the government. This scheme doesn’t even require that the banks engage in any self-dealing.