Geithner’s naked subsidy redefines toxic

By J Saft
March 25, 2009

jimsaftcolumn31– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.

But most interesting of all is a plan to buy whole loans, dubbed “legacy loans”, from banks but this time the private-public subsidized vehicle will get its leverage courtesy of Federal Deposit Insurance Corporation-guaranteed debt.

Notice that the ground has shifted subtly and the government is now talking not just about “toxic” assets but “legacy” ones. A legacy asset is, more or less, everything real estate related now on bank balance sheets.

These loans are not marked to market they are held to maturity, so no blaming the market here. They are nothing more than doubtful loans in the process of going bad as the economy implodes and the real estate they are collateralized with drops in value.

There is an almighty bust in the U.S. real estate market and it is blowing holes in bank balance sheets having nothing to do with securitizations.

It rather undercuts the argument that was advanced about earlier subsidy plans, that there was a “market failure” leading to hard-to-value complex securities being priced by the market at too little, below their fair “held-to-maturity” value.

The only uncertainty around a whole loan is whether the debtor will pay back the loan and, if not, what the collateral is worth. So there is no more deception about liquidity, market failure or anything else, only a naked subsidy to the banking industry, using the private sector as a pricing mechanism and cutting them in on the deal in exchange.

DEFINITION OF PRIVILEGE
So, will it work, and if it does how will this step influence the way banking functions down the road? Depends on what you mean by work, but it will doubtless take a tranche of lousy assets off of banks.

But as for creating confidence, I can’t see it. Firstly, investors will twig to the idea that the balance sheet issues are deep, and secondly, now that we are talking whole loans I think it’s clear that the $1 trillion is only a down payment.

That means the administration will need Congress to play along and fund another wodge of subsidy. That may be a tough sell, especially considering that the administration has bent over backward to keep Congress out of the funding loop, using the Federal Reserve and FDIC as funding mechanisms and thereby effectively arrogating the funding powers Congress is supposed to hold.

The plan also hugely encourages moral hazard, as it leaves too big and too failed companies, boards and executives in place while providing them with a chance to climb out of the holes they have dug themselves. Not much of a lesson in accountability.

Writing in the Wall Street Journal, Secretary Geithner said the U.S. must strike a balance between promoting public trust and spending taxpayer cash to get the banking system functioning.

“This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders,” he wrote.

It is just astounding that he even sees the need to remind us that free government money is not a right, and reveals much about the balance of power between him and those seeking handouts. And you simply can’t give a subsidy without enriching executives or shareholders, you can only hope not to do it too obviously.

Finally, don’t even begin to believe that concerns about government interference will leave the U.S. with few well qualified asset managers willing to commit their capital to the plan. New York and Connecticut are stuffed to the gills with asset managers who would crawl naked over hot coals to get access to cheap, non-recourse, long-term funding from the government.

That there are suggestions to the contrary is simply an attempt to try and influence the debate about government control over compensation at firms which accept taxpayer largess. A smokescreen within a smokescreen.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –

55 comments

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Brilliant article. Geithner seems to be working for Goldman Sachs not for the rest of the taxpayers. This exercise is about nothing but enriching executives and shareholders, a giant transfer of wealth from the middle-class to the already super-rich, making a few millionaires in the process be it only with book deals.
Disgusting.

Posted by Robynne | Report as abusive

The cover page of the current Harpers magazine depicts the “state of the union:” a huge, fat banker sitting on the “bank” under which a common guy (schmuck ?) can not wiggle out under.

Posted by DeSegnac | Report as abusive

Thank you, Mr. Saft, for pointing out how the goals have shifted. If Secretary Geithner intends to expand coverage from so-called toxic assets like CDOs and other structured products to include all manner of legacy loans, then it is fair for us to broaden our analysis as well. We could start by asking about the FDIC; if that agency now controls adequate resources to finance the purchase of legacy loans across the banking industry, then surely it has sufficient resources to take over even the largest insolvent bank. What the Geithner plan inadvertently proves is that no bank is too big to fail. The government should proceed accordingly.

Posted by J. Marston | Report as abusive

Looks like the honest Taxpayer is being strung and hung via obnoxious,ill conceived,and unethical bale out plans of Geithner and Big Ben. Honestly I expected Obama to be a different kind of President but Policies do not seem to be even cosmetically different. This kind of organised looting may not be accepted by the people forever and sooner or later the citizens may hit the streets in protest. If this n’th bale out fails Social unrest is likely. Wall street Bankers have merrily gambled away the future of coming generations, in their Casinos. They have the nation by its bawls(pardon me) and squeezing while asking for more.

