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The Geithner plan is yet another attempt to relieve banks of their toxic assets - all the irresponsible loans they made, willfully or not, to clients that will not be paying them back. Bad mortgages, bad mortgage-backed securities, bad loans to Lehmans or Icelandic banks, bad loans to vehicles that invested in the same, etc...

There's $2 or 3 trillion of these bad assets in the world's banking system right now. And Geithner's plan is to help the banks by inflating somewhat the value of these assets and funding their purchase with (mostly) taxpayer money.

But he's missing the real problem, and in the process, he's blowing another trillion of taxpayer money (just another friendly gift to the finance world) to actually not solve the financial crisis.

As strange as it may seem, banks' shitty assets are their smaller problem. Like the AIG saga is showing, the real problem is the size of their liabilities.

Thanks to the CDS market, the big financial institutions have taken to making very, very, very large bets on supposedly highly improbable events (ie, they's get a fee upfront and would commit to make a big payout if the unlikely event, say the bankruptcy of Lehman Brothers or AIG, happened). CDS were initially created as a risk-mitigation instrument, and they can certainly be used that way (for instance, if a transaction depends on a large payment by Lehman Brothers, it may be useful to buy the additional protection to guarantee the amount of that payment from someone else, typically a highly rated entity like AIG (used to be), should Lehman fail). But they turned out to have two great advantages:

  • they were a totally unregulated way to release regulatory capital: since you don't take the risk on Lehman anymore, you can re-use the amount you'd have normally needed to set aside for that exposure (apparently the regulators forgot to note that you took exposure on someone else instead for that amount, even if that someone else was highly rated); by using capital more than once, you can boost your returns;
  • they were a totally unregulated way to make bets: you did not need to have an actual need to hedge a position to purchase (or sell) them, which allowed you to bet mutliple times the amounts you could have under normal regulations on a given risk. By taking risks that were considered extremely low (like AAA rated risk) in high enough concentrations, you could make good income for (what was perceived as) no risk - or at least for no cost in equity;

So lots of financial players started taking those huge bets on supposedly unlikely things happening - with commitments to pay huge amounts should these things actually happen.

For those players, the CDSs are not assets, they are potential liabilities. They booked the upfront fee right away, are maybe getting a smallish yearly commission as income, and have this potentially huge payout to make if something bad happens to some company or asset.

Again, to get an idea of what kind of leverage we're talking about, read this article about John Paulson in last week's Economist:

Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust.

And well, there were three problems:

  • One was that these unlikely things were not that unlikely (or, in any case, not as unlikely as suggested by the price used to take the risk). People tend to have trouble allocating proper probabilities to rare events, and bankers seem to be no better (go read Nicholas Taieb's Black Swan);
  • the second was that the "virtuous circle" effect of bubbles further distorted perceptions (asset prices are rising, people borrow more, they buy more assets whose prices go up; they can borrow more to repay earlier loans by backing that with rising collateral, thus reducing default rates, which encourages banks to lend yet more, etc...). All the securities that were seen as not risky at all in a bubbly environment were maybe riskier than they seemed. How could there be only 12 AAA-rated companies in the world, and 64,000 mortgage-backed securities with that same rating?
  • the third was that the very use of their instruments, and their heavy concentration in the hands of a small number of players actually created new risks that did not exist before. AIG could have survived underwriting a few billion of CDSs, but not 500 billion-worth of the stuff.

And of course it now turns out that, as should have been obvious (and was to people like John Paulson) these CDS were, in more than a few cases, very, very bad bets. And the number of cases is growing rapidly as the crisis gets worse and hits more companies and reduces more assets' values. Which means that those that underwrote these CDSs are faced with large - and mounting - bills.

Thje size of these bills potentially dwarfs the size of the toxic assets they are also saddled with.

And as the risks are increasing (or seen as increasing which may or may not be the same thing), those that underwrote the CDS are seen as increasingly weak, and those that bought the protection, or took naked bets (but how can you tell - this is all unregulated anyway), suddenly worry about their CDS counterparty in addition to worrying about (or hoping for, in the case of naked bets) the underlying insured event to happen. That CDS counterparty being, of course, a (until recently) highly rated financial institution.

CDS typically have mechanisms whereby the CDS underwriter may need to post collateral to guarantee its obligations: this is what brought AIG down: as signs of trouble started to build, it lost its AAA-rating, which triggered obligations to pay collateral to all its counterparties on its portfolio of CDSs. It is those obligations, all coming at the same time on a large pile of CDSs, that bankrupted it and led government to step in to make the necessary payments.

Note that initially, the government did not even use taxpayer money to make actual payments under the CDSs - just to post collateral. Now, as CDSs are triggered, full payments need to be made, thus the successive bailouts.

The justification for these bailouts is that not paying out on these CDSs could make some of the buyers of protection bankrupt themselves, thus triggering more CDS payments, giving birth to further liabilities for the institutions that underwrote the CDSs. In addition, givne that many of the buyers of CDS protection were banks or hedge funds, there is worry of a domino effect.

It is that liability crash which is the cause of the continued lack of trust in financial institutions by the markets themselves: they know that financial bombs are littered all over the landscape.

Buying toxic assets is "nice" for banks, but solves nothing. Bailing out AIG, oddly enough, could be seen at least as a step in the right direction - the problem of course being that if you're going to take care of all potential liabilities, the total bill might be in tens of trillions, rather than mere trillions - with a lot of that money going to the smart hedge funds that bet on things going badly in various markets and for various institutions (cf Pauslon above).

Given all that, we have several routes:

  • one that gives a lot of money to banks that do not deserve it to solve their asset problem, but still do not make them creditworthy (the current Geithner plan), which gives stock markets a temporary boost, taxpayers permanent pain, and solves nothing;
  • one that does help them get rid of their real problem (huge contingent liabilities on bets that are turning sour), but is vastly more expensive than the mind-numbing numbers we're throwing around already, and gives all the money to hedgies: the AIG route, multiplied ten or hundred-fold;
  • one that acknowledges that the issue is liabilities rather than assets, and that focuses on the fact that a lot of these liabilities are wholy unrelated to any economic or financial activity, and are contingent rather than actual - ie nobody loses anything if they are cancelled. If a 100:1 bet you made is cancelled, your actual loss is not 100, it is 1 - something that could be paid back to you.

So far, the second route has been used when an emergency beckoned (AIG et al); the first route has been used massively but the Treasury does not seem tired of it yet, and the third one seems anathema.

Of course, it means taking the shiny toy away from the hands of the hedgie kids.

Why is that a bad thing, again?

Originally posted to Jerome a Paris on Mon Mar 23, 2009 at 10:18 AM PDT.

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  •  Tip Jar - 23 March (445+ / 0-)
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  •  Because Obama doesn't support it. (2+ / 0-)
    Recommended by:
    TomP, JesseCW

    In conversation that seems to be the most stated reason.

    Or that nationalization would mean discarding Third way policies which they see as unmanageable.

    Or that no institution could properly manage writing down the losses for them and taking them into receivership.  

    "What is the robbing of a Bank compared to the FOUNDING of a Bank?" Bertolt Brecht

    by thethinveil on Mon Mar 23, 2009 at 10:35:37 AM PDT

  •  Wow, how quickly does Jerome make the rec list? (4+ / 0-)
    Recommended by:
    ferg, Creosote, dconrad, swampus
  •  Why Does It Feel (39+ / 0-)

    Like we're paying for the SAME instruments not once, not twice, but three or four times?

    We gave money to the banks to cover the losses from these POS, then we give money to AIG to - cover the losses from these same POS, and now - we're going to give them MORE money to cover the losses by relieving them from the burden of having to account for the losses on theses POS.

    And why, exactly, are we allowing this money given to AIG to be used to pay off, at 100 cents on the dollar, contracts between AIG and Goldman, etc for these contracts they entered into to insure against losses - that aren't even necessarily THEIR losses?  It's like taking out an insured bet on a horse race - your pony loses, but you get the top payout anyway!

    I am feeling completely screwed - and bonuses are the least of our problem with these jackals.

    I agree - the assets themselves are not the problem - with the $9.7 BILLION they've thrown at this problem already, they could have paid for 90% of ALL MORTGAGES!!!  So, obviously, there is a different issu at hand - they just don't want to come clean about it or the media doesn't think we're smart enough to understand it.

    I'm just glad that you've been here, all along, to explain what is REALLY going on.

    "One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." -Plato

    by Bcre8ve on Mon Mar 23, 2009 at 10:36:23 AM PDT

  •  Jerome - can you explain (9+ / 0-)

    the numbers I always see associated with derivatives?  I've read some who suggest that 300 trillion dollars exist in derivatives.  I know Buffett warned against them many years ago...

    But we're all so overwhelmed by the 12 trillion already thrown at the financials and as your excellent diary explains, the trillions at risk mthrough CDS's is also overwhelming.... so what the hell happens with 300 trillion in derivatives that seem tio have played a role in this meltdown too.

    Sorry for my confusion.... 300 trillion is a very large amount.

    "History is a tragedy, not a melodrama." - I.F.Stone

    by bigchin on Mon Mar 23, 2009 at 10:36:27 AM PDT

  •  And Wall St. making new CDS' on the old one, too! (18+ / 0-)

    Morgan and Goldman, among many others, are actually packaging these and creating new funds and CDS/derivatives based upon these funds, as well! Announcements were made last week...most related to "Distressed Asset" funds popping up all over the place!

    Pathetic...not only is the problem going unaddressed, it's actually being magnified!

    And, this doesn't even go into the incredibly fictitious accounting that's going on between banks and hedge funds that's about to occur as these entities ramp up to dig-in to this taxpayer-sponsored smorgasboard!

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Mon Mar 23, 2009 at 10:37:37 AM PDT

  •  An open question to JaP (0+ / 0-)

    While you have my complete buy-in that toxic assets are not the biggest problem, do they not have to be dealt with?  And is the Geithner plan as good as any for doing so?

    We are living the Republicans' vision. Do you like what you see?

    by thenekkidtruth on Mon Mar 23, 2009 at 10:37:50 AM PDT

    •  another open question (3+ / 0-)
      Recommended by:
      kyoders, thenekkidtruth, JesseCW

      if we cancel the liabilities, how does this play out in the economy?

      for example, lets say that due to some crisis, my home owners insurance carrier cancels my policy and returns my premium. technically, i'm not out anything. i got my money back and they are free from paying me should my house burn down, which supposedly they couldn't do anyway. again, technically, i'm free to find other coverage with my money. but let's say this crisis is pervasive, to the extent that next to impossible for me to get other home owner's coverage for at least one year.

      what changes are likely in my personal economic behavior as a result of being exposed to the entire loss of my house, and who else might be impacted by those changes?

      play out the cancelation of liabilities scenario with some quantitative analysis. we need to understand this better before comparing to what we are doing.

      •  No, no, no (4+ / 0-)

        Many of these swaps (80%) were sold to your neighbors who simply wanted to place a bet on whether your home would burn down.  If the default event occurs (house fire) they don't lose a thing.

        In addition, you really did buy insurance on your home and then YourInsuranceCo turned around and bought a CDS from ReinsureCo in case they have to pay you off and ReinsureCo bought one from AIG in case they had to pay off YourInsuranceCo and so on.  One little house fire, a million counter-parties.

        nuts

        •  i understand that (0+ / 0-)

          but the same crisis that wiped out my insurance is wiping out theirs too. probably even all of our auto insurance coverage too, especially the liability coverage.

          now none of us have coverage for baseline risks in the modern economy. we've rendered those contracts null and void and haven't explained to anybody when that system might be returned to us in some fashion that can be relied on.

          our exposure has gone up dramatically, and we only have ourselves to back-stop the potential losses. our options are to conserve cash, sell our houses for cheaper one we can more afford to lose, defer investments (since anything we add to our house, like a new energy efficient furnace, would be lost with the trigger event) and defer unrelated expenditure.

          in some fashion, this will ripply through the economy of my neighborhood. understanding how is what is missing from this diary.

      •  Probably why there is a need for a (3+ / 0-)
        Recommended by:
        Jerome a Paris, Terra Mystica, whoknu

        Government owned utility bank to make loans in the meantime, no?

        "What is the robbing of a Bank compared to the FOUNDING of a Bank?" Bertolt Brecht

        by thethinveil on Mon Mar 23, 2009 at 12:22:30 PM PDT

        [ Parent ]

  •  Sorry, but I'm not reading anything on this until (11+ / 0-)

    Krugman writes the column that details a plan that is simple, won't cost the taxpayers much of anything, and, of course, can't fail.  Surely, he has such a plan in mind.

    •  Don't hold your breath (1+ / 0-)
      Recommended by:
      Silverbird

      Bitching and moaning for $$$$$ doesn't require real work.

      He's a fat cat, just like Kudlow and Maddoff and all the other Wall Streeters he rails against.

    •  Would you settle for one that will *work*? (7+ / 0-)

      WTF? You're demanding that any alternative be magical? How about we just demand that Krugman tell us about a workable solution?

      Oh! Yeah, that's right! Because he HAS posited a workable plan — the Swedish model. But since that's not simple and probably not cheap (though in the end WAY cheaper than throwing trillions in free money at the bankers that screwed us) and not 100% guaranteed for success (what is?), apparently it doesn't absolve Krugman of the burden he incurs by pointing out that Geithner's plan is more expensive and certain to fail.

      Now, you might not agree with him that receivership is the best way forward, but don't get all high-and-mighty about how Krugman has no ideas. He has ideas, but right now the immediate need is to shoot down bad ideas.

      Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

      Shirley Schmidt: A Democrat.

      by Jyrinx on Mon Mar 23, 2009 at 12:01:43 PM PDT

      [ Parent ]

      •  Oh, lighten the hell up, already. (1+ / 0-)
        Recommended by:
        freakofsociety

        I've now read about a half-dozen articles from Krugman where all he does is criticize anything and everything that's coming out of the administration, and with little regard for anything that he thinks would actually work.  He's talked about nationalizing the banks, placing them in receivership, and other such drastic measures, but he's about as critical of those suggestions as a doting mom is of her daughter at the elementary school play--not very.  

        All we seem to get from is a lot of "That'll never work."   There are a lot of very serious people who have a lot of serious problems with just about every suggestion out there--Krugman's included.  

        In vino veritas

        by GOTV on Mon Mar 23, 2009 at 02:22:25 PM PDT

        [ Parent ]

        •  Fuck the Very Serious People. (2+ / 0-)
          Recommended by:
          imabluemerkin, Terra Mystica

          And BTW, a LOT of people who know what they're talking about are not at all happy with the Geithner plan. It's not just Krugman. Stiglitz and Roubini are none too happy about the Paulson-warmed-over plan.

          In other words, the people who were right when they predicted that this was coming are all hating the Paulson-Geithner plan. Fuck the Very Serious People.

          (If Volcker were talking publicly about all this, I'd give him some serious weight. But he's staying in the background.)

          Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

          Shirley Schmidt: A Democrat.

          by Jyrinx on Mon Mar 23, 2009 at 02:29:43 PM PDT

          [ Parent ]

        •  Oh, and BTW, (0+ / 0-)

          he never said that the receivership plan was easy. He's saying that it's the only plan that will work. If nothing else will work, receivership is what must be done, no matter how difficult.

          I have yet to hear anyone give a good reason to believe that receivership wouldn't work, only that it'd be difficult and/or expensive. If all these half-assed approaches had any better chance of succeeding, there might be a good reason to try and get a bargain price for fixing the problem. But all of these plans are predicated on all these crap derivatives actually turning out to be worth something, and in the event that they don't, the taxpayers get shafted. So basically the Geithner plan is “Come on, it can't really be that bad.” And all the people who've been saying that about the financial bubble for the last decade have been consistently wrong.

          Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

          Shirley Schmidt: A Democrat.

          by Jyrinx on Mon Mar 23, 2009 at 02:34:32 PM PDT

          [ Parent ]

    •  AT LEAST Krugman, Unlike You (4+ / 0-)
      Recommended by:
      Creosote, lotlizard, 4Freedom, thethinveil

      recognizes a taxpayer RIPOFF when he sees it.

      please explain just how it's equitable to we the taxpayers when the PPIF "partnership" requires a 93% public (taxpayer) investment and a mere 7% from the private sector? THAT is a partnership?

      Plus, of course the zombie banks are now stating they are not going to participate in the PPIF unless congress guarantees there will be NO caps on executive pay!!

      hah hah hhah!! now do you see the problem?

      "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

      by Superpole on Mon Mar 23, 2009 at 12:16:48 PM PDT

      [ Parent ]

    •  Because ... (0+ / 0-)

      that's your standard for all policy criticism?

      "There -- it's -- you know, one of the hardest parts of my job is to connect Iraq to the war on terror." --GWB

      by denise b on Mon Mar 23, 2009 at 07:46:43 PM PDT

      [ Parent ]

  •  ya know there's a lot of focus (13+ / 0-)

    on bad mortgages as if people JUST CANT BE TEH TRUSTED!!!!

    maybe if we had a stable economic environment where people weren't having to change companies 5 times during 40 years things would be different,

    instead of companies retooling their workforce, they either ship it off to someone else overseas, or they hire new younger people who'll work with less benefits and salary who arent such a huge "health" risk.

    Of course we still blame the average worker for all this, we're just irresponsible fools who cant manage money, WE are the greedy ones, not the multibillionaires who see their career as legacy building rather than living sustainably.

    •  Yeah, that's the problem with the approach so far (5+ / 0-)

      it merely attempts to put a band-aid on a festering wound.

      Instability in almost every job market is economically debilitating. The flat-world free market approach to corporate labor costs is destroying the middle class and must be addressed by hard line government action, or else.

      Government bail out programs will at best create temp contract based jobs which are not the kinds of stable employment opportunities that create economic stability.

      I am a liberal - I question authority, ALL authority.

      by Pescadero Bill on Mon Mar 23, 2009 at 11:45:58 AM PDT

      [ Parent ]

  •  Checkout NakedCapitalism.com to look at gaming... (20+ / 0-)

    ...that's occurring to scam hundreds of billions of taxpayer funds as a terrible byproduct of a "solution" gone awry!

    Krugman, Stiglitz and others have all stated that including the shadow banks in this "solution" just dramatically increases the costs to the taxpayers and leaves everything open to much greater problems going forward...INSANITY!

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Mon Mar 23, 2009 at 10:40:09 AM PDT

  •  I've been wondering about this. (6+ / 0-)

    So, there are these huge liabilities, but are they just owed from one financial institution to another? If they all triggered, would there be a huge whirlwind reshuffling of money? And if so, who would be the ultimate beneficiaries? Are you saying that it would generally be hedge funds? And if so, what would it take to cancel all these bets?

    The best is the enemy of the good. --Voltaire

    by pateTX on Mon Mar 23, 2009 at 10:41:03 AM PDT

  •  This stuff makes my head hurt. (4+ / 0-)
    Recommended by:
    frandor55, lgcap, Johnny Q, thethinveil

    Why does Geithner still have a job???

  •  Most of the big banks are net buyers of CDS. (5+ / 0-)

    They have net asset positions in their CDS portfolios, and their problem really is the toxic asset-backed securities.

    We are building a team that is continuously being built. - Sarah Palin

    by burrow owl on Mon Mar 23, 2009 at 10:43:33 AM PDT

    •  I am in no position to evaluate the truth of this (1+ / 0-)
      Recommended by:
      skeletondisco

      But assuming it's true, it seems like an effective rebuttal of Jerome's pessimism.

      Al que no le guste el caldo, le dan dos tazas.

      by Rich in PA on Mon Mar 23, 2009 at 10:54:41 AM PDT

      [ Parent ]

      •  It's just a different kind of pessisism. (5+ / 0-)

        The danger isn't in the banks' CDS positions themselves1, but in the risk that the other side of the contract - viz., AIG - won't pay up to cover the banks' losses if and when they're realized.  

        1 A few weeks ago I shuffled through Citi and BOA financials, and IIRC they were both net buyers of CDS protection.  I just looked through JPM, and it was a net seller, so my factual assertion above comes w/ a big fat neon "caveat emptor."

        We are building a team that is continuously being built. - Sarah Palin

        by burrow owl on Mon Mar 23, 2009 at 11:24:49 AM PDT

        [ Parent ]

        •  how are they accounting for those assets? (0+ / 0-)

          How much do they consider their long positions to be worth - something like what they paid for them?  more?  less?

          Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

          by eparrot on Mon Mar 23, 2009 at 12:36:25 PM PDT

          [ Parent ]

          •  FMV, I think. (2+ / 0-)
            Recommended by:
            4Freedom, skeletondisco

            Assuming the positions are perfectly hedged, the FMV of the asset + FMV of the CDS insuring the asset should equal the discounted cash flows from the asset in a world in which it doesn't default.

            So every quarter, we see these big write-downs in the underlying asset and corresponding increases to the CDS asset portfolio.

            We are building a team that is continuously being built. - Sarah Palin

            by burrow owl on Mon Mar 23, 2009 at 01:07:26 PM PDT

            [ Parent ]

            •  Hmm, let me see (2+ / 0-)
              Recommended by:
              Creosote, skeletondisco

              So as the FMV of say a bundle of mortgage-backed securities goes down, the FMV of the CDS insuring them goes up by the same amount.  I'm assuming we'd also subtract the discounted cash flow the buyer pays every month to the writer of the CDS.

              That makes sense to me.  And if there were actual mortgage-backed securities behind every CDS on a 1-1 basis, this would not be a problem.  But of course, there are far more of them than that.

              This is all the more reason why this whole issue should have been addressed directly back in October.  We should have taken the temporary pain of exposing the wounds then, because every day that goes by, the banks on the long side are increasing FMV of contracts that can only be paid back by taxpayer bailouts.  Making it harder to do anything other than jerome's solution #2

              Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

              by eparrot on Mon Mar 23, 2009 at 01:27:04 PM PDT

              [ Parent ]

    •  true, but (10+ / 0-)
      1. a few have highly concentrated CDS liability positions, like AIG;
      1. if these topple, a lot of back-to-back CDSs are suddenly at risk, and your gross exposure can become as relevant as net exposure;
      1. a lot of the CDS portfolio in banks protects them against toxic stuff, so unraveling this creates a new source of toxic assets.
  •  As usual, Jerome, a fine post (10+ / 0-)

    I have one question, however, that I have not been able to find an answer for re: CDSs.  Don't CDSs have a time frame attached to them?  And if so, doesn't the CDS just expire when the time frame is up?  Wouldn't this relieve the liabilities over time?  To me, if the bets are like insurance, they would be like term insurance.  The purchasers get the "protection" against the event for the term of the CDS, but only for that term, not in perpetuity.

    Apologies if this is too simplistic.  

    "A liberal is a man or a woman or a child who looks forward to a better day, a more tranquil night, and a bright, infinite future." - Leonard Bernstein

    by outragedinSF on Mon Mar 23, 2009 at 10:43:36 AM PDT

  •  I haven't been able to figure out why... (15+ / 0-)

    the quickest, cheapest way out isn't for the government to directly refinance the risky mortgages. Viola! the bets are off because the loan did not default, is was paid off. It also largely solves the foreclosure crisis. This would cost a fraction of what we've laid out so far, and would be compassionate to boot.

    This seems too easy.

    ...we reject as false the choice between our safety and our ideals.
    -- Pres. Barack H. Obama, Jan. 20, 2009

    by davewill on Mon Mar 23, 2009 at 10:46:59 AM PDT

    •  C'mon man.. this is a REAL problem (25+ / 0-)

      stop bothering us with your crazy ideas of helping poor people.

      We have millionaires to save!

      Thinking men can not be ruled. --Ayn Rand

      by Wisper on Mon Mar 23, 2009 at 10:48:46 AM PDT

      [ Parent ]

    •  But then the mortgages pay out less than was (4+ / 0-)
      Recommended by:
      Yoshimi, 4Freedom, davewill, JesseCW

      anticipated, and there are additional write-offs by the banks, the credit market seizes up again, blahblahblah.

      We are building a team that is continuously being built. - Sarah Palin

      by burrow owl on Mon Mar 23, 2009 at 10:51:48 AM PDT

      [ Parent ]

    •  I don't think you have any clue about what you (2+ / 0-)
      Recommended by:
      Yoshimi, Simian

      are saying. First off, this plan will cost us a whole lot less than had we follow your suggestion of let's refinance the risky mortgages ourselves. The issue is bigger than just toxic assets. The plan will also allow to fix the credit problem. More over, the risk is a shared risk with the private sector in this plan and the return is also a shared return. It may be difficult to unload or sell such massive volumes of assets later when the economy recovers back to the banks but I will take that chance of tackling inflation that may be caused because of this plan and have my stable economy back.  

      •  Are you sure? (9+ / 0-)

        I know there are supposed problems with my idea, I've just never seen them delineated. But on the cost, I'm not sure you're correct.

        First off, this plan will cost us a whole lot less than had we follow your suggestion of let's refinance the risky mortgages ourselves.

        We've committed trillions thus far, counting TARP, AIG, loans by the Fed, and actions taken by FDIC, with more pretty much guaranteed to follow. The actual distressed real estate, even at the old inflated prices are not that big.

        ...we reject as false the choice between our safety and our ideals.
        -- Pres. Barack H. Obama, Jan. 20, 2009

        by davewill on Mon Mar 23, 2009 at 11:36:38 AM PDT

        [ Parent ]

        •  In the long run it will cost us even more and (0+ / 0-)

          that is more than probable. yes, we have committed trillions thus far and you can add a price tag of 5x if you try to nationalize things. The key here is to try to fix the problem with little as possible with the more return for the buck. That is why the risk on this plan is minimized as it is shared by the private sector compared to us go at it alone as tax payers. Again, in addition to fixing the mortgage issue, we are allowing once again to have credit flow by fixing bank's balance sheet.

          •  I don't think you have any clue (1+ / 0-)
            Recommended by:
            lgcap

            how much money you're talking about. This post is nearly enough on its own to convince me that Geithner's plan is a bad idea.

            ...we reject as false the choice between our safety and our ideals.
            -- Pres. Barack H. Obama, Jan. 20, 2009

            by davewill on Mon Mar 23, 2009 at 12:02:08 PM PDT

            [ Parent ]

            •  oh...i know what I am talking about and here is (0+ / 0-)

              independent source for you to comprehend the risk and the kind of money required to nationalize this problem. Read Bad Bank or Nationalization: What will CDSs Cost Us?

              Hence...

              What will happen to the CDS portfolios of these behemoths if we nationalize them? Are we going to wind up paying off on some part of these bets? This is from Morgenson’s article:

                 While the amount of credit insurance outstanding is around $30 trillion, Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., says he believes fully half that amount isn’t problematic because it consists of winning and losing stakes that offset each other.

                 But that still leaves $15 trillion worth of contracts that may be in need of triage.

              Got the drift?

          •  The best way to have avoided (3+ / 0-)
            Recommended by:
            Creosote, Simian, Skex

            all of it was to give all the bailout money - ALL of it - back to the people.  Give everyone a large check and let them do with it what they will.  Most would pay off debt, giving all these banks a way out of the "toxic" asset bullshit because the underlying "bad" mortgages would no longer be bad.  The credit card securities wouldn't go bust, because most people would pay off their credit card bills.  And the people who had no debt would get a fuckin' bonus to spend in the "real" economy.

