Yesterday Obama announced his plan for buying so-called “toxic” assets from banks. The stock market responded positively. Why? The taxpayers are footing the bill for the bailout (taking all the risk), while investors can get all the rewards.
For every $100 used to buy “toxic” assets, private investors will put up only $7, while taxpayers will put in a matching $7 plus $86 in loans. These are no recourse loans. In other words, if a “toxic” asset doesn’t pay off, taxpayers will eat the loss — potentially $93 out of every $100 invested.
Investors get a chance to profit, while most of the potential losses will be socialized — paid by you.