Posted by F.Daruwala | Report as abusive

Mr. Saft,

It seems that you disagree with Mr. Geithner. Do you agree that no plan can please everyone and no plan can avoid harming everybody? In this case, you need to propose an alternative. A criticism without a superior alternative is of no value here.

Posted by Winchester73 | Report as abusive

Re Winchester 73 posting-Unfair shot as Mr. Saft has been suggesting for some time that the correct alternative is to take the haircut on the bad loans, restructure, and move on.Instead we get smoke, mirrors and magical incantations from the Federal government that tries to avoid, and instead, postpones the deflation that’s coming anyway, while adding to the leverage that helped us get here. This latest plan is so transparent I can’t believe it was allowed to hit the streets, but I fear it is more proof that the balance of political power rests in hands that depend on hiding the true value of financial and other assets and using the taxpayer as guarantor of the overstated values.

Posted by Gary Leeper | Report as abusive

Gary, I still think it’s a fair criticism. The alternative offered should be stated. It doesn’t take a lot of space to do it. The haircut -> restructure -> move on plan won’t spread out costs and benefits in perfect proportions either. It is worth repeating in these criticisms that we’re in a “pick the least horible” situation.

Posted by Winchester73 | Report as abusive

Great article – James Saft does it again!
Real estate prices are following the stock market – they’re just slower to reach the 50% depreciation mark because RE transactions are by nature slower and more complex than buying and selling stocks.
The US government is trying to inflate a bust bubble – No chance anything like that would work.
It takes years for firms and households to de-leverage, and you can’t compress years into months through government subsidies. Trying to do so could very well dig a deeper hole for the US economy to fall into.

Posted by YR | Report as abusive

This entire bailout process is predicated on the (failed) concept that banks and financial products firms have learned a lesson about failed oversight, bad ratings, and overly complex securitization. That would be a good starting point if the lesson had been learned.

Banks and consumers both need to de-leverage, but they need to understand the necessity, and this kind of buyout or guarantee process that essentially takes the risk out of over-leveraging is counterproductive. If there are no consequences for stupidity, stupidity will continue to be the norm.

There is no such thing as “riskless risk”, but these institutions included in the bailout have used our government to manufacture it when their own plans failed.

Posted by pmitch | Report as abusive

When there seem to be arguments for only one side, and when everything is perfectly clear and obvious,we should start being suspicious.
I suppose, balanced comments with arguments pro et contra proved to be more trustworthy.

Posted by Marco | Report as abusive

Winchester 73, George Soros has publicly stated the financial system is on life support. Chairman Bernanke and World Bank President Zoellick have said essentially the same thing. Now I am not a doctor medical or otherwise, but I would consider such a situation as almost without hope. That being said, throwing money at this problem or greatly expanding government powers over the entire finance industry as Secretary Geitner has requested, are at best very dangerous solutions. Similar paths were followed during the Great Depression in Europe. I would argue this signaled the rise of fascism, although the moves by Germany and Italy were hailed and praised around the world at the time.

As a nation our life expectancy, infant mortality, morbidity, educational ranking, crime rate and wealth disparity rank well below the industrial nations and many developing nations. By definition we are becoming a third world nation if we are not one already. We have tent cities for the homeless around the country. Rhawanda. Venzuela, Zimbabwe and other nations have have employed measures such as land reform, nationalization of resources, suspending foreign land ownership and debt forgiveness within it’s borders. None of these solutions would be welcomed by economic ruling class or government in this country. It should be noted these reforms in other countries were in response to extreme poverty and violence. I for one hope we don’t descend into a similar state before action is taken to alleviate human suffering in our country.

It is time to let go of our sacred cows( capitalism, militarism, hegemony…) and think outside the box. It is time Americans realize we are ruled by oligarchs who have the means and influence to put those in political power who will serve their interests. We must find a way to empower those who will serve the People’s interest.

Posted by Anubis | Report as abusive

“Finance is a conspiracy against the laity.”…David Ricardo, late 18th Century UK Economist

Posted by John P. Crowley | Report as abusive

Anubis,

I think that you’re advocating something different than Mr. Saft. I’m advocating the Geithner plan in the absence of a superior plan, with the understanding that no plan will be pleasant. I myself would go further than the administration and stop a lot of wasteful subsidies (e.g. 3 billion to sugar farmers). But that’s just me.

