Bail-out Banks to Buy Toxic Assets with YOUR Tax Dollars
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April 3, 2009

*****Bailed-out banks may buy toxic assets


*****23% Gains

Fellow investor,

There's a lot going on today. The unemployment rate “surprisingly” hit 8.5%. President Obama knocked ‘em dead at the G-20 meetings.

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But the headline that caught my eye was "Bailed-out banks may buy toxic assets."

Believe it or not, Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and JP Morgan (NYSE:JPM), are considering using the Public-Private Investment Program to buy toxic assets from other banks, according to the Financial Times.

The Public-Private Investment Program is designed to encourage private investors to put money to work buying toxic assets from distressed banks. The Treasury and the Fed have offered loans to make the purchases less risky for the buyer. In essence, all a buyer has to do is put up a token amount of cash and the government will fund the rest.

Yes, the plan reduces risk to the point that it's kind of like a free money giveaway – the taxpayer takes the risk, the subsidized investor makes the profit, assuming there is one.

Personally, I'm not happy about the plan. But something has to be done to get the market for these toxic assets moving. Right now, there's a huge spread between the banks asking price and investors' bid. And nobody's budging. Throw in some free money via the Public-Private Investment Program, and the bid can rise to be more in line with the ask price. It's a sweetheart deal.

*****I'm sure Morgan Stanley, Goldman and especially Citi would love to be a part of this sweetheart deal. What makes them think they should be considered as worthy participants is completely beyond me.

 The first time they bought these assets, they nearly brought the global economy to its knees. Now they want to try again, only with better terms, with less risk and more upside.

If you think Americans were outraged about AIG's bonuses, just wait.

*****Two things about the G-20 summit please me. First, the members declared that they will refrain from competitive currency devaluation. Of course there's no punishment if a country actively seeks to devalue its currency. But there can now be grumbling, and probably some complaining, too.

Seriously though, currency devaluation is precursor to protectionism and all-out trade wars. That would be bad.

The second has to do with a proposal forwarded by France and Germany to create a “global regulator” for financial markets. President Obama successfully squashed the idea, saying that the U.S. doesn't need foreign intervention in our financial markets.


*****SmallCapInvestor PRO just took a 23% gain on biotech Theravance (Nasdaq:THRX) in just over two weeks. Theravance was our feature recommendation on March 16 at $13.50.

SmallCapInvestor PRO has now sold two stocks for gains in March. The first was another biotech that we sold for 34% gains. All the stocks in the portfolio are currently showing gains. For more on SmallCapInvestor PRO, please click HERE

That's it for today. Have a great weekend and I'll talk to you on Monday.

Ian Wyatt


Daily Profit

Posted 04-03-2009 1:22 PM by Ian Wyatt
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