Rolling Stone’s Matt Taibbi – the guy who famously referred to Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” – has an interesting expose of how the wives of two Morgan Stanley hot shots, though they had no previous financial experience, set up their own investing initiative and got $220 million in bailout funds.
With a $14.87 million upfront investment, the firm got $220 million in free cash from the Feds, which it used to buy up securities valued at $253.6 million. How that “value” was determined, no one will disclose. $150 million still hasn’t yet been paid back. Because the loan was a “non-recourse loan” it may never be. What’s a non-recourse loan? Taibbi writes:
Essentially, this means that if you don’t pay the Fed back, it’s no big deal. The mechanism works like this: Hedge Fund Goon borrows, say, $100 million from the Fed to buy crappy loans, which are then transferred to the Fed as collateral. If Hedge Fund Goon decides not to repay that $100 million, the Fed simply keeps its pile of crappy securities and calls everything even.
This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed’s books. If the securities lose money, you leave them on the Fed’s lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. “Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, ‘The government is giving out free money!’ ” says Black. “As crazy as he was, this is making it real.”
Someone should make some calamari out of that vampire squid…
The Real Housewives of Wall Street [Rolling Stone]