Geithner Plan

[NickCole]

Details of Geithner's plan have now been revealed:

WASHINGTON — The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.

The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks. ...

http://www.nytimes.com/2009/03/21/business/21bank.html?_r=1&hp

Read it and weep.

Or, if you've still got enough Obama Kool Aid in your system, cheer and defend him.

This is a disaster.

Basically it proves Obama & Co does not get what happened within the financial system and their way of fixing this is more of the same kind of thinking that made the mess. Except now they're taking the taxpayer down along with those who lost home value and 401k value. If we were screwed before, we're about to be royally fucked.

It's the height of irony because this "Change" candidate could not be less about change. Well, unless the change you wanted was a President who can seduce a population through a segment on Jay Leno.

What this plan does is invite private investors to gamble very little capital to buy toxic "assets" that ObamaCo says are actually worth a lot more than anybody is willing to pay for them, and the investors are kept safe with big government-backed (that's you, middle-class taxpayer once again protecting the rich) non-recourse loans. ObamaCo are doing exactly what I've warned they'll do: they're making a bad situation into an awful mess. ObamaCo is creating private/government financial operations with miniscule capital and tons of government-guaranteed liabilities. Un-fucking-believable. It has Geithner's imprint all over it -- the brilliant tax cheat Obama HAD to have oversee this. Investors will probably jump at this --why not, the government (that's you) is carrying most if the risk-- but all it'll do is "help" banks that don't need it and do squat for banks in serious trouble because of undercapitalization.

And when this fails, even if ObamaCo finally figures it out, will they have any political capital left to do what should be done to fix this?

 

[naked gent]

Except now they're taking the taxpayer down along with those who lost home value and 401k value.

I don't much like this plan either Nick but as far as the taxpayer is concerned I don't see how your suggestion to nationalize the banks and take these mortgages directly onto the government's books is any kind of improvement. It seems to me our money is equally at risk in both cases.

What this plan does is invite private investors to gamble very little capital to buy toxic "assets" that ObamaCo says are actually worth a lot more than anybody is willing to pay for them,

According to the story the problem is not that ObamaCo believe those assets are worth a lot more than anyone is willing to pay for them but the banks which currently hold the mortgages think that which is why they won't sell.

Since we need to get those loans off their books and they don't want to sell into a buyers market thats where the gov. comes in. The real question here is is the auction system the best way to receive the best possible price for those toxic assets and while it may be I do think a better solution would be for the gov. to just take the loans themselves and hold them until the market returns or even take them all and slowly bring a few loans to market over the next few yrs as the market improves.

 

[runner]

The sooner he is gone the better.

 

[khushibagh]

According to the story the problem is not that ObamaCo believe those assets are worth a lot more than anyone is willing to pay for them but the banks which currently hold the mortgages think that which is why they won't sell.

Those are two sides of the same coin. Either the assets are worth more than investors are willing to pay for them absent the plan or they're not. The whole rationale of the plan is based on the idea that prices of these assets have been excessively depressed by a combination of extreme risk aversion on the part of investors, lack of financing for investors who are interested in the asset class and lack of transparency regarding the quality of the underlying, which makes it hard to distinguish between the really bad stuff and the not so bad stuff.

Since we need to get those loans off their books and they don't want to sell into a buyers market thats where the gov. comes in. The real question here is is the auction system the best way to receive the best possible price for those toxic assets and while it may be I do think a better solution would be for the gov. to just take the loans themselves and hold them until the market returns or even take them all and slowly bring a few loans to market over the next few yrs as the market improves.

I agree the government needs to come in and rather than have the government set an arbitrary price for these assets I think it makes sense for the government to try to enlist private investors to set a price through an auction process. To the extent the price is higher than the price to which the banks have marked down assets, some of the undercapitalization issues may be resolved as well since the banks have become undercapitalized in part because they have had to mark these assets down to current depressed market prices.

If the assets are worth at least as much as the investor groups bid for them then the Treasury will not be a loser even if a fair number of investor groups default on their loans and the securities become the property of the government. To the extent investor groups overbid (and there is a mechanism for the government to refuse a loan if it does not think a bid makes economic sense) then the government would take a loss on such assets. However, while there are particular pieces of paper on which the government will lose money, it is unlikely that the government will lose money overall since as a group these assets are probably in fact undervalued and the government will be sharing in the equity upside on the investments that don't get put back to the government.

Given the political realities - hositility across party lines to allocating more money to purchase assets outright and uncooperative Republicans who try to filibuster any proposal that requires Congressional action - this is probably the best that can be done.

 

[NickCole]

I don't much like this plan either Nick but as far as the taxpayer is concerned I don't see how your suggestion to nationalize the banks and take these mortgages directly onto the government's books is any kind of improvement. It seems to me our money is equally at risk in both cases.

According to the story the problem is not that ObamaCo believe those assets are worth a lot more than anyone is willing to pay for them but the banks which currently hold the mortgages think that which is why they won't sell.