            This plan saves the wrong people, as did all the plans before.

      •  the global problem (6+ / 0-)

        is equivalent to every mortgage in the usa.

        every single one.

        what does this mean?

        to me it means that the bad mortgages are not the issue, the issue is the derivatives that were sold on the bad mortgages.

        this ain't no party.. this ain't no disco.. this ain't no foolin'around..

        by fernan47 on Mon Mar 23, 2009 at 11:39:20 AM PDT

        [ Parent ]

      •  The credit problem (0+ / 0-)

        At least where mortgages are concerned, now only qualified borrowers are extended credit. How is that a problem?

        •  If only that were true... (1+ / 0-)
          Recommended by:
          viscerality

          I've been looking into refinancing my home. I owe about half what the property is worth in today's market, and I have impeccable credit. I've been told that the max I can borrow is about one-third of the total market value. If the credit crunch were what you describe, things would be tolerable, but it's not. Creditworthy individuals and businesses are suddenly finding themselves unable to get very sensible and safe loans.

          ...we reject as false the choice between our safety and our ideals.
          -- Pres. Barack H. Obama, Jan. 20, 2009

          by davewill on Mon Mar 23, 2009 at 12:28:57 PM PDT

          [ Parent ]

      •  It was an option: (0+ / 0-)

        all the mortgages in the country, commercial AND residential, come up to about 16 trillion dollars.  When we are talking about a trillion dollar guarantee, it doesn't SEEM like a huge risk to offer refinancing on not particularly favorable terms to anyone who wants it, for a bridge loan or a new thirty year flat rate.  

        Reinstituting the HOLC would have allowed refinancing and liquidated the troubled loans which in turn allows for an evaluation of toxic assets.  Not bad for something that also keeps people in their house.

        Congress! Pass a 100% tax on Bush's pension, because tax dollars shouldn't reward incompetence that blew up the country.

        by Inland on Mon Mar 23, 2009 at 12:52:31 PM PDT

        [ Parent ]

    •  The risky assets are more than just mortgages (1+ / 0-)
      Recommended by:
      Creosote

      I calculated back in November that bad Mortgages seemed to be about 1/3 of the asset problem (based on comparing top-line dollar valuations of the various holes in the universe).  

      I've never seen a good reckoning of what the other 2/3 might be - though its probably some combination of business receivables, credit card receivables, etc.

      Maybe some of them are "securitized" receivables on loans to build ethanol plants?

      Actually, I wonder how much of the remaining assets is tied to receivables on loans taken out to buy commodities (like oil, copper, etc.) on speculation?  There appear to have been a bunch of commodity asset bubbles, and hedge funds are all about borrowing and leveraging up to do stupid things like inflating commodities bubbles.  If there are CDOs out there based on repayment of those loans, they may very well be next to worthless - short term and long term.

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

      by Minerva on Mon Mar 23, 2009 at 12:28:08 PM PDT

      [ Parent ]

    •  That seemed right to me, too: maybe it's too late (1+ / 0-)
      Recommended by:
      Creosote

      I have several diaries asking for a HOLC revival and directly give refinancing to homeowners...not on good terms, but on terms, thereby allowing a sense that the toxic assets have value.

      It too would involve private decisionmakers, it too would have been backed by government money...I don't agree that it would have been cheaper, but if it ended up being a waste, the waste would have goone to individuals and only indirectly to financial instituions rather than the other way around.

      The biggest reason I can think of is that we would have had to have started in 2007.

      Congress! Pass a 100% tax on Bush's pension, because tax dollars shouldn't reward incompetence that blew up the country.

      by Inland on Mon Mar 23, 2009 at 12:48:43 PM PDT

      [ Parent ]

  •  Lots of problems (13+ / 0-)

    I think anytime we try to focus on just one, we are really missing what's going on. This isn't just about toxic assets or CDSs. And it's not just about bad actors. Imagine this scenario:

    It's 2004, a family with 2 kids is about to have another baby. They really need to move out of their apartment into a larger home. The problem is that the only place they can find is farther from their jobs than they would like, and is more expensive than they would like. It's also about 500 sf smaller than would be comfortable. Even so, they look over all the numbers and they agree to an ARM, knowing that in a few years, with their jobs, they should be able to afford the higher mortgage payments. Even without raises, they should still be ok. Comes 2007 and their mortgage resets, adding about $150 per month to their mortgage. They are still ok. Then in 2008, they have to pay about $200 per month more for gas, and $150 more per month for food. They also have about $500 more per month for health care expenses. This family did nothing wrong, and yet now they are about to lose their home since they could not pay their mortgage and all their other bills.

    Sometimes people can make good, informed decisions, and still be much worse off because of the collective decisions of other people. That is where we are today. We were like a herd, being driven to a cliff. And everyone from the Chairman of the Federal Reserve to your local banker was driving us forward, thinking that it wasn't a cliff at all.

    I guess that was rambling, but in short, not only bad actors, but good people were caught up in a movement that is going to take a lot of work to break out of.

    Do Pavlov's dogs chase Schroedinger's cat?

    by corwin on Mon Mar 23, 2009 at 10:48:16 AM PDT

  •  I don't think that Geithner's approach is going (17+ / 0-)

    to work. That is only one reason why I don't like it, but that's enough. I don't think that banks are going to start lending again in a highly negative economic climate with low interest rates no matter how much money you pump onto their balance sheets.

    What I am speculating about at this point is what it will take for the public to realize that Geithner is dealing in smoke and mirrors and how long is it going to take for that to happen.

  •  AMEN BROTHER (4+ / 0-)
    Recommended by:
    JuliaAnn, frandor55, beltane, Johnny Q

    my take is in my new diary Geithner v Einstein v Bonddad ...this thing is nothing more than warmed over socialism for Wall St. - which hates socialism, unless they are the socialists

    Get up out of your chairs, and proudly proclaim, I'm mad as hell, and I'm not going to take it any more...Howard Beale in Network, 1976

    by ExElephant on Mon Mar 23, 2009 at 10:49:49 AM PDT

  •  so were all free market conservatives now? (0+ / 0-)

    wow, that took less time than I expected.

    Bring on the libertarian populism!!!!

    •  The point is actually that rather than investing (28+ / 0-)

      in these instruments that really are not tied to and do not foster any productive economic activity, the government should instead invest its resources in doing things that directly make jobs and improve ordinary people's standard of living.

      Here is Jerome's description of the option he apparently supports:

      one that acknowledges that the issue is liabilities rather than assets, and that focuses on the fact that a lot of these liabilities are wholy unrelated to any economic or financial activity, and are contingent rather than actual - ie nobody loses anything if they are cancelled. If a 100:1 bet you made is cancelled, your actual loss is not 100, it is 1 - something that could be paid back to you.

      Instead of going toward building a monorail or making sure people get health care, money under the current plan is going to be spent toward making sure the people who placed a bet analogous to what Jerome describes get their hundred (or as close to it as possible) rather than their one.

      "It's like we weren't made for this world, But I wouldn't really want to meet someone who was." --Of Montreal

      by andydoubtless on Mon Mar 23, 2009 at 11:02:40 AM PDT

      [ Parent ]

      •  Thank you. Thank you. Thank you. (1+ / 0-)
        Recommended by:
        andydoubtless

        Very well put. I've been arguing about this for days now. I'm amazed at the number of people who refuse to see how awful this plan is. Our grandkids are going to be paying taxes to cover the cost of making sure the hedge funds get their winnings.

        Funny how no one around here supported cash for trash when Paulson was proposing it.

        You've got to say, 'I'm a HUMAN BEING, Goddamnit! My LIFE has VALUE!'

        by expatjourno on Mon Mar 23, 2009 at 05:05:33 PM PDT

        [ Parent ]

        •  Thank Jerome, actually. (3+ / 0-)
          Recommended by:
          Hornito, expatjourno, Leap Year

          His clear thinking and explanatory skill make this hard task much easier.

          I think in the end people are retreating from the complexity of the economic issue into the comforting simplicity of this being about trusting Obama.

          That makes this all very hard. I want to trust Obama. I want Obama to do well. I want the economy to do well. I want the Dow to go up as much as it did today every day for the next year.

          But. To the best of my knowledge, this is not an effective policy, or a fair policy to the American people.

          And so here I am.

          "It's like we weren't made for this world, But I wouldn't really want to meet someone who was." --Of Montreal

          by andydoubtless on Mon Mar 23, 2009 at 07:04:40 PM PDT

          [ Parent ]

          •  I second the "well put", (1+ / 0-)
            Recommended by:
            andydoubtless

            and I have seen, here and there in places like the NYT Business section, some serious proposals for "undoing" the credit default swaps (at least the ones which were only side bets). This basically amounts to giving people their $1 back and walking away. That is, their premiums can be returned, but after that, sorry. Why is this not even a point worthy of discussion?

            We're all hurting now. People who have worked hard, not cheated on their taxes, and invested soundly have seen 35% of their retirement savings evaporate. But somehow Wall Street thinks it is entitled to payouts on the illegal lottery tickets they bought.

            I've been reading about this debacle for months, and I can't for the life of me understand why taxpayers need to cover others' gambling debts. If I were Charles Barkley, I'd be mighty pissed that I wasn't getting a piece of the action.

  •  The bankers need to make this work. (1+ / 0-)
    Recommended by:
    PsychoSavannah

    Why should we worry about it?

    They messed it up.  They need to fix it.  If it doesn't work, then the outrage will make the fuss about the AIG bonuses pale in comparison.

    The banks need to make this right.

  •  So, for those of us financially impaired (12+ / 0-)

    are you suggesting that the Feds simply void the CDS's?

    I mean, it's not like all of this economic activity was based on any real wealth generation.  It's 'post-modern' economics--money being made on the mere idea of money.

    What happens if all of these liabilities are cancelled?

    It seems like they are all owed to each other, anyway, since the smartest thing to do with a CDS would be to 'net' it--buy a swap at 2%, wait for the underlying asset to fall in value and then sell it at 4%.  You were never at risk for the principle, anyway.  And everyone was doing the same thing.

    Would there be any inherent loser if we simply canceled all of these deals?

    Or is the problem that no one knows who would be hurt?

    Is what was true now no longer so? --Joe Strummer and the Mescaleros, Johnny Appleseed

    by Sylvester McMonkey Mcbean on Mon Mar 23, 2009 at 10:53:04 AM PDT

  •  But isn't the liability insured? (0+ / 0-)

    I understand that we are still trading the junk stocks but isn't there federal insurance built into the latest bail-out?

  •  just write the damn $40,000 checks to each... (15+ / 0-)

    ...American already.  It'd be far more effective than continuing to throw money at this gambling ring.

    Dear Mr. President, There are too many states nowadays. Please eliminate three.
    P.S. I am not a crackpot.
    -Abe Simpson

    by fromer on Mon Mar 23, 2009 at 10:54:43 AM PDT

  •  Ummm...this doesent make any sense to me. (1+ / 0-)
    Recommended by:
    Yoshimi

    How does a bank borrow money by issuing a default swap?

    Seems to me a bank liability is money that a bank OWES. So where does the borrowing come into play with resepect to default swaps?

    With him from the beginning, with him until the end.

    by brooklynbadboy on Mon Mar 23, 2009 at 10:56:04 AM PDT

    •  A bank can borrow money for anything. (4+ / 0-)
      Recommended by:
      Creosote, 4Freedom, TomP, JesseCW

      It happens everyday, between banks...usually to the tune of trillions of dollars...overnight, monthly...longer-term...and everything in-between.

      And, indeed, it was this lack of distrust/confidence between banks which was--to a great extent--at the heart of the credit crunch to begin with. The problem, as it was discerned at the time, was that banks couldn't properly valuate their own portfolios--due to their complexity and the lack of a market valuation for some of their holdings. So, the rationale/CW was (and is, even now): "If my competitor doesn't know if he's solvent, and I don't know if I'm solvent, how can we lend money to each other."

      But, the reality that lending between banks continues(ed)--albeit at very reduced levels--is an underscoring fact.

      Thus, you get "LIBOR" which stands for "London Interbank..." yadda, yadda, yadda.

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Mon Mar 23, 2009 at 11:15:38 AM PDT

      [ Parent ]

      •  That doesent answer my question at all. (0+ / 0-)

        I understand interbank lending.

        The point of this diary is that banks owe tons of money in CDS. That doesent make any sense to me.

        With him from the beginning, with him until the end.

        by brooklynbadboy on Mon Mar 23, 2009 at 11:36:02 AM PDT

        [ Parent ]

        •  I think it means that (2+ / 0-)
          Recommended by:
          GN1927, imabluemerkin

          they've insured transactions, expecting that there would never be a need to pay out all or most of those claims at once. and now they have no cash on hand, owe tons of (perfectly law-abiding) people tons of money, and need bailout $$ to pay those debts.

          Terry Gross: So, why do you have an Afro?

          ?uestlove: Because I'm secretly a Chia-pet.

          by itsbenj on Mon Mar 23, 2009 at 12:04:00 PM PDT

          [ Parent ]

          •  Well yes, thats what AIG (0+ / 0-)

            was doing.

            So how is it the case that banks have been insurers under similar arrangements?

            With him from the beginning, with him until the end.

            by brooklynbadboy on Mon Mar 23, 2009 at 12:07:23 PM PDT

            [ Parent ]

            •  "insurance" (3+ / 0-)
              Recommended by:
              Creosote, GN1927, Habitat Vic

              You have to be an insurance company, and regulated as such, to sell insurance.  To sell "insurance" (CDSs), you just have to have a pen and paper.  The whole CDS term was created specifically so that they wouldn't have to call it insurance, and therefore not be regulated like insurance.  Well, actually that wasn't the original reason, at least as stated publicly.  CDSs do serve legitimate purposes, but those are generally ones that most closely resemble real insurance.  I suppose that in theory CDSs are a lower-cost way to accomplish what an actual insurance policy would.  The big problem is that CDSs have been used for purposes well beyond what a real insurance policy can be used for.

