You Can Now Invest in TARP 2. Is it a good deal?

It seems that the Son of TARP that is going to be rolled out tomorrow might be an interesting alternate investment depending on how it is structured.

The administration is expected to announce Tuesday that the government's latest bailout strategy will be enticing big investors to buy more than $1 trillion in troubled assets from the banks. The hope is that, free from the drag of subprime mortgage debt and other bad investments, banks will be more likely to start lending money again and the economy will rebound.

If the government eats even 50% of the losses then it might be a pretty good deal depending on how it is set up. It would be like buying a super risky stock and having the government eat half of your loss if the company goes belly up. However, if the number is too small like 20% reimbersement for losses then it is like throwing good money after bad.

Most of this debt is still performing for the most part or the homes that they are backed with would have been forclosed on already. There is quite a bit of risk that the homeowners could lose their jobs in the recession and then kill off the loan. If expert risk managers can get in there and vet the loans for failure then you might be able to get a chance of a lifetime on these assets. Also if the government provides some way to reduce loan rates to limit forclosures it will help these assets as well.

It is kind of like having the government buy an entire shipwreck site of a Spanish Galleon full of gold and then bringing it to the surface. You would have to go through plenty of muck and rotted timbers but there is gold waiting in there. The government may even pay half any losses you get from removing the muck and timbers as well.

What we need to know now is if the government is paying an inflated price for that shipwreck site or not. It would also be nice to know the timbers and muck to gold ratio as well. In any case going long the "Bad Bank" from TARP 2 might be quite a handsome investment if you hedge the downside and are prepared to do some digging.