Because sometimes I don't know what's best for me I was listening to NPR again, and on Morning Edition I heard this piece, which has made me pretty goddamn depressed. In it, Dave Kestenbaum explains to Steve Inskeep the toxic assets bailout plan, using a Vivid Metaphor to illustrate what it's all about. And, it's depressing as hell. Let's listen in!
David Kestenbaum: You're going to play the private investor and I have a toxic asset to sell you.
Steve Inskeep: OK, so I'm some billionaire with a lot of money.
DK: I have some pictures.
SI: This is the asset? It's a car.
DK: It's the closest thing I have to a toxic asset — a 1992 Toyota Corolla.
OK, got that? The "toxic asset" is a 1992 Corolla with more than 100K miles on it. So all these toxic assets are like shitty 17 year old used cars. All right. Inskeep agrees to buy the car for $1000, though he says he doesn't have that much (though he's playing the part of a billionaire investor, remember), but he will pony up $200. Kestenbaum explains that under the Geither plan, the government will also pony up $200. Where does the rest of the money come from? Well, the government will lend Inskeep $600, and then Inskeep will get to drive the car, even though he only paid for a fifth of it.
DK: .... That is why investors like this plan. You get to buy a big expensive thing, the car, without a lot of money. And if that big expensive thing increases in value, you make big profits. Even if the thing decreases in value — this is a actually a really good part for you as an investor — if you take the car, you leave my driveway with it and it's a piece of junk and it dies, you don't have to repay the loan. It's what's called a nonrecourse loan.
SI: Why on Earth is that a good deal for the government to lend all that money and take so much more of the risk than that investor who puts in the $200?
DK: Here's the best-case scenario: The banks get the stuff off their balance sheets. Private investors — you — make money. And the taxpayers make money because they're going in on buying the stuff with you — the really smart investor. So if you made a good investment, you gain and we [the government] gain. And in the big picture, one of the central problems of this crisis gets a lot better.
Right. Well, that sounds great!
Except, here's my question: it's a fucking 1992 Toyota Corolla. How the fuck is anyone going to make any money by investing in a fucking 1992 Toyota Corolla?
This is a great deal for Kestenbaum, because he gets rid of a piece of shit vehicle (that is costing him money now because it's, well, 17 years old and probably needs work) and collects cash on it free and clear. For the government, they have 4/5 of a asset that is only going to depreciate into total shit from shit, and then you have Inskeep, the billionaire, who might be hoping there's a kilo of smack in the trunk or something and so might profit handsomely; basically he's buying Lotto tickets. And perhaps expecting that he'll be able to just write it off later.
I don't know how accurate Kestenbaum's metaphor is, but now I'm thnking I'm part owner of a million motherfucking 1992 Toyota Corollas and some used car shyster is telling me I'll be rich, rich, rich!
Must listen to CD's in the morning. Must listen to CDs in the morning....
NOTE: As whetstone points out in the comments -- and as Kestenbaum himself says -- the example of a used car is somewhat misleading, because the value of the toxic assets will be set at auction and is not (relatively) fixed by a blue book or anything similar. I get that; should have said do in the post -- my point is simply that the NPR example is exceedingly depressing, and listening to NPR in the AM just isn't good for me. And I'm not cheered up much by the auction part of things, because, you know, the reason these assets are called "toxic" in the first place is because they are probaly even more for shit than a '92 Corolla. Maybe they need a rebranding, like "Freedom Assets" or something. EVEN YET STILL MORE. In comments Bloix reminds me that they have been rebranded as "legacy assets," something I guess I actually knew, but didn't want to.