              So banks sold "insurance," as did hedge funds, and probably even some wealthy individuals and/or private equity operations.  The fact that AIG is the current focus, and is an insurance company, is just coincidence.  They sold insurance, and also "insurance," but were only regulated on the former, not the latter. The banks only sold "insurance" because they didn't want to be regulated.

              This is all part of the de-regulation that allowed commercial and investment banks to merge.  And of course the decision to not regulate CDSs in the first place.

              Government can't restrict free speech, but corporations can? WTF

              by kyoders on Mon Mar 23, 2009 at 12:33:39 PM PDT

              [ Parent ]

          •  But if we remove the toxic assets, they won't (1+ / 0-)
            Recommended by:
            itsbenj

            have to pay it all out at once.

            I think that's the part that JaP doesn't address: the pricing of toxic assets means that the CDSs aren't triggered and AIG and everyone else doesn't have pay claims.  

            Congress! Pass a 100% tax on Bush's pension, because tax dollars shouldn't reward incompetence that blew up the country.

            by Inland on Mon Mar 23, 2009 at 12:55:30 PM PDT

            [ Parent ]

            •  from what I understand (0+ / 0-)

              the main problem AIG had even before all of the collapsing happened (well, right before, hehe) was that their rating went from AAA to AA, and when that happened, they had to pony up some serious collateral as part of process. and they couldn't do it, and needed a cash infusion immediately (pretty much) to continue to even be traded & listed.

              then the claims started coming...

              Terry Gross: So, why do you have an Afro?

              ?uestlove: Because I'm secretly a Chia-pet.

              by itsbenj on Mon Mar 23, 2009 at 06:29:33 PM PDT

              [ Parent ]

    •  if you bought CDS protection (5+ / 0-)

      you were able to lever your other assets, since somebody looking at you as a credit worthy borrower would see "insurance" payouts to you should one of your investments turn against you, thus giving some greater certainly of their gettting paid by you when their loan to you came due.

      you then made more investments with the additional borrowing capacity you got with the CDS coverage.

      what's happening now is that as one class of assets tanked, it triggered so much CDS coverage that it exceeded the systems ability to pay it all out. hence the credit crunch.

      •  And AIG had ratings triggers in their CDS (1+ / 0-)
        Recommended by:
        anonymous coward 8

        contracts, meaning that when they were downgraded, they were required to post collateral to the counterparties holding CDS contracts.  The source of those collateral payments---the pockets of the US taxpayer.  A lot of money changing hands with no material benefit to the average American.

        With hope and virtue, let us brave once more the icy currents, and endure what storms may come. - President Obama

        by GN1927 on Mon Mar 23, 2009 at 12:23:09 PM PDT

        [ Parent ]

      •  So the Geithner plan wants to work in reverse (0+ / 0-)

        Put a price on assets so that the CDS coverage isn't triggered, or if triggered, not so much that it can't be covered in large part.

        Congress! Pass a 100% tax on Bush's pension, because tax dollars shouldn't reward incompetence that blew up the country.

        by Inland on Mon Mar 23, 2009 at 12:56:59 PM PDT

        [ Parent ]

        •  i think that is the crux of it (0+ / 0-)

          i've been wondering (and asking the DKOS experts) if something like this scenario was behind the hesitancy over nationalization. would it create a triggering event that was so big it would overwhelm the governments ability to contain it? i won't pretend to know the answer to that question, but until I see the mechanics and cost laid out for nationalization or JDP's CDS cancelation proposal, I don't feel like I can compare them against the Geitner plan favorably or unfavorably.

          probably just exposing my ignorance.

        •  "Step-son of CDS? n/t (0+ / 0-)

          "The perpetrators must be on the winning side, and never subject to prosecution for anything-by anyone. THAT is a coup d'etat".

          by eddienutzak on Mon Mar 23, 2009 at 05:34:05 PM PDT

          [ Parent ]

    •  Issuing a default swap (1+ / 0-)
      Recommended by:
      andydoubtless

      creates the risk of a future liability in the event that:

      1. A ratings trigger in the CDS contract causes the CDS issuer to have to post collateral upon being downgraded (as the diary states, this is what the lion's share of taxpayer money to date has been used to finance--AIG posting collateral to CDS counterparties); or worse
      1. Default on the underlying instrument, which would make the CDS issuer liable for full payment

      I think in light of having read your comments, I have only a fraction of your understanding of finance matters, but this diary is pretty clear.

      How that risk of liability should have been booked, I have no idea not knowing much to anything about accounting.  But to dismiss the idea that there should have been SOME measure of reporting the risk of liabilities inherent in the number of credit default swaps which AIG issued doesn't strike me as entirely reasonable.

      With hope and virtue, let us brave once more the icy currents, and endure what storms may come. - President Obama

      by GN1927 on Mon Mar 23, 2009 at 12:20:28 PM PDT

      [ Parent ]

  •  I totally agree with this (17+ / 0-)

    The arguments against option #3 from the Geithner Henry Paulson contingent ring hollow.

    Here we have Paulson threatening us with Martial Law in the Fall, and he's worried about the sanctity of a CDS contract? What is Martial Law except breaking the biggest contract that binds us, the Constitution?

    Conservatives are fond of saying the Constitution is not a Suicide Pact, but apparently, they are staunchly ready to claim that CDS's are a suicide pact.

    A single CDS > the US Constitution

    That's the depth we've sunk to.

    And Obama comes in for criticism as well, because he spoke eloquently about the responsibility for sending American soldiers to Afganistan last night, but the fact is, this plan that keeps faith with the bankers and those who bought these contracts is a plan that will kill lots of American children in their sleep.

    I'm stunned that Henry Paulson's plan under Bush has just been sugar-coated as Obama's plan now.

    Look at these people! They suck each other! They eat each other's saliva and dirt! -- Tsonga people of southern Africa on Europeans kissing.

    by upstate NY on Mon Mar 23, 2009 at 10:56:36 AM PDT

  •  I'm for a BARF plan. (10+ / 0-)

    A Bad Asset Relief Fund.

    Works like this:  AIG execs are lined up.  They're told they're going to be given, and must accept, AIG's bad paper.

    But that the paper is going to be stuffed down their fucking throats (barf...get it?).

    Except on one condition:  that they personally pay the inflated value of any paperr about to be jammed into their throats into the BARF Fund.

    Works for me.

  •  But for working families we need to "Fix it" (1+ / 0-)
    Recommended by:
    Yoshimi

    All the fascinating analysis is fine, but the issue for most of us is how do we keep working, pay the monthly bills and raise our families.  

    We really don't care if Corporate/Investor Group A takes advantage of Corporate/Investor Group B.  Neither contains working families in them or benefits them.  

    International banking group A vs International Banking Group B is not ever going to really matter to the working families of the US so all this type of diary does is give the chattering class something to fill the 24/7 airwaves.  

    The Administration is trying to keep working families from starving.  Support it and help it and us.  Save the rest for the book only a few will buy.

  •  Here's a question (4+ / 0-)
    Recommended by:
    decembersue, GN1927, rweba, Actbriniel

    I don't know a damn thing about high finance, investing, stocks, etc.

    I don't know Geithner, Bernanke, Paulson, etal.

    What I do know is that Obama is smart.  Now it seems to me that this smart man has a tendency to listen to every voice around him.  

    So tell me this - if Geithner is so off the mark, wouldn't every finance guy talking to Obama tell him so?  And wouldn't Obama has a clue to this all on his own?  

    I have a very hard time reconciling the fact that our President is not an idiot with all the doom/gloom/catastrophe looms stuff being posted here.

    I took heart in Bondad's post simply because while not raving about the plan, he didn't say it would cause the apocalypse either.

    And sorry Jerome, but for us neophytes, your diary did nothing but sound the voice of doom.  Without me having a clue as to why.

    "But your flag decal won't get you into heaven anymore"--Prine 4240+ dead Americans. Bring them home.

    by Miss Blue on Mon Mar 23, 2009 at 11:05:03 AM PDT

    •  I'd like to see bondad and Jerome (8+ / 0-)

      pose questions for each other and have each other answer those questions directly in additional diaries. I think that would be useful.

      Otherwise, we have our reclist hosting two very smart guys who seem to disagree, but who aren't doing so directly enough for us non-experts to understand where they're coming from.

    •  Only With a Truly Diverse Staff (14+ / 0-)

      "...So tell me this - if Geithner is so off the mark, wouldn't every finance guy talking to Obama tell him so?  And wouldn't Obama has a clue to this all on his own?..."  

      What happens if all of the advisers come out of the same milieu?  Worse, what happens if all of the advisers literally come from the same firm and received the same training and inculcation?  In certain respects, that is what we're seeing play out here.  None of the financial advisers come from anywhere but the financial services industry.  They all speak the same language, with one voice.  How does the President break out of the bubble of that mind-set when he isn't being told anything different?

      "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

      by PrahaPartizan on Mon Mar 23, 2009 at 11:12:27 AM PDT

      [ Parent ]

    •  JFK was a smart guy too, but that didn't stop (12+ / 0-)

      … him getting conned into stumbling into the Bay of Pigs fiasco by advisers all tied to the CIA.

      The Dutch children's chorus Kinderen voor Kinderen wishes all the children of the world a happy holiday season!

      by lotlizard on Mon Mar 23, 2009 at 11:24:03 AM PDT

      [ Parent ]

      •  Ike was a smart guy too... (6+ / 0-)

        But he still got conned by former OSS operatives (who he trusted, because they gave him good intell during the War) into backing the Coup in Iran and get the Shah back on the Throne.

        8 years later, he warned us about the MIC.  

        If only he knew at the start of his Presidency what he knew at the end, Iran today would be a Democratic Socialist Ally with a moderate Islamic religious influence.

        "Callin' it your job sure don't make it Right, but if you want me to I'll say a prayer for your soul tonight" John Mellencamp ~ Scarecrow

        by JesseCW on Mon Mar 23, 2009 at 12:12:15 PM PDT

        [ Parent ]

    •  I think there's entirely too much dick waving (1+ / 0-)
      Recommended by:
      Miss Blue

      going on over here in the diaries and everywhere else on this site in the comments by people who find it easy to pontificate from their keyboards.

      I reserve judgment because I don't know dick about the issue, and no one will know the outcome until something is tried.

      Let the great world spin for ever down the ringing grooves of change. - Tennyson

      by bumblebums on Mon Mar 23, 2009 at 11:33:45 AM PDT

      [ Parent ]

      •  There are people out there who DO know dick (1+ / 0-)
        Recommended by:
        Miss Blue

        about the issue (er - so to speak) like jerome and bonddad and so on.  

        But like you, I myself certainly do not have time to understand macroeconomics along with all the other things I have to pay attention to in my life.  I've just put my trust in Obama and his team to do what they think is best; that's why I voted for him.  

        And that doesn't make me an Obamabot, either.  It just makes me someone who is content to let the guy I elected to fix the country do what he thinks will work to fix the country.

    •  obama is smart, but..... (2+ / 0-)
      Recommended by:
      jgtidd, TomP

      he knows almost nothing about economics and finance. He selected and listens to the worst possible people.

      We have a problem, and it will continue to get worse. There is, in fact, no grounds for hope nor optimism at this point.

    •  But “every voice around him” (7+ / 0-)

      is a Clintonite neoliberal. Note that Summers has been actively pushing to make sure Volcker's voice doesn't get near Obama. They're doing their damnedest to craft a bubble around Obama.

      Now, I hope that Obama is in fact still paying attention to Volcker, Stiglitz, Krugman, et al. Perhaps he's got a contingency plan in mind for if (when) the Geithner plan falls through (as of today they're only committing $70B to it as a sort of trial run). But the evidence we have now shows a distinct tendency toward groupthink — note the sheer number of variations on the original Paulson plan that they've proposed (and this is merely the latest variation).

      Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

      Shirley Schmidt: A Democrat.

      by Jyrinx on Mon Mar 23, 2009 at 12:11:44 PM PDT

      [ Parent ]

    •  "Every voice around him" is key, I think. (3+ / 0-)
      Recommended by:
      Lipstick Liberal, alizard, Skex

      It's important to look at who the appointments have been to that economic team, and who they've not been. Essentially we're not seeing a plurality of voices reaching the president.

      But beyond that, I have to say I don't agree with where you're coming from here. I agree with Obama on perhaps ninety percent of the issues facing our country, and maybe eighty percent of the issues I care most about, with the exceptions being largely apart from this same-sex marriage and trade.

      I worked hard for him here at this site and yes out there in the real world, during the primary season and after. I phonebanked, I contributed, I wrote comments at a hundred frickin' websites defending him from whatever smear the rightwing came out with that week.

      And now, I disagree with the president on an issue. An important economic issue, mind you, but an issue. And I disagree because based on what I know and understand, he is doing the wrong thing. And what I keep getting in response back from the other side of this debate is that if I disagree with him on this one issue, then I must not really support him, then I must not really be a good progressive, then there must be something wrong with me, that my opposition to this view is the result of a default of my character that leads me to have some hidden wish to see him fail.

      And y'know what, on a level apart from the substance of this dispute, that's really unfair to us critiquing Geithner and the bailout and it's unfair to me personally. I cried when Obama won Iowa. I cried when I saw him declare victory in Grant Park. I cried during the inauguration.

      And now I see my concerns about nothing less than the future of our country, that happens to lead me, somewhat painfully, to take a position opposite our president, derided in the comment below that you rec as "dick waving."