Posted by Winchester73 | Report as abusive

Not all birds of a feather flock togeather.
Thousands of smaller community and regional banks through out our nation have no problems with their real estate portfolio and continue to operate well within FDIC guide lines and are profitable even in todays difficult market. The large national banks that bit off more than they could chew and became involved in risky investments, Wachovia and Merrill Lynch type mergers are great examples of poor management, greed and lack of intelligent control by their boards of directors.

Posted by Bighorn | Report as abusive

AIG financial unit = Bernie Madoff on steroids.
Banking System = fraud and mismanagement.
SEC = corrupt and inept.
FDIC = circumventing the Constitution
American taxpayer = sap.
Congress = totally corrupt
President = clown salesman
WHAT DOES IT TAKE TO INFURIATE PEOPLE ENOUGH TO REVOLT
Our “capitalist” system has failed and should restructure itself WITHOUT govenment participation.
The governmetn should be ivnestigating fraud and putting the culprits in jail for a long time.

Posted by ZZwhale | Report as abusive

Just another reason to put your trust in Jesus, not the government. Governments and economies will fall, but God is the same yesteday, today and forever. He will not change.

Posted by Dan | Report as abusive

On the First Day of Christmas, my country gave to me, Universal Bankruptcy. But then, as if my divine miracle, I sold Park Place, Board walk, and Marvin Gardens, and made a 3.5 Trillion Dollar(US)profit. I then built a solar powered Tent City, the Tower of Tents; and colonized Mars. You can buy a condo there in three years, and it is all green energy.

I am so inspired I am going to win the Oscar next year, do Vogue and become Miss December.

In my spare time, I am going to adopt the people of Mars, part the seven seas and turn water into wine.

For that, I will show up!

Anubis is right in his analysis. I also think the comments about Europe and esp. Germany are also correct and insightful in their analysis.

Geithner is a PIMP for Wall Street thieves.

Posted by stevador39 | Report as abusive

So what makes a company too big to fail? The out of control, unregulated CDS markets. Take a bank holiday, force them to back out of all CDS contracts, any remaining with out collateral to back them are considered null and void. Once that is done have the banks open all their books and let the insolvent ones go into bankruptcy. Clear most of the bad debt out of the system through bankruptcy and we are on the road to recovery. A system without bankruptcies and the ability to clear debt is unsustainable.

Posted by Waubay | Report as abusive

Democrat/Republican; there is no choice or difference anymore. They both have perfected that ‘organized looting’ of the middle class. The rich and the poor both have health care and enough to eat. The middle class, are busy trying to get these things. The second time the money was doled out from the peoples funds to banks and managers who seem to have no clue about fiscal responsibility I thought about all those people on the Mall in front of the Capitol on Inauguration day, as far as the eye could see. What if…. that many people stood on the Mall the next time a Trillion is given out for nothing???
But of course, a protest like that would be taken over by some political entity trying to enrich itself, isn’t that what happened in Europe in the 30es?

Posted by QueZen | Report as abusive

If all money can be just printed in a machine as and when needed. Why then for the Last 300 years are people starving and dying in Africa?. Is money different for the Rich and Poor ?

Posted by J Fernandes | Report as abusive

In the end, the financial institutions and some insurance companies are saved by a massive deployment of unadulterated socialism.

The Geithner plan is exactly that of Paulson, the details have been shifted around. Save the banks at all costs.

So there you are – virtually the entire financial system of the US is busted from their own reckless doings – yet the sector enjoys absolute and total protection from failure by two administrations of opposing ideologies. The damages the US banking system has done to US citizens, and billions around the world, is so vast it cannot be calculated. But there is no accounting for that failure. There is not even a single bad word uttered by the US government about Greenspan’s Fed irrational exuberance.

But there will be accounting in the eyes of the world. The reputation of the US in all aspects of financial policies is shot.

