In the first part of the plan, the Treasury will set up public-private investment programs, or PPIPs, to purchase the bad loans from banks. For loan purchases, the financing will be provided by the FDIC, officials said. In these transactions, the FDIC will loan around 85% of the purchase price -- if it determines it's willing to leverage the pool at a 6-to-1 debt-to-equity ratio -- with the Treasury and the investors contributing equally to the down payment.
For example, for a group of deteriorating mortgages purchased by a PPIP for $840,000, private investors would put up $60,000, the Treasury would invest $60,000, and the FDIC would provide a loan of $720,000. The mortgages might have an original face value of $1 million, but would have deteriorated in value with the collapse of housing prices and would already likely been written down by $160,000 in value by the bank holding them. In the sale, not only would the bank get rid of the loans, it would get a fresh injection of capital to use for lending and other purposes.
$840,000 = purchase price
$60,000 = Private investor share
$60,000 = Treasury share
$720,000= provided by FDIC = 85% (?)
So a private investor would spend $60,000 for what someone valued to be worth $1,000,000. The investor sells them or holds them. All the investor has to cover is the $60,000.
OR
So a private investor is going to take the institutions word for it that these were written down by $160,000 from $1,000,000 and they used to be worth $1,000,000.
If the private investor is able to sell these for $840,000 while expending only $60,000, that is a great deal for the private investor. In fact, the private investor can sell for $70,000 and make a profit of $10,000 and what would they care that it was supposed to be worth $1,000,000 or not. He only needs and hopes to cover his $60,000.
Does the taxpayer (FDIC, Treasury) get paid back any money at all on the profits these private investors will make?
Have I figured this correctly? Something must be missing or are we really giving this much money away to get these off the banks books?
Someone please chime in!!