This is precisely why Stiglitz said the plan wouldn't work, btw (and DUers were calling him stupid for saying it :eyes:).
Ray Dalio: Why Bridgewater Won't Participate In Geithner's PPIPhttp://www.businessinsider.com/henry-blodget-ray-dalio-why-bridgewater-wont-be-playing-tim-geithners-ppip-2009-4">The Business Insider
The bottom line? Too much political and reputation risk. If taxpayers ever figure out how badly they're getting screwed, there will be hell to pay for those who ran off with the loot.
Ray Dalio, who runs one of the largest hedge funds in the world, wrote a letter to his investors explaining why Bridgewater wants no part of Tim Geithner's trash-asset-purchase plan. He says that he thinks most big funds will decline to participate, leaving PIMCO, Blackrock, and a few others to run off with the taxpayer loot (and later be bashed for it).
We've excerpted the letter below. Much of it is a sophisticated analysis of the plan's economics, which is hard to follow if you're not obsessed with the PPIP. But here's Dalio's bottom line:
The only way the plan can work is if the investors buy the assets at low prices, the banks sell them at high prices, and the taxpayer covers the difference. Dalio is worried that, eventually, taxpayers will figure that out.
While we were initially considering participating in the Legacy Securities PPIP program, we decided against it based on how it is designed. Some of our investors asked for our reasoning, so we will explain it to you all.
Let’s start with the deal economics. In digging into the specifics, we learned that the program is not as attractive as it initially appeared to us. As you know, unlike many others, we don't think that most of these assets are all that cheap because we think that the debt problems will be worse than most others expect, we believe that the legal foundations of creditor rights will be in jeopardy and we think that liquidity in this environment is worth a lot.
With these considerations, we find some of these assets a bit cheap, but not cheap enough to buy.When the program was announced we were originally interested because with the non-recourse leverage (i.e. the ability to put the bad loses back to the government) we thought some of these assets could go for cheap enough prices to lead us to buy. However, as things now stand, very little leverage is actually being offered via the "Legacy Securities PPIP." The non-recourse leverage that Treasury is offering is only 1:1, though the PPIP Fact Sheet does allude to the potential that this may be re-levered in some unspecified way through the TAL F Program (no details on this are currently available). So, unless the leverage ends up being a lot greater than 1:1, the program offers little value to us (as the put has little value). Additionally, it now appears that participants will essentially be short an unspecified call option to the government in the form of warrants that must be issued by all PPIP chosen funds in order to comply with EESA (the legislation that created TARP). Therefore, without knowing the amount of leverage that will ultimately be provided (and for now looks pretty small), or the strike price of the warrants participating funds are short, we don’t have enough information to even assess the value of the program in aggregate.
http://www.businessinsider.com/henry-blodget-ray-dalio-why-bridgewater-wont-be-playing-tim-geithners-ppip-2009-4">read the whole letter