Posted by The Real Deal | Report as abusive

I think its time to face up to the fact that the U.S. has been taken over by a new paradigm. We talk about the largest transfer of wealth from the middle class to the wealthy in the history of the world as if it were just a technical readjustment instead of the piracy that is going in front of our very noses. While I think James Saft’s analysis in this regard is about as good as it gets, why are we not looking at the possibilities in this deal for collusion and price fixing among this small fraternity of financial gangsters? If only the investment banks and the hedge funds are players in this deal, they can rig it any way they want to since they all attend the same country clubs. This plan is a catastrophic error. The 18 wheeler has now flipped on the highway and is screeching toward us on its back with sparks flying and pieces breaking off. We are standing in the road with our backs to our impending demise and we seem to be deaf. Yikes.

Posted by Jonathan Cole | Report as abusive

Anubis, I do sincerely hope that your sincere in your saying that their is no alternative to Timmy ” the Pimp” Geithner’s plan, & not a ruse, for in that case allow to be educated. http://www.larouchepac.com

The bailouts are not only foolhardy, they are outright illegal and treasonous. Both the Bush and now the Obama presidencies are destroying the US through this bailouts. We can never, even if we attempt it, to bailout all the outstanding Derivative obligations. GDP for the whole world put together is only about $50 Trillion, most conservative tallies for the outstanding Derivative obligations are between $2-$3 Quadrillion. yes with a “Q” and 1000 times a Trillion $. Nothing short of bankruptcy proceedings with an outright nullification of any “Exotic financial instrument” will save the US and by extension the world economy. God save us and Bless America, we Damn as hell do need it today………

Posted by Alicat | Report as abusive

As expected, the FED fired its last bullet. Mr. Bernanke does not seem to understand or want to understand that you cant get something out of nothing, i.e. you can’t create demand for real goods and services by printing money, because money is a medium of exchange and not a good based on labour that produced it that you can exchange for other goods. Money is implicit in this transaction: A construction worker exchanges his labour (that built a house) for a pound of meat that a farmer produced (using his labour). That is real economy, that is exchange of goods. What Mr. Bernanke does, is he pushes a button on his computer, adds money to his electronic account and then thinks he can exchange it for something valuable. What is he giving in return? Nothing really. So there is no real economic output as a result of this exchange transaction on the side of the FED, so there won’t be jobs created and goods exchanged for other goods. Mr. Bernanke’s academic theories, being tested on real living people, are falling flat on its face and we’are headed for Great Depression 2.0, because “the student of Great Depression”, the “helicopter Ben” just does not get it – You can’t create something out of nothing. We are in DEMAND DEFLATION and until it runs its course the slump will go on. The FED’s actions can slow down the decline, but they will not stop the trend.

Posted by Sam | Report as abusive

It used to be A BILLION HERE …A BILLION THERE and pretty soon you’re talking about REAL MONEY.

NOW IT’S A TRILLION HERE…. A TRILLION THERE ….too bad there’s $42 TRILLION IN WORTHLESS CDS / CDO’s floating around …….. tsk tsk tsk

What will they name the next abortive measure?

Pile on top of that the SPEND and TAX program…..worth another 10 Trillion thru 2010 ……. yes definitely buy a gun or two….

Posted by zzwhale | Report as abusive

The true losses have either not been fully revealed by the Banks or is it possible the Banks and Goverments are withholding the true reality and are trying to drip feed it into the system?. There is bad business, very bad business and I suspect a lot of “mirage” investment.
We are all just experiencing a breathing space, we aint seen nothing yet !

Posted by Jones | Report as abusive

The plutocracy, then, attempts to preserve its privileged position, as the social contract is shredded and the furies rise, threatening bonfires.

If nothing else, I suppose, it’s appropriate entertainment.

It would seem, then, that this is likely the last gasp of the Summers/Geithner/Bernanke approach.

The only ‘hope’ I see in the present state of play is the advocacy — finally — of appropriate authority to take into conservatorship/receivership/bankruptcy the appropriate institutions.

Far better that it had been advocated sooner, as Geithner rightly pointed out.

We’re going to need it.

Still, we’re far, far, far behind the curve here.

So much for the prescience of our putative elites, eh?

Posted by atomikweasel | Report as abusive

without a huge overhaul program and re-education including life values .. printing money to buy toxic debt , like with Nazi Germany , will lead to WW3.

we must stop the corperate world living the lie at others expense !!!!

if one is forced to gives back their bonus all must give … governments need as much $$$ as they can get now !!! Swiss banks etc … printing more is a disaster .

Obamas first weakness … stand up to the manipualators , supporters or not , like Kennedy did …. and try to educate them for their own benefit.