      Wow. Glad to know you are making such an informed judgment about someone you know so well.

      "It's like we weren't made for this world, But I wouldn't really want to meet someone who was." --Of Montreal

      by andydoubtless on Mon Mar 23, 2009 at 12:16:46 PM PDT

      [ Parent ]

    •  Collective denial comes to mind as a reason. (1+ / 0-)
      Recommended by:
      alizard

      So tell me this - if Geithner is so off the mark, wouldn't every finance guy talking to Obama tell him so?  And wouldn't Obama has a clue to this all on his own?

      Did you ever see "Trading Places"? Remember the end?

      "Turn the machines back on!"

      If you see mistakes in this post, it's because my editor's on vacation. Sorry.

      by TKinVT on Mon Mar 23, 2009 at 12:56:29 PM PDT

      [ Parent ]

  •  or, if the economy were to turn around (4+ / 0-)
    and the underlying housing market rebounded, we could mitigate much of the problem. i would like to see the government stop the strategy of bailing out wall street and instead work on the housing market. they could give struggling homeowners, under a certain income level and home price, 1% government loans and refis, but for a limited time (say, 18 months.) i think that would spur a boom in the housing market, as well as the economy, since all those poor and middle class people would suddenly have much more cash in their pockets if they didn't have to spend so much on interest to banks. we're doing this backwards.

    "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

    by mindtrafficcontrol on Mon Mar 23, 2009 at 11:06:44 AM PDT

    •  Housing is still massively overpriced (15+ / 0-)

      Proper long-term home prices are 2.5-3x income, no more. Propping them up simply screws this generation of buyers, and besides, cheap housing is a good thing (just like cheap gas and cheap food).

      •  i'm all for cheap housing (3+ / 0-)
        Recommended by:
        slinkerwink, Sparhawk, JesseCW
        and in fact i just bought a house because i think the price was good. but think about how much of the mortgage payment goes to interest (almost ALL of my payment is interest!) if low income people could get 1% loans it would be like getting a house for less than half price. so you would get the best of both worlds, cheap housing (measured in monthly payment) AND a reversal of the economic downturn. it's better than giving money to wall street, which by the way, also is intended to put a floor under housing. at least my way helps PEOPLE, not banks and hedge funds.

        "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

        by mindtrafficcontrol on Mon Mar 23, 2009 at 11:17:02 AM PDT

        [ Parent ]

          •  interest rates are historically low right now (1+ / 0-)
            Recommended by:
            Sparhawk
            but housing is still way down in price. today it was reported that median home prices fell to around $165k while sales are up 5% in february. at some point the low rates will start to push prices up, of course, but that time has not come yet, so what we have is a combination of lower prices and lower interest rates. i'd still like to see rates lower by eliminating banks from the equation. at least for poor people like me!

            "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

            by mindtrafficcontrol on Mon Mar 23, 2009 at 11:30:58 AM PDT

            [ Parent ]

            •  Don't you see... (4+ / 0-)
              Recommended by:
              Creosote, TomP, JesseCW, krnewman

              ...that interest rates don't matter when you're buying a house? You can pay 1% or 100% and it makes no difference (as long as your rate is comparable to what other people are paying).

              The principle value of the house will adjust to the interest rate. If you can afford $2000/mo as your housing cost, at 0% interest a 30-year mortgage implies a home price of 2000*12*30 = $720k.

              At 100% interest, you can still only afford $2000/mo, so you can only pay $24,000/year so your house is only worth $24,000 (the same house as above).

              The point of this exercise is to show that wishing for low rates is pointless; it doesn't really help you, and you're far better off buying at high market interest rates than low interest rates.

              •  2 years ago interest rates were higher (0+ / 0-)
                AND prices were higher. today interest rates are lower  AND prices are lower. your model is not correct in the effect you are predicting on the market. according to your theory, it would have been better to buy a house 2 years ago when rates were in the 7's and 8's, but the house i bought would have sold for $450,000 then. i bought my house recently under 6% and for $280,000.

                "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

                by mindtrafficcontrol on Mon Mar 23, 2009 at 11:52:21 AM PDT

                [ Parent ]

                •  This is because... (2+ / 0-)
                  Recommended by:
                  TomP, VincaMajor

                  ...home prices were inflated by bad lending standards. The entire drop in prices from 2006 to now was improvement in lending standards. Since lending standards were so incredibly poor in 2003-2006, the drop in prices there was able to overwhelm the interest rate drop.

                  Today, we still have lending standards that are too loose (especially due to government programs attempting to keep it this way), and we have supernaturally low interest rates.

                  What does this imply about the price of housing going forward?

                  •  i don't know (1+ / 0-)
                    Recommended by:
                    Sparhawk
                    you tell me. all i'm saying is that you made a claim that it is best to buy a house when interest rates are high. i explained that if i did that i would have lost a lot of money. and in fact i did much better not doing that. if you are going to add a bunch of qualifications and addendums (addenda?) to your theory as to when to listen to it and when not to my head will hurt. if a theory is any good it should work consistently, should it not?

                    "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

                    by mindtrafficcontrol on Mon Mar 23, 2009 at 12:34:34 PM PDT

                    [ Parent ]

                    •  Well (0+ / 0-)

                      I guess that's a metaphysical question.

                      Housing prices are driven by many factors, one of which is interest rates. Another is lending standards. Yet another is the average salary in the area the house resides. Yet another is property tax rates in the home's area, etc.

                      My main point is just to shoot down the "low interest rates are a good time to buy" meme; I should have qualified it by saying "all other things being equal".

                      I appreciate the skeptical reply (really). Keeps me/all of us on our toes.

                      •  i think that all things are never equal, though (1+ / 0-)
                        Recommended by:
                        Sparhawk
                        and that it is always situational, never the model or perfect scenerio. i don't think i said that low interest rates are the best time to buy in my original comment anyway. i said that i had a better plan for the current situation where the goal is to stop the slide in house depreciation which is causing our economy to suck. house prices are low and generally falling (although there was some good news on that front today...) and if the government were to cut out the middle man and give 1% loans to those of us who have been generally screwed over by wall street and washington lately, then we would be able to take advantage of both the lower house prices and the cheap interest rate. the end result for me would be something like a reduction in my mortgage from $1,400/month to $700/month. whether or not that means now is the best time to buy because of the theory of when to buy vis a vis interest rates is not really my point, it was just a side conversation. although, since i'm in that conversation now, i don't think that it is necessarily best to buy when rates are high. i think it is best to buy when house prices are low.

                        "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

                        by mindtrafficcontrol on Mon Mar 23, 2009 at 04:57:14 PM PDT

                        [ Parent ]

            •  Almost 50% of that 5% Increase (2+ / 0-)
              Recommended by:
              4Freedom, JesseCW

              Were foreclosure sales. Just so you know.

              •  i do know (0+ / 0-)
                that's a good thing, actually. we need to go through that inventory

                "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

                by mindtrafficcontrol on Mon Mar 23, 2009 at 12:03:00 PM PDT

                [ Parent ]

                •  but people will then default on the new sale (2+ / 0-)
                  Recommended by:
                  Sparhawk, Creosote

                  and we'll go through it again. And remember that each foreclosure that gets sold end up as two "sales", one when the lender takes it back, and one when the lender sells it again, so the numbers are inflated. Also the average price is half based on the original insane purchase price that got foreclosed on. So imagine a house that sold for $500k, foreclosed, sold again for $250k. It gets booked in today's stats as 2 sales with an average price of $375k, which is, of course, a ridiculous pack of lies that only a moron would believe.

          •  Great diary at that link. Clarity! nt (0+ / 0-)
      •  cheap gas is not a good thing n/t (0+ / 0-)
        •  I completely agree (2+ / 0-)
          Recommended by:
          JesseCW, krnewman

          But it's just to make a point.

        •  this is actually a debateble point environmentally (0+ / 0-)
          my father and i are both greens and we have had this argument a lot and i haven't convinced him yet, but i'll give it a try here. the more expensive gas is, the more carbon is released into the atmosphere because drilling increases and previously unprofitable methods of production become profitable, and so are employed. the best solution to the seemingly counterintuitive fact is to tax energy to a high price rather then let it become expensive through market forces. so if oil companies charged $5 for a gallon of gas but with $3 of that in taxes, then it would be a good thing. but if the whole $5 went to exxon they would be drilling everywhere to make that money.

          "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

          by mindtrafficcontrol on Mon Mar 23, 2009 at 12:18:59 PM PDT

          [ Parent ]

          •  properly speaking, price should reflect true cost (0+ / 0-)

            including the cost of cleaning up the damage caused by the consumption of the gallon of gas. Basically, the government subsidizes the profits of the oil companies by assuming those costs, which ultimately we pay. The true "cost" of a gallon of gas is really about $9 and the oil companies cost to produce is about $1, so they are not only making the money on the $1.50 (i.e. $2 - 50 cents tax per gallon)they also don't have to pay the $7 extra that that gallon really costs. It's a totally free ride for them. If we had to pay $9 up front for each gallon, we would doubtless buy less. The price inelasticity of demand for gasoline we had always theorized to end at about $4/gal and that is in fact where we empirically found it to be recently.

            •  all the more reason to tax the oil (1+ / 0-)
              Recommended by:
              krnewman
              and/or the gas. that is how you apply the true cost, as you say.what i'm pointing out is simple and incontrovertible: if the high price is because of market forces, more carbon will ultimately be released into the atmosphere. if the high price is from taxes, less carbon will be released. so pray/work/advocate for a gas tax, not unqualified "higher prices". or, look at it from another angle, research how much carbon was pumped into the environment when oil was up in the $100's and you will see my point. the high price did not prevent the release of carbon. or look at the day rates for deepwater drilling rigs from a company like transocean during the same period (and look at them now!), or the sudden viability of shale in canada. when the high prices mean profit for finding previously untouched/difficult-to-utilize reserves, the environment is fucked. this really is something we environmentalists need to come to terms with.

              "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

              by mindtrafficcontrol on Mon Mar 23, 2009 at 05:10:53 PM PDT

              [ Parent ]

      •  ie average housing price in the us should be (3+ / 0-)
        Recommended by:
        Sparhawk, Creosote, VincaMajor

        figure about 45k is the average income.
        use 2.75 times that...

        123,500 dollars for an average 4 bedroom house in  the US. what is the actual average price?

        about double that...
        we have a long way to go until we hit bottom...

        remember its not the fall that kills you... its the landing... at least thats what they taught me in army airborne school 25 years ago...

        Welcome to the empire. now run away if you can... life is not a dress rehearsal

        by johnfire on Mon Mar 23, 2009 at 12:45:34 PM PDT

        [ Parent ]

        •  actual median price is $165K (1+ / 0-)
          Recommended by:
          Sparhawk

          That was in today's numbers of existing home sales.  And actual household income was $51K in 2007, probably went up in 2008 and started dropping last few months so about the same $51K now.

          That means prices don't have much more to drop.

          Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

          by eparrot on Mon Mar 23, 2009 at 12:47:42 PM PDT

          [ Parent ]

      •  Median home price is now $165,400 (1+ / 0-)
        Recommended by:
        Sparhawk

        Which is in the ballpark of 3x median household national income (was about $51K in 2007, haven't seen 2008).  I think that some markets still have very overpriced houses, but many have come down.  A lot of houses that were going for $300K in 2006 are now going for $160-$170 where I am in Florida.

        We still have a supply problem, a tight credit, an unemployment problem, and a confidence problem - solving the first 3 will fix the 4th.  so it will likely be years before the housing market stabilizes.  Probably prices will overshoot on the downside by next year.  But fundamental median price is now getting closer to historical levels relative to income.

        Now, if the economy really craps out - another 20 million jobs lost or something - all bets are off. And that could happen. But I don't think it's accurate to say housing is still massively overpriced as a blanket statement.

        Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

        by eparrot on Mon Mar 23, 2009 at 12:45:37 PM PDT

        [ Parent ]

        •  Thanks for the stats (0+ / 0-)

          Perhaps "massively overpriced" is too aggressive a statement, but I still think it's true in many places, particularly with the recession taking down incomes.

          •  Agreed (2+ / 0-)
            Recommended by:
            Sparhawk, phonegery

            And I would not be a "knife-catcher" at this point.  To many problems beyond simply median prices versus incomes.  When i read things like the Irvine housing blog, I realize how there are still plenty of places where delusion is holding up the market.

            Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

            by eparrot on Mon Mar 23, 2009 at 12:59:11 PM PDT

            [ Parent ]

            •  Yeah (0+ / 0-)

              I mean, other than the intangible benefits, what's the possible upside at this point? A slight upward trend? Compared to comparatively major downside risk?

              I suspect that we've had a secular change recently in which home ownership (also stocks, etc) will be just less attractive than it was in the past. It may be that over the next 30 years, home ownership will be less desirable than over the last...

              •  could very well be (0+ / 0-)

                and that would not be a problem, though I'd like to see tax law changes to reflect that.

                Want a progressive global warming novel, not a right wing rant? Go to www.edwardgtalbot.com for a free audio thriller.

                by eparrot on Mon Mar 23, 2009 at 01:19:08 PM PDT

                [ Parent ]

            •  Santa Cruz CA county. (0+ / 0-)

              Ads for houses range from 100K for a trailer in a family park, through an occasional 300K  for a house in the boonies, 500K and up for a house in town to 7million.  Not affordable for many.

              Justice, if not pursued, does not exist.

              by phonegery on Mon Mar 23, 2009 at 03:38:30 PM PDT

              [ Parent ]

              •  you should consider eureka (1+ / 0-)
                Recommended by:
                phonegery
                i bought a 2260 square foot house in a nice neighborhood for $280k. i had to remodel it myself, but it has a gym where i can work from home, so it produces income as well. we have giant sequoias in and around town and a great college and art scene. paradise for not much money (at least for california). our market has fallen but the pot economy has kept prices from bottoming out the way other areas have in this state. but if you are a good business person and can create your own income i would highly recommend buying a house here. but if you need a job market, stay away! wages are pretty low.

