Geithner plan for banks leaked - a trillion more down the toilet

Everyone agrees that the government has to do something about the dangerous situation with our banks. Most agree that the government - including the Fed - is going to have to spend gobs of money to fix it.

The fact is, there is probably more in toxic assets held by the banks than the entire banking system is worth. This alone is reason enough to find a way to take this economy killing paper off the balance sheets of banks which will (theoretically) free up credit and get the economy moving again.

President Obama promised us at his press conference last month that his whiz kid Treasury Secretary Timothy Geithner would unveil his plan to save the banks "tomorrow." Well, "tomorrow" has turned into 6 weeks and counting with various ideas floated - including the creation of a "bad bank" that would buy up these assets - as well as various plans to get private capital to help defray the costs of the bail out.

I will let others with a helluva lot more knowledge and expertise in this matter comment on the plan leaked by the Obama Administration this weekend:

Yves Smith at Naked Capitalism:

If the money committed to this program is less than the book value of the assets the banks want to unload (or the banks are worried about that possibility), the banks have an incentive to try to ditch their worst dreck first.

In addition, it has been said in comments more than once that the banks own some paper that is truly worthless. This program won't solve that problem.

[snip]

Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?

And notice the hint of skepticism from the Times regarding the Administration's supposition that the bidding will result in fair prices. Huh? First, the banks, as in normal auctions, will presumably set a reserve price equal to the value of the assets on their books. If the price does not meet the reserve (and the level of the reserve is not disclosed to the bidders), there is no sale; in this case, the bank would keep the toxic instruments.

Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.

So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank's reserve, which would be the value on the bank's books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.

Yves analysis points to big trouble for America. And even Paul Krugman doesn't like the plan:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won. The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

(HT: Balloon Juice) 

The Obama administration is not going to get another chance. They are going to have to get this right the first time. Judging by reaction across the political spectrum among those who know quite a bit more about the issues than I do, my guess is that they will fail and we risk a complete collapse of our financial system. As John Cole put it rather brutally and succinctly:

If this were a medical emergency, it appears it would look something like this:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

Perhaps the plan will work because it must work and if everyone realizes that then maybe there is some hope. As far as I can tell, that's about the best we can wish for at this point.




Everyone agrees that the government has to do something about the dangerous situation with our banks. Most agree that the government - including the Fed - is going to have to spend gobs of money to fix it.

The fact is, there is probably more in toxic assets held by the banks than the entire banking system is worth. This alone is reason enough to find a way to take this economy killing paper off the balance sheets of banks which will (theoretically) free up credit and get the economy moving again.

President Obama promised us at his press conference last month that his whiz kid Treasury Secretary Timothy Geithner would unveil his plan to save the banks "tomorrow." Well, "tomorrow" has turned into 6 weeks and counting with various ideas floated - including the creation of a "bad bank" that would buy up these assets - as well as various plans to get private capital to help defray the costs of the bail out.

I will let others with a helluva lot more knowledge and expertise in this matter comment on the plan leaked by the Obama Administration this weekend:

Yves Smith at Naked Capitalism:

If the money committed to this program is less than the book value of the assets the banks want to unload (or the banks are worried about that possibility), the banks have an incentive to try to ditch their worst dreck first.

In addition, it has been said in comments more than once that the banks own some paper that is truly worthless. This program won't solve that problem.

[snip]

Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?

And notice the hint of skepticism from the Times regarding the Administration's supposition that the bidding will result in fair prices. Huh? First, the banks, as in normal auctions, will presumably set a reserve price equal to the value of the assets on their books. If the price does not meet the reserve (and the level of the reserve is not disclosed to the bidders), there is no sale; in this case, the bank would keep the toxic instruments.

Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.

So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank's reserve, which would be the value on the bank's books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.

Yves analysis points to big trouble for America. And even Paul Krugman doesn't like the plan:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

(HT: Balloon Juice) 

The Obama administration is not going to get another chance. They are going to have to get this right the first time. Judging by reaction across the political spectrum among those who know quite a bit more about the issues than I do, my guess is that they will fail and we risk a complete collapse of our financial system. As John Cole put it rather brutally and succinctly:

If this were a medical emergency, it appears it would look something like this:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

Perhaps the plan will work because it must work and if everyone realizes that then maybe there is some hope. As far as I can tell, that's about the best we can wish for at this point.