Posted by Harry | Report as abusive

So the government is going to buy mortgages at above-market rates with taxpayer money.

And I’m going to spend the rest of my life paying off both those purchases and my own overpriced home mortgage.

That’s all I wanted is to be upside down twice on essentially the same mortgage. Is there any way I can hand my house AND my government over to the bank? Too late.

Posted by chad | Report as abusive

One scam piled on top of another. All CDOs and CDSs are WORTHLESS. Any scheme to assign ‘value’ to these bogus contracts is sure to create an instant industry of consultants who will spin around and promise anything after their fees are paid. — Just shot-can all of it, wipe the slate clean and start over.

Posted by Bill | Report as abusive

As I read the responses here and talk to folks that I come in contact with, I see that most Americans see this for what it is; finding ways for the banks to get value for items that by definition have no value. The banks selling toxic assets is the same as trying to resell the oil leases that the President just cancelled. Neither one have much value. I think maybe Mr. Madoff taught these folks about finance or visa versa since every government involvement in finance resembles a ponzi scheme.
The question is, what can we do about it?
Or what will we do about it?

Posted by Marv | Report as abusive

What is your proposed solution? I’m tired of everyone’s cheap insight. Propose a solution –

Posted by yahoo | Report as abusive

The solution to this economic crisis is to stop government propping up the incompetent and the failed. Let them go down, and stop taking away money from the competent.

Posted by Sam | Report as abusive

I Don’t Understand All Of This High Financing

Posted by les | Report as abusive

++++++++++++++++++++++++++++++++++++++++ +++++
It doesnt surpise me that the participants of the sub prime and cdo’s etc market that created this mess had thought that it would be a feasible way to enrich themselves,as the govt gives them the message that they are always favoured and are never really accountable. ++++

I think this is a GREAT EXAMPLE of WHY the american big business and banking community felt they were able to commit the fraud and enter contracts and create worthless so called “innovative” financial products
and renumeration packages to enrich themselves –> the US govt gave them that sort of message <– as they are doing it again ….. Geithner’s Plan to use TAX PAYERS MONEY to pay for these so called “Toxic Assets” via govt funding,and securing those loans with the those assets
only GIVES AWAY ANY UPSIDE that those toxic assets are likely to have,while making the common tax payer take the loss if those Toxic Assets in fact become useless and the instutitions and investors walk away.All
Geithner’s plan is really doing is GUARANTEEING the Upside for those investors (and tax payers take any possible loss)!
INSTEAD Geithner should be trying to reap the likely upside to those assets and hopefully either not put up tax rates in the future or lower them for the lower tax brackets to help the common consumer who can least
afford the loss on the value of their property/superannuation etc
Geithner’s plan begs the question : What does Geithner have to gain by trying to enrich top executives and rich investors and institutions ? Is he so much part of their community being a rich man himself and a likely top executive after all this is over as well? Or is he going to run for office and in need to future campaign funding?

To Me these are the real questions that need to be asked.
And WHY does the US govt and governnments all over the western world somehow help perpetuate this sort of mentality among large institutions and rich investors ?Are they really so afraid to lose their next round of
campaign funding?? OR?? We NEED TO ASK !! Everyone who lost money/value in this mess deserves an answer and a proper remedy.
WHEN will any govt/govt dept/official who either is directly elected or works for the tax payer indirectly do something 100% for the common tax payer (or the majority of tax payers)???

I think it is time Govts’ did the right thing for the tax payers.

Posted by lw | Report as abusive

Re Yahoo: Okay, Yahoo, stand away from the Houyhnhnms and keep your hands in clear sight.

Seriously, if I may: There is in my estimation no ‘solution’, but there are better ways of approaching the management of the situation:

The essential flaw in the proposals attempted to date, as many have pointed out, is an unwillingness or an extreme reluctance to accept and confront the plain fact that many critically important financial institutions still carry on their books enormous quantities of worthless or near-worthless assets which fact, if it is accepted and confronted, results in the equally plain fact that they are insolvent.

The reasons for this avoidance are both obvious and less-obvious, but it is becoming clear to very nearly all at this point, that it would be far better to confront the plain ugly — or shall we say skanky? — facts more directly, and to deal:

To wit:

1) Put in place the requested authority to declare critically important financial institutions insolvent.

2) Exercise that authority.