                "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

                by mindtrafficcontrol on Mon Mar 23, 2009 at 06:01:15 PM PDT

                [ Parent ]

    •  That is a basic issue here. (3+ / 0-)
      Recommended by:
      slinkerwink, Sparhawk, alizard

      Can something like the housing bubble be recreated so that everyone can go back to business as usual. There are some pretty strong indications that that may not be possible.

      •  i'm not sure i undersand your point (1+ / 0-)
        Recommended by:
        thethinveil
        i'm not in favor of creating any more bubbles. first of all, i would only be in favor of extending this government loan to poor people and middle class people who are struggling right now. second, i would not keep that rate longer than was necessary to save our economy from crashing, although i would like to see some form of carry-over of the program to help the poor get low interest government loans. i believe we are already doing (or obama proposed it, anyway) something like this in the student loan program, where the government would bypass middlemen (banks) who take a piece of the action, and administering the program themselves, which means cheaper loans for poor students.

        "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

        by mindtrafficcontrol on Mon Mar 23, 2009 at 11:22:38 AM PDT

        [ Parent ]

        •  Your notion of the housing market (2+ / 0-)
          Recommended by:
          Jerome a Paris, JesseCW

          rebounding to something close to where it was requires another bubble. Housing was grossly over priced and all sorts of debts were accumulated based on those inflated prices. It is probably not going to be possible to get housing prices back up to that level for a very long time.

          •  i'm not trying to do what you say (0+ / 0-)
            i'm simply trying to stop the crash and reverse it. not shoot it back up with the same velocity. a quick 10% followed by a slow recovery over 5 to 10 years is all i'm hoping for the housing market, along with a corresponding economic boom as a result of more money in the pockets of the people who actually spend money at stores for things like food and clothes and solar panels. a second housing bubble from the depths of where we are now doesn't even seem realistic (to me, anyway) particularly if you limit the duration of the program.

            "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

            by mindtrafficcontrol on Mon Mar 23, 2009 at 11:59:32 AM PDT

            [ Parent ]

        •  I would be very much in favor of creating a (2+ / 0-)
          Recommended by:
          Creosote, JesseCW

          government bank that would be used to provide loans for modest housing that would insure some of the MCmansions are devalued while people with a smaller amount of income can afford a place to stay.

          "What is the robbing of a Bank compared to the FOUNDING of a Bank?" Bertolt Brecht

          by thethinveil on Mon Mar 23, 2009 at 11:53:28 AM PDT

          [ Parent ]

  •  What happens if we nullify most OTC CDS?? (10+ / 0-)

    To me, it seems as if the CDS arrangements sold to third parties (parties without a direct stake in the stability of a debt issuer) ought to have been banned from day one.

    Outsiders shouldn't really have a right to bet on issuers going bad, especially in an anonymous, over-the-counter way, if, in effect, "short selling" companies' debt can actually CAUSE the issuers to go bad just by spreading mean rumors about the issuers.

    It's not clear to me whether these naked CDS arrangements were actually even legal when they were made. It seems as if the REAL beneficiaries of all of the naked CDS gyrations are a few rich guys (or potentially rich guys) in undershirts who made insane bets that the financial services companies would go to hell, and now have the potential to win big on their bets because the financial services companies are going to hell.

    So, anyhow, if these arrangements are against public policy and possibly illegal, why is it possible for the parties involved to use the courts to enforce the arrangements?

    Why, at this point, should any of these CDS be valid if they're not brought onto an exchange and made transparent?

    Why not nullify all CDS that fail to meet strict criteria; have the government partially compensate the big banks, investment banks, etc. that speculated intelligently on CDS and are losing potential profits due to nullification; then tell all of the wild and crazy speculators to go to heck?

    If we want to be very generous, find the speculators in the undershirts and give them some fun money -- say, $5 million each -- so that they can be comfortably semi-rich, but DON'T let them even think of collecting the billions of dollars they think they should be getting if the CDS slot machine comes up cherries. (Or, in this case, skulls.)

    Analogy: I put some of my 401(k) money in an energy fund. I knew that, if the energy markets really tanked, I'd lose money. But I knew that, if energy prices really, REALLY skyrocketed, the government likely would take over and mess with the market in a way that would wreck my mutual fund. In other words: I understood that my mutual fund share price wouldn't REALLY reach the sky if the end of oil caused civilization to collapse.

    Why should CDS speculators seriously expect to reap billions of dollars because the CDS system causes the financial system  to collapse?

    •  Because they can donate 0.01 % of those billions (5+ / 0-)

      … as campaign contributions to politicians willing to have the taxpayers pay off on their bets?

      The Dutch children's chorus Kinderen voor Kinderen wishes all the children of the world a happy holiday season!

      by lotlizard on Mon Mar 23, 2009 at 11:19:45 AM PDT

      [ Parent ]

      •  Probably difficult, dangerous, but need to (2+ / 0-)
        Recommended by:
        lotlizard, Robert Davies

        figure out how.

        One argument would be that the government can't just cancel contracts, but the government could, say, nullify a contract for Jim Cramer to sell a nuclear bomb to Larry Kudlow. Why not this contract?

        Also, to the extent that nullifying these things could cause implosions: I think the solution is to protect the affected institutions against imploding, as much as possible, not to keep the bad CDS arrangements alive.

        Also also: my understanding is that some parts of the CDS market might be working OK. If so, then the solution for those would be to put them on an exchange and regulate them, not to cancel them.

        But the CDSes that are all messed up ought to be deleted, to the extent that this does not destroy the financial universe.

        •  Fraud is null on the face. (0+ / 0-)

          Fuck recruiting problems in the Army.
          We need more then "A Few Good..." auditors, accountants,  etc.

          We are in  undeclared Financial Warfare.
          The Treasury and SEC should have recruiters
          stationed on every college campus in the country,
          hell, draft every kid majoring in accounting.
          LOL ( but I'm only HALF joking.)

          Nothing in the world is more dangerous than sincere ignorance
          and conscientious stupidity. - Martin Luther King, Jr.

          by Robert Davies on Mon Mar 23, 2009 at 08:14:08 PM PDT

          [ Parent ]

          •  I don't know if these were all fraudulent (altho (0+ / 0-)

            maybe the arrangements set up by parties with a direct stake in the well being of the credit issuers involved serious misrepresentation) but it seems as if they were pretty clearly against the public interest, and maybe they violated some other kind of laws or regulations.

    •  Aye. (3+ / 0-)

      It's not clear to me whether these naked CDS arrangements were actually even legal when they were made. It seems as if the REAL beneficiaries of all of the naked CDS gyrations are a few rich guys (or potentially rich guys) in undershirts who made insane bets that the financial services companies would go to hell, and now have the potential to win big on their bets because the financial services companies are going to hell.

      I'd have taken that bet. What did I need to bring to the table to get a piece of that action? I'm guessing I had to already be using $1000 bills as toilet paper at some hedge fund.

  •  this says it all about the era that has ended (12+ / 0-)

    How could there be only 12 AAA-rated companies in the world, and 64,000 mortgage-backed securities with that same rating?

    A terrible beauty is born. --W.B. Yeats

    by eightlivesleft on Mon Mar 23, 2009 at 11:08:17 AM PDT

  •  but there's more than one problem (2+ / 0-)
    Recommended by:
    trillian, lompe

    I don't disagree with anything that Jerome says (he forgets more about finance in a night of heavy drinking than I'll even know!), except for the conclusion that the Geithner plan is therefore not worth pursuing. There are at least four interlocked problems now, aren't there?

    (1) collapsing property values, which has direct consequences for homeowners.
    (2) banks with toxic assets, causing a credit freeze.
    (3) interlocked CDSs that magnify the cost of any institution failing, and double any anxiety already in the market.
    (4) a recession.

    I'm not sure how trying to fix #2 (in addition to trying to fix #1 and #4, which are already in the works) impairs our ability to address #3. Especially since, as these issues are interlocked, fixing #1, #2, and #4 will reduce the issues with #3.

    car wreck : car insurance :: climate wreck : climate insurance

    by HarlanNY on Mon Mar 23, 2009 at 11:09:09 AM PDT

  •  Impt- Galbreath's Great Critcism of the Plan (6+ / 0-)

    WALL STREET SOCIALISM AT IT's WORST

    Bonddad has links to excellent video by economist John Galbreath on why this is Hamburger Helper Socialism for Wall Street

    http://bonddad.blogspot.com/

    Get up out of your chairs, and proudly proclaim, I'm mad as hell, and I'm not going to take it any more...Howard Beale in Network, 1976

    by ExElephant on Mon Mar 23, 2009 at 11:09:09 AM PDT

  •  Does the Geithner plan (0+ / 0-)

    explicitly say that CDS is not included in the toxic assets?  If so, does the plan provide a way we can distinguish between the two?

    I thought the plan was to buttress the assets just so defaults would not occur, and so the contingencies of the CDS would not occur either.  Is this not the plan?

    No stimulation without regulation.

    by Publius2008 on Mon Mar 23, 2009 at 11:09:15 AM PDT

  •  Maybe it's just me, but these (4+ / 0-)

    financial instruments remind me of the Vegas sports book teaser bets, where they make shit up to bet on, just to create more action.  

    When a big chunk of our banking system and the stock market turns upon or is based upon betting on stuff that people make up to bet on, that no one understands, we are all effed.  

    Having credibility when making an argument is the straightest path to persuasion.

    by SpamNunn on Mon Mar 23, 2009 at 11:10:16 AM PDT

  •  Absolutely, Jerome (11+ / 0-)

    If I am in a poker game with 20 other people and we each have $100 on the table and there is a fire in the casino, do we play out the hand or each take our $100 and leave?

    We need to give each of the banks their $100 back and tell them they are lucky they aren't really getting burned.

    http://en.wikipedia.org/wiki/Jesusland_map is shrinking

    by AppleP on Mon Mar 23, 2009 at 11:10:55 AM PDT

  •  But then, isn't Geithner doing the right thing? (1+ / 0-)
    Recommended by:
    HarlanNY

    I read this diary to say that we have both toxic legacy assets on the one hand and (potentially unbounded) liabilities on the other. I think I get that the liabilities are the real problem, when you run the numbers if the CDSs are all triggered. I think I also get that if they aren't triggered, and perhaps expire (as suggested by one commenter), then that part of the problem just goes away.

    Now, Geithner is ignoring the liabilities, and focusing on the toxic legacy assets. Isn't that at least half-way right, in that he's at least not trying to pay off the liabilities?

    (Caveat: Not a macro-economist, here, by a long shot.)

    "The problem isn't government, it's Republican government - and everyone knows it." TPM reader BH

    by itswhatson on Mon Mar 23, 2009 at 11:12:16 AM PDT

  •  Jerome is there really any difference between (4+ / 0-)

    modern finance and casino gambling?

    Sponge Bob, Mandrake, Cartoons. That's how your hard-core islamahomocommienazis work.

    by Benito on Mon Mar 23, 2009 at 11:12:21 AM PDT

    •  Well it does appear (3+ / 0-)
      Recommended by:
      Robert Davies, Akonitum, JesseCW

      that the house (bank) always wins.

      Interviewer: What do you believe is behind this recent increase in terrorist bombings? Helpmann: Bad sportsmanship

      by ceebs on Mon Mar 23, 2009 at 11:37:48 AM PDT

      [ Parent ]

    •  Modern finance... (0+ / 0-)

      ...owns a solid chunk of the media, which talks up or down what the <strikethrough>casinos</strikethrough> financial institutions need to have happen to win.

      It's all about optimism and confidence.

    •  also in modern finance (2+ / 0-)
      Recommended by:
      Creosote, Robert Davies

      when you win, you get to keep your winnings but if you are big enough, when you lose, the gov't covers your butt and gives you more nut. In finance, if you are big and bad enough, there is no failure.

      Of course, it's the reverse for the little guy. If you do bad and lose, you have to pay (and the gov't will send people in uniforms with guns to kick you out of your home), but if you do everything right and win, you still lose, because what you have gets taken away to give to the big guys who gambled and lost, to cover their losses and get them back in the action.

      And, unspoken in all this is the element of coercive force that hides behind it all: they can kick you out of your home, they can do anything they want to you, they can kill you. And there's nothing you can do about any of it. You might even think you could vote in someone who would try to protect you and look after your interests, instead. You can't. It's just an illusion.

      It's all a mugg's game. A mugg's game, and YOU are the patsy. You can't even choose not to play.

    •  Casinos (2+ / 0-)
      Recommended by:
      ctsteve, Robert Davies

      are much better regulated?

  •  BINGO thank you (6+ / 0-)

    one that acknowledges that the issue is liabilities rather than assets, and that focuses on the fact that a lot of these liabilities are wholy unrelated to any economic or financial activity, and are contingent rather than actual - ie nobody loses anything if they are cancelled. If a 100:1 bet you made is cancelled, your actual loss is not 100, it is 1 - something that could be paid back to you.

    Now we need to determine what is to prevent this from happening? Ideology based on markets? Fear of Govt intervention in international contract law? Stinking filthy greed? This is what will determine whether we live like paupers or normal people. Get on it for gods sake someone.

  •  How does acknowledging a problem solve it (3+ / 0-)
    Recommended by:
    HarlanNY, Back In Blue, Irixsh

    You may be right, but I don't see any suggestion as to what the US should do.  If the problem is liabilities not backed by assets, then basically you're suggesting the problem is not really solvable with any kind of infusion of cash.  You do an excellent job of smacking the banks for irresponsible behavior without really suggesting a meaningful alternative to solve the problem

    Does the third option mean nationalizing American banks or something else.  And if we did nationalize the banks, how would that happen without absorbing all of the liabilities you just mentioned.  I can't really tell from your post.

    The only thing we have to fear is fear itself - FDR. Obama Nation. -6.13 -6.15

    by ecostar on Mon Mar 23, 2009 at 11:13:55 AM PDT

  •  Truly... (6+ / 0-)

    Everybody is an expert.

    I note that Daily Kos is loaded with experts the last few days.

    Call me when oil hits $200 a barrel.

    I'll give $100 to the first person to pull George Will's bad rug off his noggin in public.

    by Bob Johnson on Mon Mar 23, 2009 at 11:15:02 AM PDT

  •  May I ask questions? (0+ / 0-)

    This seems like an excellent analysis but I still don't quite understand.

    Is it too fantastical to be understood by ordinary people?

    And what really is the solution -- both for the future and for protecting taxpayers' money now?

    Media Reform Action Link http://stopbigmedia.com/

    by LNK on Mon Mar 23, 2009 at 11:15:12 AM PDT

    •  despite what some folks will say, the (7+ / 0-)

      key point for the future is to strip "investment" in derivatives of its status as anything other than gambling. which will, of course, eliminate the derivatives markets. which is what needs to be done.

      various nattering about "liquidity" and "lubricating markets" and such are pure BS. we don't need these derivatives markets, we don't benefit from them, and we shouldn't permit them anywhere outside of a casino.

      I don't know what to say.

      by UntimelyRippd on Mon Mar 23, 2009 at 11:29:50 AM PDT

      [ Parent ]

  •  I think that the missing element... (6+ / 0-)

    in all of this that we are not priviy to is that financial fraud was committed on a massive scale against our global trading partners. Like it or not, they gave us goods, resources and services in trade for dollars that they then recycled back into all of these debt securities that had the highest ratings possible when in fact a lot of it was junk.

    I think the issue comes down to the fact that they have demanded that they be made whole on this and I really don't blame them.

    If we really accept that these assets are in fact worth 30% of what they paid for them or some other number then it won't really matter how we inflate out way out of it. If we we stiffed our trade partners by giving them 30 cents on a dollar of investments then it really just means that the value of the dollars we gave them is 70% less than what it was and we would see an immediate 70% drop in the value of the dollar.

    There aren't any good options on this at this point, but the overall facts are clear, Americans ran themselves into debt consuming resources, goods and services from foreign countries who in good faith recycled those dollars back into what they were told were safe investments. Its not their fault if we set up a regulatory environment that allowed fraud on a massive scale to occur. And its not their fault that Americans kept voting in people who were intent on shutting down factories here and shipping all of those jobs overseas.

    We Americans got ourselves into this mess and we're just going to have to take the hit and be a man about and suck it up and pay for it one way or the other.

    Which is why I think we keep coming around to the paying "full price" for them...

    What we do for ourselves dies with us, what we do for others and the world remains and is immortal. (Albert Pine)

    by laughingriver on Mon Mar 23, 2009 at 11:16:30 AM PDT

    •  Out of all of this, this is my question as well (1+ / 0-)
      Recommended by:
      4Freedom

      what to do with the foreign investors holding these CDS?  Can we null and void our obligations to foreign investors, and at what point does this turn from protectionist sabber-rattling to all out war?  IIRC China liked to make bets too.

      "To the corruptions of Christianity, I am indeed opposed; but not to the genuine precepts of Jesus himself." Thomas Jefferson

      by meatwad420 on Mon Mar 23, 2009 at 11:49:02 AM PDT

      [ Parent ]

      •  The swaps they hold will be canceled (1+ / 0-)
        Recommended by:
        Creosote

        when they are made whole for the underlying security.

        China bout securties that they were guaranteed safe and they even bought an insurance policy for added measure.

        The security was in fact junk and the company who sold them the insurance policy is insolvent and sold them a junk insurance policy also.

        So we'll make them whole at face value by the fed basically printing up the money and buying them out, they will in turn funnel all of those dollars right back into our budget deficit. From a macro perspective this all really amounts to a balance sheet transfer, swapping one type of security for another.

        And it simply falls on the American people as we are the ones who ran up all of this debt in order to purchase stuff from our foreign trade partners...

        What we do for ourselves dies with us, what we do for others and the world remains and is immortal. (Albert Pine)

        by laughingriver on Mon Mar 23, 2009 at 12:47:22 PM PDT

        [ Parent ]

    •  Thank you for that sane reality based (1+ / 0-)
      Recommended by:
      laughingriver

      analysis.

      •  Your welcome... (0+ / 0-)

        I think its the truth, but can you imagive the politics of something like this and the spot it puts the new administration in? I mean really, it amounts to a "hey America, you did this to yourself, now you are going to have to suck it up and pay the price for it, I imagine if they actually told that truth to the American people Obama's poll numbers would drop. Too many Americans are self absorbed indignant childres with a "want want want" mentality who refuse to take responsibility for their actions.

        And most of them go by thy name of republicans:>)

        What we do for ourselves dies with us, what we do for others and the world remains and is immortal. (Albert Pine)

        by laughingriver on Mon Mar 23, 2009 at 12:40:14 PM PDT

        [ Parent ]

    •  woof (2+ / 0-)
      Recommended by:
      Jerome a Paris, laughingriver

      right here folks. I've been saying pretty much the same shit for a couple of weeks now. everyone looking at this as purely related to US domestic politics. there is a serious blogosphere bubble at work on the issue.

      sure we can minimize some of the losses, but there is no 'reset' button & no easy answers as to how exactly all of those people / governments / institutions are going to get their money.

      Terry Gross: So, why do you have an Afro?

      ?uestlove: Because I'm secretly a Chia-pet.

      by itsbenj on Mon Mar 23, 2009 at 12:18:29 PM PDT

      [ Parent ]

  •  Telling investors their CDS payouts (3+ / 0-)

    aint worth poop is probably a hammer better dropped on their heads AFTER we get them to buy up the toxic assets, yes?

  •  I totally agree... (4+ / 0-)
    Recommended by:
    trevzb, Creosote, basquebob, JesseCW

    ...it is very unfortunate.  On HuffPo, Ariana has a good article she wrote explaining how Geithner is smart but he simply CANNOT think outside of the Wall Street Box.  He is all about Wall Street.

    She further talks about Axelrod and Geithner having had a major fight about this stuff.  Axelrod gets people...Geithner doesn't...he only gets Wall Street.

    Crap!

    "Ignorance is bliss only for the ignorant. The rest of us must suffer the consequences." --Paradise50

    by paradise50 on Mon Mar 23, 2009 at 11:18:57 AM PDT

    •  pffffft (0+ / 0-)

      Arianna (and her degree in Economics from the University of My Ass) is a big talker without much knowledge to back it up. funny, Axelrod doesn't go out to the media after "losing" this "fight" and blab and whine about it, does he? but hey, she's a smart lady, and she has digital space to fill with as many sensationalized headlines as can be fit at once, so ...

      Terry Gross: So, why do you have an Afro?

      ?uestlove: Because I'm secretly a Chia-pet.

      by itsbenj on Mon Mar 23, 2009 at 12:21:21 PM PDT

      [ Parent ]

  •  It's not a bad thing (3+ / 0-)
    Recommended by:
    trevzb, 4Freedom, JesseCW

    to the real economy but the government seems to been taken over by the banker/ wall street so called too big too fall. The threats we hear if they are not allowed to continue, ring as false as the Bushies Mushroom Cloud routine. I want my country back and have no interest in having the government being the permanent ATM to the pillaging gamblers who bet on debt and call it product. Insolvency sold to the government and then sold back to private sector seems insane. Rolling Stone has an excellent article about The Big Takeover

    http://www.rollingstone.com/...

     

     

    "And if my thought-dreams could be seen They'd probably put my head in a guillotine" Bob Dylan

    by shaharazade on Mon Mar 23, 2009 at 11:19:21 AM PDT

  •  The problems start and end with employment... (2+ / 0-)

    If I can pay my mortgage, the underlying CDS liability goes away, no?

    So the biggest problem is getting people back to work, BUT job creation takes the longest time...and that's what the name of the book on this whole Geithner plan is...PLAYING FOR TIME.

    More Truth Here: www.exiledonline.com

    by ezdidit on Mon Mar 23, 2009 at 11:26:14 AM PDT

    •  no, housing more than unemployment (1+ / 0-)
      Recommended by:
      Creosote

      This problem started back last year, when employment was still in pretty good shape, but the housing market was tanking. If your adjustable-rate mortgage is increasing, but the value of your house is decreasing, you can neither refinance nor pay your new premiums. That's the source of much of the MBS problems. The CDS thing just amplifies everything by tying companies together, so if one falls they all fall.

      car wreck : car insurance :: climate wreck : climate insurance

      by HarlanNY on Mon Mar 23, 2009 at 11:44:40 AM PDT

      [ Parent ]

      •  Unemployment has been rising for years. (5+ / 0-)
        Recommended by:
        Creosote, alizard, ezdidit, numen, Areopagitica

        I lost my job in 2007, and I'm still unemployed.

        I was a leading indicator, as industries outsourced and off-shored, and cut wages for those who were left. And it actually started in 2005, as off-shoring got really hot, and many corporations took all their jobs overseas.

        But as long as the housing market kept going up, and people making $40K could still buy a house and pretend to be real-estate tycoons, they just put their hands over their ears and went, "La la la, I can't hear you," until it all came crashing down.

        If wages and jobs had kept up, this sharp drop would not have happened.

        This Wall Street scam would have come out eventually, but it might not be hurting everyone so much if anyone had noticed 30 years ago that corporations were starting to screw their workers while dangling bright shiny 401(k) plans in front of their faces to distract them from the underhanded bullshit going on with their salaries.

        Not everyone in the country owns a house, but we all need jobs to pay the rent.

        "The difference between the right word and the almost-right word is like the difference between lightning and the lightning bug." -- Mark Twain

        by Brooke In Seattle on Mon Mar 23, 2009 at 01:02:12 PM PDT

        [ Parent ]

  •  Jerome (3+ / 0-)
    Recommended by:
    Joe Bob, apsmith, Seeds

    I agree the CDSs are the issue and that the speculative ones should just be canceled and premiums returned.

    But also aren't most swaps time limited. Don't they expire as time goes by? It is my understanding that few exceed 5 years.

    Also, isn't there anything the government could do to avoid the default event.  Say AIG wrote 5 10Million swaps on the return of a certain mortgage portfolio.  If the portfolio defaults AIG will owe 50 million.

    Why not just use government funds to stop the default and the bet doesn't pay off at all?  They'd just have to come up with the nominal income stream, no?

    •  Isn't this the idea of Geithner's Bad Ass plan? (1+ / 0-)
      Recommended by:
      Seeds

      To the extent the CDSs are linked to particular institutions, the idea is to keep as many institutions as possible from going under without nationalizing (which I would guess would also trigger the swaps).

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

      by Minerva on Mon Mar 23, 2009 at 12:06:35 PM PDT

      [ Parent ]

      •  I don't know (0+ / 0-)

        I thought CDS were more linked to whether certain institutions (in particular these shell companies that are CDOs and such) default on particular income streams payable on specific securites.

        Like whether XYZ CORP will default on its May 2015 6% bonds or whether special purpose vehicle CDO will default on its payments on XYZ mortgage security.

        There is so much we lay people don't know - sometimes I wonder if the experts know either.  They are so silent.

  •  If Route 3 is as easy and obvious (2+ / 0-)
    Recommended by:
    trevzb, ezdidit

    As the diary makes it seem--why aren't we taking it?

  •  Jerome (6+ / 0-)

    I think this plan is obscene and that it won't work. But I think you just made me realize what Geithner and Summers are trying to do.

    The CDS market is OTC, which is why it is so large nominally -- a lot of players have offsetting positions (which they accumulated in lieu of buying and selling), so if one goes down you have a cascade of bankruptcies. Let's say there are 10 T of nominal CDS liabilities. If one bank is declared insolvent, the cascade of bankruptcies is triggered, and the government has to take over all the banks involved.

    The actual value of these 10T is based on the value of the underlying assets. Let's say there are 3T of them, actually only worth 1 T at fair value. If the government buys them for 3T, all the CDSs are instantly worthless, and the 10T problem is gone.

    It won't work because even the 2T subsidy is too much for taxpayers to digest, and putting in any less than that doesn't solve the problem. If they do manage to throw enough money at it to overvalue the assets enough that the CDS problem is solved, they are doing an obscenely massive subsidy of the ruinous management of the banks and irresponsible investors. If they throw in 1.5T, to keep the numbers in this example, we have the worst of both worlds. The banks have enough cash to keep going as zombies, but still have massive liabilities on the CDS market to other players such as hedge funds, which is where the cash will go -- that is, if the government doesn't go all the way, the plan becomes a way of keeping ruinous management in place at the banks as well as an obscene subsidy to the hedge funds, while the banks stay alive but still in a zombie state, still unable to provide credit to the rest of the economy.

    •  I think you're right (0+ / 0-)

      I'm less convinced its the wrong thing to do, given other options.

      Here's some interesting speculation: It seems to me that if you play it out, the last act is the Fed buying up a couple $ trillion in US government debt - and then forgiving it.

      After which I think we end up with a bout of hyperinflation (I think they're betting that the world's "reserve currency" won't hyperinflate) and maybe a return to something like the gold standard for another century or so until people forget about the rabbit-out-of-a-hat-trick...

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

      by Minerva on Mon Mar 23, 2009 at 12:11:46 PM PDT

      [ Parent ]

    •  Uh... (0+ / 0-)

      still unable to provide credit to the rest of the economy.

      and even if they were "able" to provide this credit, would they even want to?

      "You must do what you feel is right, of course" -- Obi-Wan Kenobi, in Episode IV

      by Cassiodorus on Mon Mar 23, 2009 at 12:14:59 PM PDT

      [ Parent ]

  •  Faulty financial products should be recalled. (7+ / 0-)

    It's what we do...with drugs, consumer goods, fraud.

    That the world's financial system is predicated on liquidity to pay liability of somewhere between $23 trillion to an estimated $60 trillion is absurd.

    More Truth Here: www.exiledonline.com

    by ezdidit on Mon Mar 23, 2009 at 11:30:34 AM PDT

  •  CEO's the real vicims (2+ / 0-)
    Recommended by:
    alizard, JesseCW

    With all the attention on the people losing their homes, jobs going overseas, retirements being wiped out etc we are losing focus on the big picture. The plight of the CEO.

    Watch this video and learn what you can do if you really want to help get us out of this mess

    http://www.youtube.com/...

    In case it needs to be said "snark"

  •  It is all funny money, isn't it? (3+ / 0-)
    Recommended by:
    trillian, Minerva, JesseCW

    one that acknowledges that the issue is liabilities rather than assets, and that focuses on the fact that a lot of these liabilities are wholy unrelated to any economic or financial activity, and are contingent rather than actual - ie nobody loses anything if they are cancelled. If a 100:1 bet you made is cancelled, your actual loss is not 100, it is 1 - something that could be paid back to you.

    These liabilities have no more real actual value than does a chip from the Sands or the Tropicana Casino.

    I don't understand why no one in a position of authority has recognized that propping up the financial institutions that are based on funny money will only continue the delusion that the chips are as good as cash.

    Piffle crack eat monkey snow. Really. Leonard Pitts, Miami Herald

    by Susan Grigsby on Mon Mar 23, 2009 at 11:36:31 AM PDT

  •  Dear lord I love this DIARY!!! (1+ / 0-)
    Recommended by:
    JesseCW

    we may not agree on what the end result is of what needs to be done but at least you are knwoledgable of what you speak of...

  •  The system IS working (1+ / 0-)
    Recommended by:
    Minerva

    These emergent financial ecosystems were predicated on one thing (how ever fantastically misguided) - collapse.

    The collapse is the natural and "correct" end game or endpoint for the CDS and other derivative market schema.

    The part that doesnt make sense to me, on a purely logic basis, is why this emergent system was so immensely decoupled from the negative feedback of it's natural endpoint (cashing out but only because of collapse).

    Further, how is it that so many humans thought that they would be able to cashout - check out - without some semblance of functional financial system "back home".

    Americans have been socialized to swallow that wage-slavery shit.

    We dont do so well with actual slavery and the reinstatement of poor houses.

    If you kill the host, you kill yourself.

  •  The "Problem" is Capitalism (1+ / 0-)
    Recommended by:
    jennylind

    Imagine how many small businesses we could have if interest were capped at 5%.

    "Seeing every side of the argument causes paralysis." - (paraphrased - Abbie Hoffman).

    by angry liberaltarian on Mon Mar 23, 2009 at 11:40:43 AM PDT

    •  Depends on way too many factors (0+ / 0-)

      those with money need incentive to lend money...5% in bad times is one thing but may not be worth it in other instances.

      •  Because without incentives (0+ / 0-)

        by which you mean obscene profits, then there won't be any lending.

        These incentives, which is a nice way of saying let these assholes be as greedy as they want, fuck them. These incentives have led us to this fucking mess. These incentives are not positive things. These incentives are not incentives to do what's best for society but is best for greedy individuals.

        Predatory capitalism needs to die, and one way to kill it is to kill these incentives.

        In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

        by Areopagitica on Mon Mar 23, 2009 at 01:15:08 PM PDT

        [ Parent ]

    •  5% cap != a solution (0+ / 0-)

      Because it still assumes indiscriminate exponential growth:

      Are Humans Smarter Than Yeast?

      "The most significant difference between now and a decade ago is the ... rapid erosion of spare capacities at critical segments of energy chains." Cheney, 2001

      by Akonitum on Mon Mar 23, 2009 at 01:55:59 PM PDT

      [ Parent ]

  •  still missing the real problem (5+ / 0-)

    still missing the real problem, the real problem is ... why did people/institutions default on the debt in the first place?

    the bubble is deflating and it still is.  Our middle class jobs are still gone, our healthcare system is still broken and still crippling citizens and the fewer and fewer business who pay for it.

    Bullshit wars are still raging, our militry is still deployed all the hell over the place.  The pentagon still takes too much money, our education system is still broken, we still have the largest seperation of wealth in our history, and on and on and on..

    WTF,  we are fixing nothing here.  We are throwing money and proping up a corrupt banking system, this? THIS is our plan?

    (regarding the bank mess) They want to cure the patient but not deal with the disease.

    by dark daze on Mon Mar 23, 2009 at 11:41:52 AM PDT

    •  I Don't Think That's True Though (2+ / 0-)
      Recommended by:
      nitetalker, andydoubtless

      Recessions happen.  AIG was insuring hundreds of billions of dollars worth of CDSs that all had the potential get called at once with ONE failure.  The CDS market is almost completely unregulated AND completely opaque.  We've had recessions before, we've had inflation before, we've had high unemployment before.  We've had major, stable companies go out of business before.  What we haven't had before is a market (the CDS market) which was offering to pay everybody a billion dollars if anything bad ever happened in the economy.  So the first time something seriously bad happens (Lehman Brothers) you get 200 hundred poeple saying, "Where's my billion dollars?"

      So I don't think "Why did people default on debt," IS the actual problem, because throughout history people have defaulted on plenty of debt.  There just wasn't a magic powerball lottery CDS market in place to capitalize on it before.

      If spittle & tooth=vigor & youth Bill-O & Savage won't grow any older If wishes & dreams=bitches & beams We'll all live in skyscrapers bu

      by TooFolkGR on Mon Mar 23, 2009 at 11:48:38 AM PDT

      [ Parent ]

    •  That IS NOT the real problem (1+ / 0-)
      Recommended by:
      Jerome a Paris

      the real problem is ... why did people/institutions default on the debt in the first place?

      NO, that is NOT the problem.
      The problem is moral hazard.  The problem is undisclosed bets on whether somebody ELSE'S house
      would burn down.  The problem is all the speculating and default swaps that went on around WHETHER that bubble would or wouldn't burst.  SOME people have already been PAID OFF HUGE for betting that it would burst.  The question now is basically whether THE REST of them will or won't be paid off.

      The amount of "default in the first place" -- on the underlying mortgage assets -- is only around 10% of the value of the derivatives.

      The road to hell has not YET been paved with Republicans, but it SHOULD be -- Corrected BumperSticker

      by ge0rge on Mon Mar 23, 2009 at 12:28:47 PM PDT

      [ Parent ]

  •  What? (4+ / 0-)
    Recommended by:
    trillian, HarlanNY, 4Freedom, Irixsh

    The Geithner plan is yet another attempt to relieve banks of their toxic assets - all the irresponsible loans they made, willfully or not, to clients that will not be paying them back.

    Is this accurate?  My understanding was that the toxic assets are securities that were purchased from OTHER banks who made irresponsbile loans.  If all we were talking about is individual loans and they were still owned by the same banks that made them, we wouldn't have any confusion about valuation and there would be no controversy about renegotiating problem mortgages.  The toxic assets are bundled securities that have been packaged, repackaged, and resold any number of times from / to any number of institutions.  In fact I think that's the whole source of the problem.  If this were just a matter of one or two irresponsible banks who had any number of bad loans on their books, there would be less pain with letting them fail.

    The whole reason they're "toxic" is because at some point they were repackaged, given a phony-baloney "rating" (AAA+++) regardless of their actual value, and then purchased.

    If spittle & tooth=vigor & youth Bill-O & Savage won't grow any older If wishes & dreams=bitches & beams We'll all live in skyscrapers bu

    by TooFolkGR on Mon Mar 23, 2009 at 11:42:39 AM PDT

    •  The hilarious thing is (1+ / 0-)
      Recommended by:
      Creosote

      that some of the banks that made these crappy loans sold them because they thought they could make MORE money by owning CDOs/securities that invested in the crappy mortgages they (and others like them) just sold.  All while the fourteen various middlemen got their cut.

      Mindboggling

    •  Toxic assets are derivatives, nothing more or (0+ / 0-)

      less. They are the deregulated financial market specialties that have burned the world financial markets, with a malignant trickle-down effect on the rest of us.

      My small business feels like it has taken on a little toxin these days.

      The players have made their billions and run. How their messy leavings are to be dealt with is yet to be determined.

      Ideas are more powerful than guns. We would not let our enemies have guns, why should we let them have ideas. ~ Stalin

      by 4Freedom on Mon Mar 23, 2009 at 02:21:17 PM PDT

      [ Parent ]

  •  And bam...there it is. (4+ / 0-)

    ...option No. 3, the one nobody will consider. Why?

    Hedge Funds don't have enough money? Who stands to lose there?

    This is the elephant in the room. Thank you for saying it.

  •  Your numbers are right on Jerome, (3+ / 0-)
    Recommended by:
    slinkerwink, JesseCW, Areopagitica

    Bill Gross stated the 2 to 3 trillon dollar number on CNBC this morning commenting that he wanted a BIGGER number for the bank bailout. This is nothing but insanity!

  •  Isn't it fraud to sell a contract you can't do? (2+ / 0-)
    Recommended by:
    Jerome a Paris, TL Eclipse

    "So lots of financial players started taking those huge bets on supposedly unlikely things happening - with commitments to pay huge amounts should these things actually happen."

    I can see that AIG could make gobs of money as long as things didn't systemically fail, but since that is the only true existential threat to the company, it seems negligent to not try to foresee it and protect against it.  My dad used to say "he who sells what isn't his'n, must deliver or go to prison".

    The big banks and insurers don't deserve to be "to big to fail", but they do deserve to be investigated, fined, and jailed like Madoff for the willfully negligent fraud that they've perpetrated on us.

  •  Betting on John McCain (0+ / 0-)

    It seems to me that the banking industry was betting on John WcCain inheriting the crisis from Bush. What would Treasury Secretary Phil Gramm have done? How is this different from that?

    "When the going gets weird, the weird turn pro." - HST

    by DocGonzo on Mon Mar 23, 2009 at 11:53:20 AM PDT

  •  I'm so happy the admin. is not taking cues from (2+ / 0-)
    Recommended by:
    Seeds, Irixsh

    you folks. lol

    We'd all be screwed if they did.

  •  All those Indian PhD Statisticians flummoxed. (0+ / 0-)
  •  Key pieces of missing information (8+ / 0-)

    There are a bunch of pieces of information missing to really evaluate Jerome's claim that the new plan is focused on the wrong things.

    First, what events exactly are all these CDSs tied to?  What fraction cover particular instruments, and what fraction really cover the solvency of particular institutions?

    Second, what triggers the swap obligations, and what invalidates the contracts?

    For example, does the failure (or nationalization?) of 10 banks suddenly increase "gross exposure" across the system by $6 trillion?

    On the other hand, if CDOs with linked CDSs get sold, do the CDSs still apply, or are they voided with the change in ownership?

    The vast majority of these liabilities seem to be conditional - and there is very little transparent information on what conditions trigger them.

    Its entirely plausible to me that one of the drivers of Obama shying away from nationalization may be to avoid triggering conditions that would make large volumes of these bogus liabilities real.

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

    by Minerva on Mon Mar 23, 2009 at 12:00:15 PM PDT

    •  Thats exactly what I was going to say about this (0+ / 0-)

      diary.

      He seems to indicate that there is a HUGE amount of systemically risky assets that these banks are on the hook for, much as AIG is. AIG issued insurance made any asset immediately AAA rated, because of AIG's AAA rating. As AIG began to falter, those oblicgations increased because of the decline in ratings. When AIG went to BBB, its obligations became HUGE.

      Is that the same case with these unamed banks? I want to know what information he is privy to that isn't apparently linked in this diary.

      With him from the beginning, with him until the end.

      by brooklynbadboy on Mon Mar 23, 2009 at 12:31:59 PM PDT

      [ Parent ]

    •  Ah, yes. Thank goodness we have transparency. nt (0+ / 0-)

      "The most significant difference between now and a decade ago is the ... rapid erosion of spare capacities at critical segments of energy chains." Cheney, 2001

      by Akonitum on Mon Mar 23, 2009 at 01:59:06 PM PDT

      [ Parent ]

  •  I wish folks out here knew what they are talking (3+ / 0-)
    Recommended by:
    Mas Gaviota, Irixsh, MoshebenAvraham

    about. It is amazing sometimes how people just post nonsense for the sake of just posting a comment.

    The bottom line is:

    1. the government is as far away from managing these banks
    1. the government does not have the skill set and experience to run all of these banks operation
    1. with this plan the risk is a shared risk with the private sector and the return is also a shared return.
    1. Credit will flow and business will ones again hire, reducing unemployment.
    1. Housing market will show a significant upward improvement
    1. I will take that chance of tackling inflation that may be caused because of this plan later in a year or so and have my stable economy back now.
    1. The DOW is already loving it as the market is almost up 400 point just today.
    1. Krugman is a fucking idiot who has no solution or sound plan. An overrated SOB he is!
    •  I, for one, rely on your psychic powers (nt) (0+ / 0-)
    •  a reply (4+ / 0-)
      1. it seems the banks are pretty far away from managing themselves as well
      1. again it seems the banksters also lack the skills to run their businesses profitability (though it seems they're good at accounting chicanery)
      1. The taxpayers have 97% of the risk compared to 3% for private investors. