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GAME THEORY EXPOSES PPIP FRAUD

10 April 2009 by Cullen Roche 1 Comment

Interesting read here from Real Clear Markets:

Suppose someone is willing to fund your gambling problem, and lend you $80 at zero interest. Better still, if you lose the bet you don’t have to pay him back. Under that scenario, the same gambler would pay $90 for the bet, giving him an even chance of winning or losing $10.

This is a microcosm of what the Public-Private Investment Program (PPIP) is intended to do: create an incentive for investors to pay $90 for a bet that is only worth $50. It is bad economics and bad public policy and it is probably fraudulent. Congress should act pre-emptively to halt Treasury Secretary Tim Geithner’s latest scheme.

In the gaming example above the lender has a bet where he gets $80 or zero with equal odds. The value of that bet is $40. Since he paid $80 for it, he has an expected loss of $40. The PPIP puts the taxpayer, via the Federal Deposit Insurance Corporation, in a similar position. The details are only slightly more complicated. A full analysis would include the diversity in the pools of loans, the interest rate charged by the lender, and the opportunity cost to the lender for a similarly risky bet.

In essence, the PPIP is a fraud or as I prefer to call it – a government managed money laundering scheme.

Cullen Roche

Cullen Roche

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Comments
  • In Debt We Trust

    PPIP is like the government offering to write naked otm calls for the insiders. Potentially big rewards but also massive downside – for Treasury credit ratings.

    Hmmmm …..shades of Warren Buffet anyone?

    04/11/2009 at 11:31 PM