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Well, that didn't take long. Usually disillusionment takes longer. But when it comes to fixing our failing financial system - a prerequisite for any economic recovery - it's only taken three weeks for the Obama administration to embrace the same giveaway-to-Wall Street bankers boondoggle that Bush and Co. patented. And as Joe Biden could tell us, that's not the change we need; that's more of the same. Indeed, as far as there even is a plan, it seems to amount to little more than putting lipstick on a pig: taxpayers guaranteeing the inflated values of dud assets. Whether private investors like hedge funds and private equity buy these items from banks first is irrelevant; taxpayers are still ultimately on the hook for assets no one wants to touch.

And that is why it is time for Geithner to go. The information about the latest bailout is the final straw. Real change - the change we need - is looking out for taxpayers before Wall Street. That means giving the public real upside in any bailout, which at this point means nationalizing the banks. Anything else is merely a poorly disguised subsidy for bankers.  So Mr. President, it's time to pull another Daschle: admit you made a mistake, and fire Timothy Geithner.

Is this a liquidity or an insolvency crisis? Or, put more directly, are the so-called "toxic assets" on banks' balance sheets undervalued due to panic in the markets, or are they simply fundamentally worthless? This is the key question policymakers must answer before formulating any plan. If we face a liquidity crisis, simply throwing enough money at the banks should resolve the situation. If the banks are insolvent, however, our best course is a temporary nationalization.

Let's consider two recent examples to illustrate this distinction between liquidity and insolvency crises. In 1998 the hedge fund Long Term Capital Management (LTCM) nearly destroyed the financial system. LTCM had made a fortune by betting that the differences between different types of bonds would narrow. But then in 1998, Russia defaulted on its debt. Stuck holding now worthless Russian bonds, LTCM had to sell other assets to raise cash. But there were two problems. First, LTCM's holdings in each asset were so large that they often couldn't sell the assets without reducing the price substantially; they had illiquid positions. Second, a number of investors who also held Russian bonds had the same holdings as LTCM. So, for example, when LTCM tried to sell Brazilian bonds to raise capital after the Russian default, they found that the Brazilian bonds were only fetching firesale prices, because other investors were selling Brazilian bonds to raise cash as well. Financial investors were the linkage between unrelated assets. This contagion essentially forced LTCM into bankruptcy. But LTCM was highly leveraged, meaning it had borrowed heavily, in this case from Wall Street firms. If LTCM failed, these counterparties would face enormous losses themselves, and likely be forced into bankruptcy as well. LTCM was the first domino. To prevent this destructive cycle from beginning, the Fed organized a private bailout of LTCM by Wall Street. They provided liquidity, i.e. cash, so that they could unwind LTCM's positions over about a year, letting the panic in the markets pass. Because LTCM's positions had more or less been fundamentally sound, the Wall Street firms were actually able to turn a profit as they sold off LTCM's assets. This was a prime example of how to deal with a liquidity crisis.

But what if LTCM's holdings hadn't been undervalued due to panic? What if they had actually just been worthless by the underlying fundamentals? This would be a problem of insolvency. And that was exactly the situation Japan's banks found themselves in the 1990s. After Japan's joint stock and real estate bubbles popped in the late 1980s, Japanese banks were stuck holding now worthless paper. Rather than admit that they held dud loans, Japanese banks kept these "toxic assets" on their balance sheets, refusing to write them down. But when banks face credit losses on this scale, of course they pull back credit; they stop giving out loans. While the government eventually bailed out Japan's financial companies, it became a bit of a black hole: the government propped up so-called "zombie" banks that were de facto insolvent and still refused to lend. Because modern economies need a functioning financial system to grow, the result was a decade of stagnation and deflation, now dubbed Japan's "lost decade".

Sweden offers a better solution to such an insolvency crisis. In the early 1990s, Sweden's financial sector, like Japan's, was de facto insolvent. But rather than dithering, or simply pouring money into a black hole by giving their banks essentially blank checks, the Swedish government took decisive action. They nationalized the banks. They wrote down all losses on bad loans. Then they recapitalized the banks with public funds, before selling off the parts of the firms to private investors. Their economy quickly rebounded.

Now these might seem like academic questions, but they are crucial when it comes to fashioning a bailout that will revive our economy. And indeed, President Obama showed that he is well aware of these precedents in his recent interview with ABC News. So how does Geithner's current plan stack up against what we know works and what doesn't? Not well. While details about Geithner's plan are still relatively sparse, the public-private partnership - the "bad bank" - seems like yet another attempt to prop up dud assets to the inflated values banks continue to mark them at. Without significant government guarantees/financing, it seems very unlikely that hedge funds or private equity firms would want to buy these "toxic" assets. And whether we subsidize hedge funds and private equity to buy these from banks with guarantees, or simply overpay the banks for these assets ourselves doesn't matter; both amount to subsidizing bankers' mistakes. Furthermore, this only continues the misdiagnosis of this crisis as a liquidity problem rather than an insolvency one. For the past year, Bernanke and Paulson flooded the markets with liquidity. They opened the Fed's window to extend financing, taking back dud assets as collateral. They got involved in the commercial paper market. And most notably, they injected $350 billion of TARP money into banks directly. While credit markets have improved from their apocalyptic October levels, we are still in a crisis. Very clearly, this is not a liquidity problem.