Since we need to get those loans off their books and they don't want to sell into a buyers market thats where the gov. comes in. The real question here is is the auction system the best way to receive the best possible price for those toxic assets and while it may be I do think a better solution would be for the gov. to just take the loans themselves and hold them until the market returns or even take them all and slowly bring a few loans to market over the next few yrs as the market improves.

The banks believe those assets are worth more than they are AND Obama believes that. That's what this plan says. Either that or Obama is purposefully screwing taxpayers. I prefer to believe the former -- at least that way he's only incompetent.

They're operating under the belief that this is a temporary crisis. They're pretending this crisis will evaporate in a couple of years and these assets will regain the value they had in 2006. That's not going to happen.

Now, nationalizing the banks won't help if Obama/Geithner would make the same stupid mistakes the banks are making. My call for nationalizing banks assumed Obama would be smart enough to deal effectively with the toxic assets, but this news makes it clear he's not. So I take that back as long as Obama's President.

IMO there's nothing wrong with the auction system, the problem is the private/government structure that this report says Obama is setting up. The plan involves almost no money down from private investors. The government will provide low interest non-recourse loans up to 85% of the supposed value of the assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Investing just 3% of the equity, practically no skin in the game, these investors can pay a higher than market price for the toxic assets since there is little downside risk. That's essentially a direct subsidy from the taxpayers to the banks and the bank's insistence that these garbage "assets" are worth a lot more than they are. And since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"? This plan may as well have been written by the bankers and investors who made this mess to begin with. A year ago they were screwing customers who didn't know better or were trying to scam the system too; now, with Obama's help, they're screwing all of us.

 

[White Eagle]

Is this the same plan they unveiled and made the Stock Market soar over 450?

 

[NickCole]

Is this the same plan they unveiled and made the Stock Market soar over 450?

Yep.

Now let's put on our thinking caps. Why do you suppose this plan would make the market soar nearly 500 points?

 

[TX-Beau]

Hey, no insulting the great invisible hand......

LOL

 

[naked gent]

Hey if they're making money at least its not costing us any money. (and we should be seeing some of that TARP money coming our way sooner as opposed to later)

When you guarantee the downside risk you'd better be rooting for those who are bidding to get in on the upside.

Economically I think the gov. could have done better but politically this is probably the best they could do.

 

[NickCole]

Hey if they're making money at least its not costing us any money. (and we should be seeing some of that TARP money coming our way sooner as opposed to later)

I'm almost scared to ask, but what does that mean?

When you guarantee the downside risk you'd better be rooting for those who are bidding to get in on the upside.

You say that like we're at a football game, as if our rooting for one "side" could possibly affect the outcome.

 

[naked gent]

I'm almost scared to ask, but what does that mean?

Dont' be ascared Nick, I'm just saying if Wall Street is happy at the prospect of making money on this deal then that would appear to limit our downside risk.

You say that like we're at a football game, as if our rooting for one "side" could possibly affect the outcome.

As any sane sportsfan can tell you rooting never effects the outcome but when its all you can do you do it.

 

[NickCole]

Dont' be ascared Nick, I'm just saying if Wall Street is happy at the prospect of making money on this deal then that would appear to limit our downside risk.

Why does it limit our downside risk?

You don't seem to get it: somebody is going to take a huge loss on those toxic assets. It's not going to be investors (hence Wall Street's Happy Day). There's only two other parties it could be, because there are only two other players in the scheme. Banks or taxpayers. So we're right back where we started except that investors get another payday before the reckoning and Geithner may have figured out a way to spread around the losses so Citigroup and BofA and JPMorgan, the big banks, aren't the only ones to take the hit -- far as I can tell that means us and/or small healthy banks through FDIC.

As any sane sportsfan can tell you rooting never effects the outcome but when its all you can do you do it.

Maybe that's the reason I've never been a sports fan, never been interested in being a sports spectator. Just seems boring, trivial, impotent. Either I play or I'm not interested. But if rooting from the stands floats your boat, have at it.

 

[NickCole]

In somewhat related news today:


Bank of America’s Bernstein Says Sell Bank Stocks After Rally

March 23 (Bloomberg) -- Investors should sell bank stocks after they rallied 12 percent today because the Treasury Department’s plan to buy toxic assets won’t stop profits from dropping, Band of America's Richard Bernstein said.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay0Xgdn2tUK8

JPMorgan Chase To Spend Millions on New Jets and Luxury Airport Hangar

Embattled bank JPMorgan Chase, the recipient of $25 billion in TARP funds, is going ahead with a $138 million plan to buy two new luxury corporate jets and build "the premier corporate aircraft hangar on the eastern seaboard" to house them, ABC News has learned.

http://abcnews.go.com/Blotter/Story?id=7146474

 

[syntax]

I am a wealthy man. My primary residence is in Schenectady, NY and my partner and I have a pied a terre in Sacramento, CA. We entertain a young crowd who have impeccable manners and nice haircuts. They do not lower their pants in order to show their underwear. Unlike that "tax cheat" Geithner, I pay my taxes. Lots and lots of taxes. That gives me license to bloviate on this forum ad nauseam about why I am always right and everybody else is always wrong. Always.