3) Put in place well-compensated external factors in government employ or contract or various combinations thereof and under government oversight to

a) Maintain operations so as to avoid systemic collapse.
b) As rapidly as practical identify and assess the actual character of assets and operations.
c) Assess whether operations ought be maintained in essentially their present form or significantly modified.
d) Put in place individuals or teams as appropriate and at levels appropriate as per c) to effect necessary changes, write-down of assets, fractionating of operations, merger or mergers, sale of part of whole, etc.
e) After it has been determined that operations are stable and on a sound footing transition the majority of such newly restructured identities to the private sector, possibly retaining a small proportion under governmental direct oversight so as to provide a window into ongoing operations of the financial sector from a participatory and operational as opposed to a merely operational perspective.

See? It’s simple. (Yes, that was irony you heard on that part.)

Other than ironically, however, it’s a viable path forward.

A path, in fact, any number of capable and experienced folks apart from or willing to stand apart from the present loci of power have in various forms suggested.

I would suggest we would turn to it as swiftly as possible after the present path has clearly demonstrated — as it will — its profound shortcomings, and there is an openness to paths presently closed by virtue of their threat to established and entrenched interests as well as established and entrenched habits of mind and aspects of individual identity.

Posted by atomikweasel | Report as abusive

It is easy – it is either to print more money ( because nobody in the right mind is going to buy Treasure Bills right now ) or let the whole American bubble economy collapse – and loose not only jobs, but even that kind of questionable confidence that keeps USA on the brink of free fall from the highest peak. Geithner & Co. are not doing anything forward-looking – they are simply trying to keep America afloat – from the banks, Walls St and car-makers to the last Joe on the street. And the more I look at it – the more I think that we should make a run for our money if they are in USD. USA economy = bubble.

Posted by Alex | Report as abusive

The structure of the markets is the problem with liquidity now – we wanted a few large banks – now we have them and they are all sick. More or less the same is true now of companies on Wall St some of whom are too big for investment banks to come up with the funding for their mergers. Changes in bankruptcy law and relentless predatory lending via 20% credit cards have done their part in dragging down the system. Anti-inflationary policies have been backed for years and that is also a part of the problem – in the 70′s you HAD to put your cash to work or risk inflation eating it up. Government instead of OPEC is now forcing us to do just that. One professor came out and said we should make investments “safer” – we dont have a hope of evaluating the safety of investments in this climate where the accounting “innovations” are running rampant. Here’s my laundry list: Simplify Corporate Accounting so its no harder than your own taxes. Force independant government verification of cash on hand for any company or investment house which claims 10million or more. Create more tiers of publicly traded companies and let lower tier banks participate in lending startup money to smaller businesses through syndicated investment banking. Bring back the Community Reinvestment Act where if banks had your money they had to lend it back to you. Make loan officer’s and bank execs pay AND retirement depend on both the return on loans AND the track record for repayment. Currently they are mostly dependant on fees generated. Force all retirement money to be in annuity form ONLY and dependant on continued viability of the company and rescindable if there is proven fraud. Bring back the law where a single shareholder of a single share can start a shareholder lawsuit.

Posted by Pnelis | Report as abusive

Seems like a pointless debate but at least Mr.Saft is doing his bit, though judging by the comments the discussion is all too one-sided and losing steam lately. Look the government needs to be seen as doing something, and at least pretend to look like it knows what they’re doing. Else they risk the common folk hitting the streets. So that’s the main objective right now. What you see now is nothing more that a ‘fire-fighting’ and trying to figure out the next move. Right, it’s hopeless but since when did politicians come up with anything other – not their primary objective for taking office. Geithner is a banker (allways a banker – though paid by the state now) so his hands are tight plus the other Wall Street bankers are crying meltdown, collapse etc. Like with AIG the counterparty risk and subsequent settlement failure risk is too great. No single person or entity is willing, able or has any incentive to tackle it – so Uncle Sam comes to the rescue, as allways. The lessons to be learned are all here laid out. You’d have to be extremely gullible to think that a solution of any kind can be proposed by the very people that could not see the bubble in the making although were charged with an oversight responsibility. How could they if the best brains are overpaid by the Wall Street. Where are all those MBA’s and PhD’s and economists with their awards for theories that seem to work in a boom time?. Employ them now! (Nobel prices and press will help as that’s all they care about anyway).

Posted by Franz Kafka | Report as abusive

I criticize Shaft a lot but this is a good statement:

“The plan also hugely encourages moral hazard”

Posted by jimmy | Report as abusive

I am a Brit who is still reeling at our own governments incompetence – of course things are gathering pace here with a schism between the government and the head of the Bank of England – Mr. King. Who allegedly was called in to see the queen yesterday…. very strange – could we be facing a quiet coup d’etat in Britain?

Anyway re the Geithner plan. I have to admit I watched the explanation of the plan on Bloomberg with a slack jaw. I understand a few things about finance – having worked in it for a number of years in a previous life – but I did not understand this plan. Or rather I did not understand how it would work. I mean wont this plan just be respreading the risk? Re packaging it up and selling it on? I may not have understood it – but if that is the case I would imagine that should be the last thing we should be doing.

It is interesting that the Brits and the US are doing the same thing once again – following each others policy and telling the rest of the world that is what they should be doing too but the rest .

However I do not think Americans should be overly optimistic about Europe. Britain is in dire straits – so is Ireland and Spain and Greece. The ex Eastern bloc is in a terrible condition – every other day a country gets an IMF loan. There is widespread unrest in Europe now – rioting in Latvia, Romania etc. Rioting and demos in Greece and France. In fact the French have started taking their factory owners hostage – we may slate the French but they know how to fight for their rights.
Of course we Brits have done it our own quiet way and smashed a bankers house!
So I am not too optimistic for you guys but then again I am not too optimistic for us or the Euro Zone either!

Posted by crackersan | Report as abusive

I have a simple suggestion for people who are outraged by our US gov giving away our hard-earned tax dollars to their cronies who lost it by being greedy pigs:

Sell short the US. Buy gold, buy foreign currencies, invest in China. At least you’ll make some money out of the Obajerks.

Posted by Jerusalemight | Report as abusive

If Saft is right, then what we have is fiction returning as fact on a monumental scale — the fiction I refer to is Tom Wolfe’s “A Man in Full” which details the unravelling of commercial real estate speculation in Georgia in the 90s. If bankers have messed up the most elementary form of plain vanilla lending — loans collateralised against real estate of a type that have been around since the Phoenicians, then you have to ask whether there is any brand value, intellectual capital or commercial reputation left to save at these banks and it wouldn’t be kinder to put them out of their misery. Geithner’s “highball” offer — which some reporters have priced at US$6 worth of no-risk loans for every 1$ of at-risk investment — should have sparked a feeding frenzy. At those prices somebody assumed that only 15% of all securitised paper has any value at all… and the rest is trash. Plainly that’s untrue as a house is still a house.

Posted by celebrand | Report as abusive

Stop creating money to give to institutions and banks that made bad financial decisions. Let them fail and compensate at some percentage the investors. As a penalty the CEO’s and top managers should have a job like picking up our garbage and or having their credit score lowered to .001! A cushy prison cell is to good for these greedy idots.

As I see it, the party of Robin Hood, i.e. Democratic party, taking from the rich and giving to the poor, has now decided to contradict its basic philosphy by financing bets of the rich and famous. The purchase of toxic assets using 6c of the private investor against 94c of the taxpayer to make a bet that the assets will someday be worth more is tantamount to going to a casino and if you win, take the money but if you lose ask the casino for a return of 94% of your losses. Great deal for those with money. Bad deal for the rest of us.

Posted by John Caiazzo | Report as abusive

I feel the better way for the US government would have been to add notional federal long-term loans in the balance sheets of banks for a percentage of the total toxic assets thus avoiding printing notes and adding to the federal deficit and inflationary trends.

The banks in this way do not get absolved of their wrong-doing but get a moratorium period to get things back on track. A new law could be enacted to link bonus payments to return of federal long-term loans wherein bonus payments above a certain amount would only be possible if banks start paying back federal longterm loans.

