The theory of this plan seems to be that we need need need the private sector to price these assets. But the guts of the proposal belie that. Indeed, as I wrote earlier, it almost looks as if the government is laundering its own price through the private sector -- and the private sector is taking a hefty cut to participate. There are at least two points where the government engages in fairly extensive pre-pricing before the private investors ever set foot in the room. The first is in setting up the subsidies. By limiting the private investor's downside risk and magnifying their potential profits, the Treasury Department changes the frame of reference that private investors use to decide how much they'll pay for a given bundle of assets. Under the details of the plan, an investment where the government provides a 6:1 debt match sees the private sector sharing 50 percent of the profit but absorbing seven percent of the losses. Those numbers will be plugged into the private investor's valuation equation and the price they offer will thus be much different -- indeed, much higher -- than the price they would offer if they were simply assessing how likely the asset was to increase or decrease in value. By building the program this way, the Treasury begins by biasing the prices sharply upwards. The second point, as Foreign Policy's Annie Lowrey pointed out to me, comes when the government decides how much leverage to offer private investors. To quote from the fact sheet, "To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee." Only then will the private investors get involved -- and they will make their decision based on how much guaranteed debt the FDIC offers them (the more debt the better the deal). The FDIC's assessment is a risk assessment: It's judging how likely, or unlikely, the asset is to increase or decrease in value. It's fundamentally the work of pricing, it's just not being called that. The question, at some point, becomes what value the private investors are adding. Some, to be sure. They're also going to manage the investments. But you have to ask: How much is it worth to say that the price of the asset is a "private price" after Treasury has systematically biased the pricing in a particular direction -- which explicitly suggests they don't trust the private market's natural pricing mechanism -- and the FDIC has assessed the asset's integrity and decided on the leverage offer that will further influence the private investor's pricing decision? Is it really worth giving up fully half the profit the taxpayer could otherwise expect and subsidizing most of the debt?