When Obama or someone in his administration says something and the stock market goes down, that is bad. When Obama or someone in his administration says something and the stock market goes up, that is also bad. There is no contradiction. Post otherwise and I will obfuscate. I am the Dean of Human Nature.

Young people know nothing. I am whatever age I want to claim I am, but I have been an activist for all of my life. I protested my own birth. I voted for Adlai Stevenson when I was in kindergarten. I went to the Castro and handed out condoms before gay men were having sex there.

I opposed the war in Iraq before Bush was elected and was criticized on this very forum for it even before I was a member. I called Obama a fraud and a charlatan when he was a Freshmen at Columbia and entertained the thought while he was a schoolboy in Indonesia. I predicted his loss in the primaries and the general election. I was right. The voters were wrong.

I consider my posts on CE&P to be only a small part of my civic duty and my public service. I am active beyond the world of gay porn forums. After he was in office for 20 minutes, I sent a text message demanding that Obama fulfill his campaign promise to close Gitmo. He eventually yielded to my pressure and influence, but not soon enough to satisfy my sense of self-righteousness.

There is no need to thank me for my contributions to this gay porn forum. I only ask for a simple acknowledgment that I am right and that you (and Obama) are always wrong. Always.

 

[naked gent]

Why does it limit our downside risk?

You don't seem to get it: somebody is going to take a huge loss on those toxic assets. It's not going to be investors (hence Wall Street's Happy Day). There's only two other parties it could be, because there are only two other players in the scheme. Banks or taxpayers.

Nick right now its not all clear to me who is going to take the hit here. The government isn't buying the assets only partnering with five approved private investments groups who will be allowed to bid. In this instance as long as they make money we won't have to shell out money to cover their losses.

If a bank participates in the auction and receives 50 cents on the dollar for a batch of mortgages are you saying the gov. will pay them the other 50 cents cause I don't see that anywhere......although I concede I don't see it said anywhere that the banks will be taking the hit and I'm not at all sure some of them could survive if they did.

But again this is no worse for the taxpayer on the downside than your suggestion that the banks be nationalized and we take control of all those mortgages.

 

[NickCole]

Another Nobel Prize-winning economist, Joseph Stiglitz, weighed in today:

"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interviuring a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives", Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

http://www.cnbc.com/id/29848741

 

[NickCole]

Nick right now its not all clear to me who is going to take the hit here.

It's clear to me and I explained it to you.

It's the government. That's us.

The government isn't buying the assets only partnering with five approved private investments groups who will be allowed to bid.

See above. With help from a link to the New York Times story, I explained the calculation. Our government, that's us, absorbs the downside risk.

In this instance as long as they make money we won't have to shell out money to cover their losses.

Not necessarily true. See above. I've explained it.

If a bank participates in the auction and receives 50 cents on the dollar for a batch of mortgages are you saying the gov. will pay them the other 50 cents cause I don't see that anywhere...

No that's not what I'm saying.

I explain it above.

...although I concede I don't see it said anywhere that the banks will be taking the hit and I'm not at all sure some of them could survive if they did.

But again this is no worse for the taxpayer on the downside than your suggestion that the banks be nationalized and we take control of all those mortgages.

It's worse if the taxpayer takes a hit for, say, 50 cents on the dollar, rather than, say, 25 cents on the dollar. When numbers are in the billions and trillions, that tends to add up. And in the end it may be necessary to nationalize the banks anyway.

 

[naked gent]

It's clear to me and I explained it to you.

It's the government. That's us.

See above. With help from a link to the New York Times story, I explained the calculation. Our government, that's us, absorbs the downside risk.

I understand that we are the ones who will absorb the downside risk if money is lost on those purchases but I don't see, nor do you contend, that the government will be making the banks whole on their losses.

You say the government will be taking a hit here not may be taking a hit but all we know with certainty is that if those loans go bad we're on the hook for the losses and if they don't it won't be costing us much at all.

Lets try and avoid predictions on what might happen and stick to what we know.

 

[NickCole]

Lets try and avoid predictions on what might happen and stick to what we know.

Let's you post your way and I'll post mine.

I'm comfortable with predictions, but maybe that's because I know what I'm talking about.

 

[NickCole]

You're the gas tax holiday guy. You don't know what you're talking about with regards to economics. You basically regurgitate whatever negative stories you find, and when proven wrong by facts or reality you are nowhere to be found.

I'm right here, bub.

... what exactly are you doing on here ...

The same thing everybody else is doing on Internet forums, expressing my opinion.