The second prong of Geithner's brief outline, the so-called "stress testing" of financial institutions, is more promising. Establishing transparency and trust in banks' balance sheets is vital to repairing the financial sector, and getting our economy growing again. Indeed, Paul Krugman asks:

What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection. So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.

While Krugman may be right - after all, Obama has shown himself to nothing if not a shrewd political operator - Obama's own answer in the aforementioned ABC interview about nationalization a la the Swedish model seems to quash such hope. Obama objected to adopting something along the lines of Sweden's temporary nationalization in part because

Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

Or, as finance blogger Calculated Risktranslates:

We know the correct answer, but we are afraid to do it - because of our "culture" - so we are going to follow the Japanese plan.

Perhaps this is too hysterical a reaction to a single remark from President Obama. But this remark taken in conjunction with the timidity of the Geithner plan seems to indicate an unwillingness to address this crisis head on for fear of the Republicans criticizing them as "socialists". This is nonsense. The public wants results. Period. It's not about bigger or smaller government, but about effective government. And if temporarily nationalizing the banking system is a necessary step towards any recovery, the electorate will reward Obama as the economy improves. Trying to win over the Joe-the-Plumber base of the GOP - or at least not anger them - should not be a concern.

At this point, choosing the wrong policy could doom the Obama presidency. Indeed, Martin Wolf of the FT already asked "has the Obama presidency already failed?" in response to Geithner's proposed bank bailout. The costs of rescuing the financial system will be enormous even if we pursue the best possible policies. If we pour trillions of dollars into Wall Street, and the economy continues to collapse, any chance of getting meaningful health care reform or investment in clean energy will probably be out the door; the GOP will continue to "rediscover" their fiscal conservatism, and obstruct any new spending. But if the economy rebounds, the Democrats will have enough popular support to push through their agenda (along with rising tax revenues from a healthy economy). So Mr. Obama, please save your presidency before it even really begins - and find someone who will bring real change and accountability to Wall Street if Mr. Geithner won't.

Originally posted to Matt OBrien on Wed Feb 11, 2009 at 07:04 PM PST.

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Comment Preferences

    •  I think Geithner got a real look at just how (2+ / 0-)
      Recommended by:
      chuckvw, appletree

      huge and horrific these Toxic[Fruadulant]Assets are and just panicked[Tue not Mon]gagged out this redundant monetary furball to placate us schmucks..Some say, Geithner was looking at Bad Assets of over Three Trillion dollars..Thus the Bandaid and a wing and a prayer..Hopefully the Japanese, Chinese, Saudis, etc etc will stay subservient because we really are too big tooo faill...And look how many times the very successful Donald The Trump pulled this old scam...And what the fuk, if anybody asks to withdraw their money or cash their treasuries we could just Nuke em...I dont think America should take anything off the table..We are Americans and we dont eat out of garbage cans

      "Better a little late, than a little never"..Julian Winston

      by Johnny Rapture on Wed Feb 11, 2009 at 07:18:45 PM PST

      [ Parent ]

      •  the credit default swaps have introduced (6+ / 0-)

        potential liability exposures of many, many, many trillions of dollars (one crappy investment bank Lehman has been assessed at $360 billion alone -- that's no typo).  So long as federal authorities cling to the misguided notion that these contracts should be honored, these banks will be sucked into the vortex of debt.  I say round up the trading companies, put the contracts on the table, and start unwinding them.  If anyone complains about their alleged federal property rights, pave them.

        •  CDS are not a problem at all. (1+ / 0-)
          Recommended by:
          lordcopper

          A few large institutions (AIG) choked on them, but that story is over. The problem today is loans, plain old loans.

          •  CDS are not a problem at all.? Really? No, I (2+ / 0-)
            Recommended by:
            Pluto, Johnny Rapture

            mean, really?

            Maybe you should visit these two links

            http://www.siliconvalleywatcher.com/...

            a snip->

            According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland -- the central bankers' bank -- the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

            1. Listed credit derivatives stood at USD 548 trillion;
            1. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

            a. Interest Rate Derivatives at about USD 393+ trillion;

            b. Credit Default Swaps at about USD 58+ trillion;

            c. Foreign Exchange Derivatives at about USD 56+ trillion;

            d. Commodity Derivatives at about USD 9 trillion;

            e. Equity Linked Derivatives at about USD 8.5 trillion; and

            f. Unallocated Derivatives at about USD 71+ trillion.

            http://www.villagevoice.com/...

            a snip->

            About $2 trillion in credit derivatives in 1989 jumped to $8 trillion in 1994 and skyrocketed to $100 trillion in 2002. Last year, the Bank for International Settlements, a consortium of the world's central banks based in Basel (the Fed chair, Ben Bernanke, sits on its board), reported the gross value of these commitments at $596 trillion. Some are due, and some will mature soon. Typically, they involve contracts of five years or less.

            Credit derivatives are breaking and will continue to break the world's financial system and cause an unending crisis of liquidity and gummed-up credit. Warren Buffett branded derivatives the "financial weapons of mass destruction." Felix Rohatyn, the investment banker who organized the bailout of New York a generation ago, called them "financial hydrogen bombs."

            Both are right. At almost $600 trillion, over-the-counter (OTC) derivatives dwarf the value of publicly traded equities on world exchanges, which totaled $62.5 trillion in the fall of 2007 and fell to $36.6 trillion a year later.

