Liberty Maven

Chris Martenson, creator of the Economics Crash Course, was quick to analyze the Citigroup bailout and point out that not only was the money handed over with no questions asked (compared to the grueling questioning given to the Big Three automakers), but that the type of loan given to Citigroup, called a “non-recourse loan”, basically gives the company a strong incentive to default on the loan and pocket $270 free and clear:

This is the most staggering giveaway I could have possibly imagined. To understand why, let’s review the definition of a non-recourse loan:

A nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender’s recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance

This means that when, not if but when, the Citi defaults on this loan there will be no mechanism for recourse for the taxpayers. Why am I confident that Citi will default on this particular rescue loan? Because they are smart people and paying it off would be stupid.

The $300 billion of “assets” pledged as collateral for this loan are worth, perhaps, half that. Possibly as little as 10% if Citi has done its job and purged the worst of the worst from its balance sheet to tuck into this sweetheart deal.

So it’s very simple. Either Citi makes good on the loan and repays all $300 billion and then takes possession of perhaps $30 billion of damaged assets or it defaults and keeps $300 billion.

What would you do?

Read the whole article here.