The Geithner Death Star

April 6, 2009

Mike at Rortybomb has a very scary and quite compelling post about the Geithner bank bailout scheme. Basically, he says, it looks very, very similar to the kind of schemes that Enron used to game the market back in the bad old days.

The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, let’s get them to someone else who wants them. However Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid “for moving energy to relieve congestion, without actually moving any energy or relieving any congestion.” And, it appears, that the large banks are gearing up to do just that; with the Geitner Death Star that they’ll just be collecting a large fee to run them in a circle, without actually moving any of them off their collective books. For old time’s sake, I hope they route their loan bids through Oregon and then Utah before putting them back right where they started.

Mind you that was the electrical grid of California – this appears to be at the scale of the entire financial market. In case you are wondering, traders out there are licking their lips to try and find ways to game this even better than Enron.

The potential hazards here are, clearly, enormous — even without the Administration explicitly rejecting criticism that the banks are going to end up shamelessly bidding on each others’ assets. If the banks get a green light to do this, you can be sure that any number of greedy traders will take that as a green light to get up to as many shenanigans as they can. Many of those greedy traders will try their hand in any event — but if the PPIP is structured so as to try to stop them, then it’s conceivable that they might not do a lot of damage. If the PPIP is structured on a laissez-faire system of all bids being assumed to be legitimate, then this could be an utter disaster.


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