            The nice thing about public markets is that they act as canaries that give warnings as they did in 1929, 1987 (the program trading debacle), and 2001 (the dot-com bubble), so we can scramble out with our economic lives. But completely private and unregulated, the OTC derivatives trade is justly known as the "dark market."

            Counting one dollar per second, it would take 32 million years to count to one Quadrillion. A lot of derivatives...

            by 0hio on Wed Feb 11, 2009 at 10:08:59 PM PST

            [ Parent ]

            •  I know all that crap. Those are notional (0+ / 0-)

              balances and have little to nothing to do with actual exposure. VERY few banks did any CDS trades whatsoever. But they are all chock full of bad loans that are getting worse. There's a giant problem (loans) and a teensy one (CDS) in the banking sector, yet around here the meme is that it's all about CDS or CDOs, even though posters admit they don't understand them. No one wants to believe for some reason that they actually DO understand the crisis - that it is all about the loans. CDS is a problem, but for the investment banks and insurance cos., NOT the banks.

          •  CDS are not a problem so long as there (0+ / 0-)

            are no more "default events" to trigger those inconsequential "notional" exposures.  I suspect that is why the fed/treasury have been force-feeding capital down the throats of the banks -- to prevent any more unsightly Lehman-type defaults.  Effectively, Geithner is now using massive amounts of federal taxpayer money to keep all of these bank and investment bank "plates spinning."

          •  AIG was a massive commercial insurer that (0+ / 0-)

            basically disappeared overnight into a financial sinkhole.  I'm glad you think that's not much of a problem.  Maybe you should apply for Geithner's position once he gets canned.

        •  Without CDSs, Goldman would be Bankrupt (3+ / 0-)
          Recommended by:
          Pluto, dancewater, valion

          In late 2006, the CFO of Goldman Sachs called a few MDs into his office, warned them about the impending housing implosion, and urged them to begin unwinding all their risky bets.

          In addition to undoing many of their positions, they also hedged, via CDSs, others.

          It is rumored that AIG wrote many of the CDSs which Goldman bought.

          If you force AIG to undo their swaps, Goldman, if it is the counterparty, would be immediately insolvent.

          Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

          by PatriciaVa on Wed Feb 11, 2009 at 08:36:33 PM PST

          [ Parent ]

          •  the expectation would have to be that any (0+ / 0-)

            company that played around with CDS would probably go out of business.   In the case of Goldman, I am assuming they would not have made the crappy mortgage investments if they didn't have the faux cds-insurance to hedge with.  I suspect Goldman won't survive anyway unless Buffett wants to empty his pockets to keep them afloat.

    •  Why not? The market tanked (7+ / 0-)

      And isn't that all that matters?

      Make Paul Krugman Treasury Secretary. He writes such a lovely column.

      And BTW: Impeach Obama! He's already failed

      The Obama Experiment: thrilling, sickening, scary...I can't wait to see how it turns out

      by John Campanelli on Wed Feb 11, 2009 at 07:17:58 PM PST

      [ Parent ]

    •  Arrest him. Then fire him. (6+ / 0-)

      He's a tax cheat.  And incompetent.  It's time for Timmy to just go join his friends at Goldman Sachs.

      To avoid starting dumb wars, punish the dumb people who vote for them.

      by joesig on Wed Feb 11, 2009 at 07:26:42 PM PST

      [ Parent ]

      •  You're confusing ... (1+ / 0-)
        Recommended by:
        happy camper

        You're confusing Paulson with Geithner. Paulson is the one that we taunt about Goldman connections. Geithner is usually baited with the Kissinger association. And Obama is to be tainted by Ayers.

        Just trying to keep the slurs straight as a public service... that's all.

        "We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term." Grantham on 2008 Crisis

        by Bronxist on Wed Feb 11, 2009 at 08:19:44 PM PST

        [ Parent ]

        •  No, Geithner has his own Goldman taint. (1+ / 0-)
          Recommended by:
          dancewater

          Start with:

          Newly installed Treasury Secretary Timothy Geithner issued new rules Tuesday restricting contacts with lobbyists – and then hired one to be his top aide.

          Mark Patterson, a former advocate for Goldman Sachs, will serve as chief of staff to Geithner as the Treasury Department revamps the Wall Street bailout program that sent an infusion of cash to his former employer.

          Also, Timmy is/was a huge advocate of the criminal AIG bailout, which serves mainly to protect Goldman.  

          And it's not a taunt, it's a taint; one that should result in his firing.  

          To avoid starting dumb wars, punish the dumb people who vote for them.

          by joesig on Wed Feb 11, 2009 at 08:51:19 PM PST

          [ Parent ]

          •  And ... (2+ / 0-)
            Recommended by:
            happy camper, jem286

            you'll find us a treasury secretary who has never been associated with anyone from Goldman, like, ever?

            And are there any other firms on your shit list?

            "We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term." Grantham on 2008 Crisis

            by Bronxist on Wed Feb 11, 2009 at 08:59:17 PM PST

            [ Parent ]

            •  There are lots of firms on my shit list. (1+ / 0-)
              Recommended by:
              Donna Z

              Are there any on yours?  The larger point is that Geithner is incompetent.  Try judging his NY Fed oversight and come to a different conclusion.   Look at his collaboration with Paulson on the initial bailout and come to a different decision.  Look at his Bush-like speaking performance the other night and come to a different decision.  