Posted by Amit | Report as abusive

OK, now I truly beleive we are f#@ked, no matter what the governemtn does. Here’s why:
The banks return to profitability after their so called ‘toxic’ assets are shifted to the national debt by lending? TO WHOM WILL THEY LEND WHEN EVERYONE IS GOING BROKE?
The CBO estimates the government will owe over $17 trillion within 10 years. Clearly if that level of debt is reached the dollar will be worthless and if the dollar becomes worthless anarchy and major wars will follow.
The GAO has reported some time ago that the REAL national debt was over $50 trillion. If the amount of debt reaches that the government chooses to be transparent about is $17 trillion, will this off balance sheet debt be $100 trillion?! How could that ever be paid unless the economy doubles in 10 years to $20+ trillion in GNP (and it won’t)?
Taxes are already on the march, so if you have a job and money, say goodbye to the days of discretionary income due to record taxes and inevitable devaluing of your cash (and therefore your real buying power). How does that make a recipe for the consumer to buy or borrow? I see more stealing on the horizon instead.
2-3 Quadrillion in CDS, CDO’s and other derivatives?! WTF! Unless all these morons end up actually owing themseleves, that will be a nuclear explosion in the FIRE sector. The financial landscape will be demolished for 1000 years, and could possible lead to a real nuclear exchange! Since commercial real-estate and securitized garbage of credit cards, auto loans, signature loans, and student loans (another gov. guaranteed loan vehicle!) are the next bomb to go off and all these derivatives seem to be set to the short, this will trigger yet another round of losses to the people who got into this casino/ponzi scheme. The government seems to be in the gambling addiction rehab business!
I’m probably running out of space, but if you want some brutally honest commentary, go to counterpunch.org and looks for P.C. Roberts and M. Hudson among others. Ahh, what a nice time to be an American.

Posted by J | Report as abusive

How is this private-public plan different from the bad bank plan proposed by then Treasury Secretary Henry Paulson? Both involve pricing of these assets, both these assets are hard to price, both require lump sum of taxpayers money, both are still supporting Big institutions that are already brain dead on a life support machine that SHOULD be dead a long time ago.

Posted by ohdear! | Report as abusive

It’s actually much worse because:
What keeps a bank from buying it’s own toxic assets for full 100% value through a proxy company with 10 or 20 to one leverage thanks to the treasury and federal reserve’s latest destructive buffoonery??

Even if the true value in the market of the toxic assets is 30 cents on the dollar OR ZERO it is of virtually no consequence.
If the toxic assets turn out to be worth zero even, the only loss to the original owner and seller (and buyer)is the tiny sliver that the Fed and treasury didn’t finance.
Remember they got full book value for the toxic asset though. The only loser is the U.S. taxpayer…and bondholder as the Fed inflates ever more.

Posted by Chris | Report as abusive

Don’t get distracted.
The real problem is Peak Oil.

It is the fundamental driver of all of this and it is not
a problem that is going to be solved with a Trillion
or two.

Posted by Louis | Report as abusive

Collateral is meaningless without without demand and ability to pay by other potential buyers. This is the situation we are presently in. Tremendous amounts of wealth generated by inflation has disappeared. Many believe greed and unethical practices are at the core of this crisis. True. It is at the core of all our crisis’: climate change, health care, education and more.

I remember when growing up adults used to tell me “What’s good for big business is good for America”. What shall we tell our children now?

Posted by Anubis | Report as abusive

I would say the posting of Mr. atomicweasel and franz kafka are right on. As I have been urging on every bolog I can find it is critical to write your congresmand, the white house, and your senator’s to express your outrage. The current crisis has clearly shown that our governmental bodies will not act in the best interests of its own citizens until they feel threaten with removal from office. Therefore, the outrgae must continue to be expressed and loudly. Otherwise the lobbied interests will get the programs they want, but these will be sold to us as something to “help the economy”. In fact as far as I can tell the great majority of these programs amount to a great wealth transfer from the tax payer to corporations. Eventually we will end up with the final solution, but if the bankers get their way our nations wealth will be used up in the process and transferred to them.

PLEASE E-MAIL YOUR REPRESENTATIVES, THE WHITE HOUSE, AND CONGRESS AND LET THEM KNOW YOU SEE THROUGH THEIR GAMES AND THEY WILL PAY AT ELECTION TIME IF THEY DO NOT STOP IT.

Posted by db | Report as abusive

If executive compensation limits would prevent these big institutions from participating, perhaps they don’t deserve taxpayer funds. I’m sure there are lots of community banks and lenders who would love to have access to those funds even with compensation limits.

What if the institution is too big to fail? Perhaps the market will find buyers for whatever is left over, and life would move on. Not everyone was irresponsible, so there will definitely be people with the capacity to pick up the pieces, and perhaps they deserve to be given a chance.

Posted by DCX2 | Report as abusive