              He's smart.  But incompetent.  Life is not an SAT.

              To avoid starting dumb wars, punish the dumb people who vote for them.

              by joesig on Wed Feb 11, 2009 at 09:04:11 PM PST

              [ Parent ]

            •  The term is reductio ad absurdum, if you're.... (0+ / 0-)

              interested in logic, though clearly you're not.  I'll bet I can find someone who won't name a Goldman lobbyist as chief of staff.  

              To avoid starting dumb wars, punish the dumb people who vote for them.

              by joesig on Wed Feb 11, 2009 at 09:11:21 PM PST

              [ Parent ]

    •  How about David Stockman, Reagan's Trickle Down (1+ / 0-)
      Recommended by:
      appletree

      guy..? Is Stockman still around and looking for wurk..If RayGun was president this whole bruhahaa would be over by now...Just fire the Air traffic Controllers, Zero Taxes for anyone making over $1,000,000.00 a year and re-invade the Evil Grenada....

      "Better a little late, than a little never"..Julian Winston

      by Johnny Rapture on Wed Feb 11, 2009 at 07:31:08 PM PST

      [ Parent ]

      •  Bring back Greenspan... (1+ / 0-)
        Recommended by:
        Johnny Rapture

        he could fix the whole fuckin' thing with an eye-test twitch of a brow or jiggle of a jowl.

        "We're all working for the Pharaoh" - Richard Thompson

        by mayan on Wed Feb 11, 2009 at 07:51:44 PM PST

        [ Parent ]

      •  He later Recanted (1+ / 0-)
        Recommended by:
        Johnny Rapture

        Recall that Atlantic Monthly piece he wrote...

        http://www.humanevents.com/...

        In his sessions with Greider over a period of a year, the architect of the Reagan budget and its chief advocate voiced doubts about whether the Administration agenda would work, foresaw huge deficits rather than the balanced budget he was publicly predicting, and -- in a blatant slap to Kemp and fellow pioneers of supply side economics who saw him as a comrade -- declared "supply side economics" was just a new name for old "trickle down" policies that favor the rich.  He even dubbed the historic Reagan tax cut "a Trojan horse" to bring down the top income tax rate.

        "None of us really understands what’s going on with all these numbers," Greider quoted Stockman as saying.

        Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

        by PatriciaVa on Wed Feb 11, 2009 at 08:46:32 PM PST

        [ Parent ]

    •  Geithner is starting to look like Necker, the (1+ / 0-)
      Recommended by:
      j sundman

      last French finance minister before the deluge.

    •  Put him in jail (0+ / 0-)

      to protect him from the public. 1873 justice would work well for Mr. tax cheat.

      Most dipshits have no idea of his role at the NY Fed. Looks like you are one of them.

      Your Treasury Secretary, Geithner, cheated on his taxes. He was caught. He then failed to pay the other two years of tax for the same thing he got caught doing, until you told him you wanted him to be the tax collector.  But that's not the worst of it.  No, the worst part is that when Bear Stearns got in trouble he, as the head of the NY Fed, knew full well that The Federal Reserve intended to open the discount window to investment banks THE VERY NEXT DAY and yet this fact was NOT disclosed to Bear Stearns, forcing them into a merger they would not have otherwise consummated.  THOUSANDS OF AMERICANS LOST THEIR JOBS AS A DIRECT CONSEQUENCE OF TIM GEITHNER'S AND BEN BERNANKE'S INTENTIONAL CONCEALMENT OF THIS MATERIAL FACT.

  •  I don't think so...nm (0+ / 0-)

    This year we can declare our independence...Barack Obama

    by PalGirl2008 on Wed Feb 11, 2009 at 07:12:43 PM PST

  •  It is too early to use failure. But I agree that (2+ / 0-)
    Recommended by:
    historys mysteries, Pluto

    Geithner's plan is the wrong way to approach the problem.  

    There is too much downside risk for taxpayers and it cost a hell of a lot of money.

    RebelCapitalist - Financial Information for the Rest of Us.

    by dennisk on Wed Feb 11, 2009 at 07:13:12 PM PST

    •  he was wrong even to propose this pile of (3+ / 0-)
      Recommended by:
      joesig, Pluto, Words In Action

      policy poop.

      •  I disagree it is a legitimate policy debate. (1+ / 0-)
        Recommended by:
        Bronxist

        Many economists and financial analysts have said that it might be best just to 'financially reorganize' insolvent banks.

        RebelCapitalist - Financial Information for the Rest of Us.

        by dennisk on Wed Feb 11, 2009 at 07:44:13 PM PST

        [ Parent ]

        •  "Is this a liquidity or an insolvency crisis? (1+ / 0-)
          Recommended by:
          dennisk

          "Or, put more directly, are the so-called "toxic assets" on banks' balance sheets undervalued due to panic in the markets, or are they simply fundamentally worthless? This is the key question policymakers must answer before formulating any plan."

          The fact no one has been able to put a value on these assets for six months, despite the fact everyone has been focused like a laser beam on the financial sector crisis, basically answers the question for us.

          The policy question for the American government is how to let out the biggest fart in the history of the church of capitalism without anyone one hearing it before they smell it.

          •  The banks know what the value of the assets are (2+ / 0-)
            Recommended by:
            eaglecries, dancewater

            but they don't want to acknowledge the truth because it will mean that many of them are insolvent.

            RebelCapitalist - Financial Information for the Rest of Us.

            by dennisk on Wed Feb 11, 2009 at 07:59:30 PM PST

            [ Parent ]

          •  Either/or (0+ / 0-)

            Why should it be liquidity or insolvency?

            Each asset has a revenue stream that stretches into the future.

            If the revenue streams have stopped (loans are in default) I presume that banks have to write off the losses by accounting rules.

            So currently no one is willing to pay much for the asset because they don't know what the future holds for the revenue stream.

            Hence the assets are illiquid. Now, depending on the assumptions you make about the future, the banks may be or may not be insolvent, as well. But at present this is unknown.

            This is what Geithner is proposing to find out using his "stress test". Presumably he'll model several scenarios and tell us how solvent or insolvent the banks are under each.

            Sounds eminently sensible rather than positing a false either/or logic ... Or am I missing something?

            "We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term." Grantham on 2008 Crisis

            by Bronxist on Wed Feb 11, 2009 at 08:27:25 PM PST

            [ Parent ]

            •  re (0+ / 0-)

              the markets for these assets are illiquid because the assets are worthless and banks won't lower their asking prices, lest they become technically insolvent. these assets aren't illiquid for a lack of liquidity. so this is a solvency issue.

              likewise, banks aren't lending because they're insolvent. when your balance sheet is terrible, you save money and try to get it in order. US households are going through the same process of deleveraging, saving money rather than spending it.

              we need to fix the solvency issue with the banks and hopefully the stimulus will help the real economy. you need to fix the financial sectors and real economy in tandem, or the downward spiral will continue, with both feeding on each other.

              •  That's ridiculous ... (0+ / 0-)

                Like Vikram Pandit said today ... you can always sell a dollar for a penny, but you wouldn't call that liquidity.

                He calls it a dollar, and you say its worth a penny. I like the idea of a stress test to first find out what all the players are holding, before I jump to conclusions.

                "We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term." Grantham on 2008 Crisis

                by Bronxist on Wed Feb 11, 2009 at 09:17:29 PM PST

                [ Parent ]

                •  i wouldn't take vikram pandit's word on this (0+ / 0-)

                  he says it's worth a dollar, you say a penny...but there are underlying fundamentals that tell you what it's "really" worth. the bankers are ignoring these fundamentals because if they sold for the actual price, the losses would be so large they'd be insolvent. if this is a liquidity crisis, why haven't the massive injections of liquidity solved this problem?

                  •  The fundamentals ... (0+ / 0-)

                    It is called mark to model, if you want to go by fundamentals.

                    And the bankers are clamoring for it.

                    "We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term." Grantham on 2008 Crisis

                    by Bronxist on Wed Feb 11, 2009 at 09:59:41 PM PST

                    [ Parent ]

                    •  re (0+ / 0-)

                      the models say this crisis didn't happen. the models are worthless. mark to model is mark to whatever bankers want. see nassim taleb on this.

                      the fundamentals are the mortgages/loans underlying the bonds. and those are going bust. so the securities should be worthless. and investors who refuse to pay the values banks want know this.

  •  "Has Obama presidency failed?" (9+ / 0-)

    If someone is asking that question with a straight face when Obama's been in office less than a month, I can't really take that person seriously.

  •  Maybe instead of calling "nationalization" we (5+ / 0-)

    can call it "financial reorganization".

    RebelCapitalist - Financial Information for the Rest of Us.

    by dennisk on Wed Feb 11, 2009 at 07:15:36 PM PST

  •  Kind of a catch 22 (4+ / 0-)

    There's so little data publicly available because they must assume creating a fuller picture of the situation would scare the living crap out of global financial markets.

    They probably have little idea what to do, besides.

    So they stumble along, pursuing a half-ass agenda with little ability to build consensus because those in the know feel they have to keep the fact base secret...

    We must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

    by Minerva on Wed Feb 11, 2009 at 07:19:10 PM PST

  •  and put in there who exactly? (1+ / 0-)
    Recommended by:
    FundaMental Transformation

    maybe you'd rather have Larry Summers?

  •  Question (0+ / 0-)

    Since these banks are so large and diverse could there be a mixture? There are say 2% of homes sold in 2005 with useless valueless mortgages. If that's all the bank did then it's clearly insolvent. But there's so much more on the books...Can, say, Citi be so large to swallow up their own insolvent books and hobble back? Is that what they're trying to do? And if so, would Geithner's plan be at least like a shot of cortisone?

    Great diary. I watched all of the testimony yesterday and today and your diary is smack on. From the outside, as a lay person, Mr. Geithner just doesn't sound ready to win.

    HR 676 - Health care reform we can believe in.

    by kck on Wed Feb 11, 2009 at 07:27:43 PM PST

    •  Citi is trying to sell off divisions. nt (0+ / 0-)

      RebelCapitalist - Financial Information for the Rest of Us.

      by dennisk on Wed Feb 11, 2009 at 07:31:40 PM PST

      [ Parent ]

      •  Yes, I know. (0+ / 0-)

        Which supports the notion that there may be a big chunk of the bank suitable for pruning (e.g., receivership?) but other branches are solvent and sufficiently detached to go on.

        How w/could such a diverse entity be nationalized for one failed segment of business? Assuming they have money...which is all hidden off somewhere because of the baking problem, eh?

        HR 676 - Health care reform we can believe in.

        by kck on Wed Feb 11, 2009 at 07:38:41 PM PST

        [ Parent ]

        •  It depends on the situation. Citi is a bank (1+ / 0-)
          Recommended by:
          kck

          holding company with several corporate subsidiaries.  It may be done is such a way that the banking subsidiary would be 'financially reorganized'.

          But that could be enough to force the bank holding company just to sell off other divisions and end it.

          RebelCapitalist - Financial Information for the Rest of Us.

          by dennisk on Wed Feb 11, 2009 at 07:48:32 PM PST

          [ Parent ]

  •  some of these "toxics" are not really assets -- (0+ / 0-)

    they are enormous insurance-type liabilities essentially mis-classified as assets per the arcane derivative accounting rules.  At the center of this fiscal disaster are these credit default swaps, which are unregulated insurance with potential liability exposures in the many trillions of dollars.

  •  Saw this at fivethirtyeight.com (3+ / 0-)
    Recommended by:
    askew, Floande, pinkbunny

    By Nate Silver
    Wednesday, February 11, 2009
    Give Geithner a Break
    I don't think he did well yesterday. I don't know that he's the right guy for the job. But what I do know is the following:

    1. Nobody, absolutely nobody, has more incentive to get this right than the Obama Administration. If the economy collapses -- well, more than it already has collapsed -- then the Democrats get slaughtered in 2010, Obama is a one-termer, health care doesn't happen, the poverty rate increases by a couple orders of magnitude, and the imperative to fix the environment gets put on the backburner. To suggest that Obama or Geithner are tools of Wall Street and are looking out for something other than the country's best interest is freaking asinine. Maybe their ideas are wrong -- but their hearts are in the right place.
    1. If the banks fail, then rich people lose a lot of money, and poor people lose a lot of jobs (and also much of what money they have). But I swear to God, there's a lunatic fringe out there that would take this trade and call it "progress".

    2a. At the end of the day, a great deal of the debate between liberals and conservatives is about how to apportion wealth. It seems so banal to talk about it that way, and so we put all sorts of window dressing on it, but that's really what it's all about. But on this issue of the banking crisis -- and to a lesser extent this was true of the stimulus -- there is a much larger delta on the aggregate amount of wealth that the United States stands to gain (or lose) than on how that wealth is distributed. Over the next 6-18 months, the outcomes for everyone from the top of the economic ladder to the bottom rung are very strongly correlated.

    1. I'm sorry, but somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue. And I'm certainly in the majority on this one. My anecdotal experience for the past several months has been that the more someone knows about the economy, the more they know (or at least are willing to admit to) what they don't know. Anyone who is professing with certainty that this or that will work -- nationalizing the banks, for instance -- is an idiot.
    1. So if I'm telling you to lay off the ideological smelling salts (not that you will) and that your ideas on policy are probably not contributing very much to the discussion (don't worry -- neither are mine) then what, exactly, do I want you to do?

    What I'm asking you to do is to clear the playing field. This is neither the time nor the place for mass movements -- this is the time for expert opinion. Once the experts (and I'm not one of them) have reached some kind of a consensus about what the best course of action is (and they haven't yet), then figure out who is impeding that action for political or other disingenuous reasons and tackle them -- do whatever you can to remove them from the playing field. But we're not at that stage yet.

    -- Nate Silver at 10:48 AM  

    •  Aren't you violating fair use? (1+ / 0-)
      Recommended by:
      Bronxist

      Although I don't think Nate will mind.

      Rabindranath Tagore-"Bigotry tries to keep truth safe in its hand with a grip that kills it."

      by joy sinha on Wed Feb 11, 2009 at 07:47:55 PM PST

      [ Parent ]

    •  Uh... (3+ / 0-)

      I love Nate. He's a bright guy and a terrific writer.

      But, "this is the time for expert opinion" and for a "consensus" of expert opinion and no meddling by hoi polloi has one very big problem. You can't reach a consensus when the experts in charge are saying "Japan" and many of the outside experts are saying "Sweden." What's the consensus on that, "Belgium"?

      "The truth does not change according to our ability to stomach it." -Flannery O'Connor

      by Meteor Blades on Wed Feb 11, 2009 at 08:39:30 PM PST

      [ Parent ]

  •  You can't fire a guy after only two weeks. (2+ / 0-)
    Recommended by:
    jem286, pinkbunny

    No way. Obama would be crucified.

  •  Wow! I wonder how any one of us would be (1+ / 0-)
    Recommended by:
    FundaMental Transformation

    expected to perform miracles in less than a week, otherwise get fired?

    President Obama said something that had a definite common sense, if you looked for someone who had never made a mistake, you wouldn't ever be able to get anyone to work for you.

    Here's a step further, not everyone is going to have all the qualities you expect when you hire them, everyone has strengths and weaknesses, and everyone will make mistakes.

    I write up a lot of performance reviews, and certainly I have opinions and expectations, but I'm not about to fire someone because of one mistake or one quality that I don't like.

    If anyone thinks that they are such an expert and knowledgeable about Finance and Depression Economics, then by all means, provide us with your opinions and analysis.

    I'm a very analytical person, I studied economics and have a masters in Statistics, and I've worked in industry for a long time, but I am not a financial expert, by any means, so anything I say is just regurgitated from newspapers and other economists' blogs. So while I may have concerns or questions, unless there are clear empirical evidence that doing one thing is better than another, then I am happy to wait and see with Geithner.

    Remember, FDR also had a do anything approach. He didn't do everything perfectly the first go round either.

    "Lead, follow, or get out of the way" - Thomas Paine

    by pinkbunny on Wed Feb 11, 2009 at 08:10:08 PM PST

  •  And you are qualified to judge this how? (1+ / 0-)
    Recommended by:
    FundaMental Transformation

    Do you have a PhD in economics?  If not - maybe we should trust Obama's judgement (he has done pretty well so far) and see where things stand in a few months before having a hissy fit.
    Seriously, all this hyperventilating over every single thing that Obama does is as bad as the Republicans.
    Holding people accountable is one thing being paranoid is another.

    •  re (3+ / 0-)
      Recommended by:
      westsyde, denise b, dancewater

      Among economists who predicted this crisis - Roubini, Krugman, Baker, Stiglitz, Shiller - there is essentially unanimity that nationalizing a la Sweden is the best strategy for recovery. I'm not a PhD, but I consider myself fairly well read, and I follow their work closely. Obama is certainly up on the particulars himself, but saying that our "culture" prevents us from choosing the best option is not good enough. Maybe Krugman is right and this is a Trojan horse to nationalization. But if it's not, and we end up wasting hundreds of billions more on another failed bailout, and it isn't hyperbolic to say Obama's presidency could essentially be over. This is the greatest crisis since the Great Depression. This is the worst legacy of the Bush years. Global economic collapse would have implications that are so far-ranging that anything else would pale in comparison. So getting this right is key. And so far when it comes to the banks there isn't much of a sign that they're getting this right. And let's not forget, it's not as if Geithner had to get up to speed on the banking situation. He was the New York Fed chief. And all he can come up with is...a plan to have a plan. Not an auspicious beginning.

  •  How to Create Money from Nothing (1+ / 0-)
    Recommended by:
    dancewater

    As diaried here, the dirty little secret about the financial collapse is the multi-trillion dollar synthetic CDO market not involved in mortgage-backed securities.

    CDO Chart 2

    This is the ultimate credit which has dried up.  Unlike regular CDO’s, synthetic CDO’s are backed only by the ability of creditors to avoid default.  There are no physical assets behind them and they are set to default if about 8% of its listed creditors go under.   The synthetic CDO’s were once considered safe because it was unthinkable that institutions such as Lehman Brothers and Bear Stearns would collapse.  Now that they have, many of these contracts are approaching their default limit.

    There are hundreds of entities involved in these types of contracts where they lent money to each other without any assets.  The reason they are afraid to lend now is that roughly 6% have already defaulted and if another couple of these investment houses go under it could put the entire multi-trillion dollar synthetic CDO market into default.

    CDO Market 3

    "Chance has put in our way a most singular and whimsical problem, and its solution is its own reward." -Sherlock Holmes

    by The Anomaly on Wed Feb 11, 2009 at 08:27:31 PM PST

  •  In regards to the diarist's question: Liquidity (0+ / 0-)

    Crisis of Insolvency Crisis.  I would describe it as a liquidity crisis for the simple reason that the "toxic assets" on the banks balance sheet are the problem.  These assets (MBS and CDO)were meant to be liquid assets, but have become illiquid due to a collapse of the market.  While there is no agreed upon mechanism to value these assets, the assets have intrinsic value over the long term. The question is can the banks survive the short term and make it to the future to reap the fair value of the assets when the markets return to functionality.

    Ironically, banks face liquidity crises amongst their customer base as a matter of routine (customer has strong sales, but weak receivables).  In those cases, it is usually the bank that determines the viability of the enterprise (whether liquidity crisis will lead to insolvency).  Turnabout is fair play.

    "Nothing is more powerful than an idea whose time has come." Victor Hugo

    by lordcopper on Wed Feb 11, 2009 at 08:40:05 PM PST

    •  re (0+ / 0-)

      I disagree. I don't think it's just "market dislocation" that is driving down the value of these assets. If it were, the massive liquidity injected into the system over the past year should have done something to create a market for these "toxic assets". And as the real economy has weakened, more and more assets are losing value - commercial real estate, auto loans, credit cards, etc. These are losing value because of the underlying fundamentals, not panic. And that's to say nothing of the MBS that no one wants to touch except at huge discounts because the mortgages backing them aren't paying. But the banks still value them as if they had value.

      •  The banks still hold them for two reasons. (0+ / 0-)
        1.  They're hoping the market returns to functionality and they will recoup their losses (typical investor behavior).
        1.  Regulators have not been aggressive in making banks write down these assets. I suspect that if these assets were written off fully it would leave a gaping whole in the balance sheet (in the equity account).

        "Nothing is more powerful than an idea whose time has come." Victor Hugo

        by lordcopper on Wed Feb 11, 2009 at 09:58:04 PM PST

        [ Parent ]

        •  re (1+ / 0-)
          Recommended by:
          lordcopper

          right. if selling them at current market prices would make the banks insolvent, of course they're going to hold them and hope the prices rebound and/or the gov guarantees the make-believe values the banks are assigning them.

          but when banks are de facto insolvent, they refuse to lend. so we effectively don't have a functioning financial system. so we don't get a recovery.

          •  That's why regulators should force the issue, and (0+ / 0-)

            let the chips fall where they may.  I would offer to purchase these assets at $.15 on the dollar and promise (and follow through with) rigorous regulatory examinations.  The winners can eat the losers, and the govt can stand by to provide assistance where it is in the public interest, but this thing would be over in a month.  The govt can then spin the assets off to private investment pools (recouping the taxpayers investment and benefiting on the upside).  The banks are experiencing a run of bad luck (greed, mismanagement, etc.), but that's capitalism.

            "Nothing is more powerful than an idea whose time has come." Victor Hugo

            by lordcopper on Wed Feb 11, 2009 at 10:14:13 PM PST

            [ Parent ]

  •  excellent job at clarifying distinction (3+ / 0-)

    Excellent post, clarifying the distinction between a liquidity and solvency problem.  The diagnosis given last fall was the former, but it's now pretty clear that it's the latter. We need to get in and clean this up! And, if it takes replacing Geithner to do so, the President should replace him. Big mystery: why hasn't Stiglitz been asked to join the administration? He's top notch, he's not wedded to Wall St., he's got international credibility...but, rumor is that Summers is hostile towards him.  Get rid of Summers as well!  The FT article is understating the problem. The bank bailout plan is not simply a make-or-break issue for the Obama Administration - it is for the entire country as well as the recovery of the global economy.

    •  re (3+ / 0-)
      Recommended by:
      joesig, denise b, dancewater

      If it were up to me, I'd form an economic council of Stiglitz, Roubini, Krugman, Shiller, Reich, and Dean Baker. All of them called this crisis more or less and all of them aren't Wall St guys. I trust their judgment on what we need to do to fix the banking system and restructure the economy so it works for everyone more than economists who were shocked - shocked! - about the economic collapse. If you're an economist who didn't see the greatest economic story of your lifetime developing, how good could you be, and why should we trust your advice on how to get out of a crisis you couldn't diagnose?

  •  I saw the Treasury Sec. on C-Span.... (1+ / 0-)
    Recommended by:
    freespeech

    the guy is the Obama of finance.  Just cause Wall Street didn't get it's truckload of money -Doesn't mean he did not do his job. I watched him with the Senate he was/is a master at this stuff.  Wait, watch and learn.

    •  You mean we should be (2+ / 0-)
      Recommended by:
      jennyL, JoanMar

      patient? Traitor! Its been 3 whole weeks and Nasdaq hasn't touched 100000 yet. Off with Geithner's head.

      •  re (2+ / 0-)

        i'm not saying that. i know that even with a perfectly executed bank bailout and stimulus, it'd take the economy 12-24 months to rebound. we're in a big hole.

        the problem is, we're nowhere near even a decent bank bailout. and modern economies can't grow without functioning financial systems. i'm worried we're ignoring the obvious solution because wall st has too much influence.

        •  Bingo (0+ / 0-)

          i'm worried we're ignoring the obvious solution because wall st has too much influence.

          The obvious solution (reorganize, then privatize, like in the past) would wipe out 20 billion in stockholder equity for Citi alone (based on today's market price).  Add up the phantom equity of all insolvent commercial banks and investment banks, and the losses would be many hundred billion.  It would take a lot of courage to do the right thing and stand up to those on Wall Street, who feel they are entitled to sell their trash for cash because they have always throughout history received preferential treatment.

          I'm not criticizing Obama, because he is probably better than most; but if this country expected courage they should have elected Dennis Kucinich.

      •  Now , you must'nt incite the flat earth folks. (0+ / 0-)
    •  re (1+ / 0-)
      Recommended by:
      Words In Action

      the obama of finance? i wish. according to naked capitalism, he went to present his plan to the Senate on Monday night and had...nothing. they literally laughed him out of the room. because right now all he has is a plan to have a plan.

      •  I watched, It the repugs tried - and he knew his (0+ / 0-)

        stuff inside out - they tried to trap him into asking for more money at that time (to blow up the Stimulus pkg) But he refrained from taking the bait)  He actually laid out his outline - and now they have to go in and figure out how much and how they will assess the bad asset.  That;s what I got from it and I am not a student of economics.

        But I watched how they huff and puffed and tried to make him look stupid - this guy was up on evey question they asked.

  •  I was prepared to be informed by your diary. It (0+ / 0-)

    is obvious that you have some knowledge - or at least know where to find it - about the economy. I did wonder why you'd ask for the firing of Geithner rather than the rethinking of the whole approach to solving the economic crisis. What really turned me off was your recommendation of that rather idiotic piece by Martin Wolf. No serious writer would ask whether a President - who has already done so much in 3 weeks and especially after 8 years of Bush - has already failed less than a month into his presidency. That is just idiocy. My problem with Geithner (and with Gibbs, whom I am really fond of) is that he lacks presence. I was not inspired by his performance the other day. It is a well acknowledge fact that the current crisis is part psychological and as such you need a forceful alpha male (or strong female) to instill confidence by their very presence. Geithner looked weak.

    It's a beautiful day!

    by JoanMar on Wed Feb 11, 2009 at 10:10:24 PM PST

    •  And I forgot to add that Kruger is beginning (0+ / 0-)

      to piss me off. He is coming across as that self-absorbed, self-proclaimed expert shouting, "Look at me, look at me, I am sooo bright and you are an idiot." His language is beginning to sound too arrogant for my taste.

      It's a beautiful day!

      by JoanMar on Wed Feb 11, 2009 at 10:14:10 PM PST

      [ Parent ]

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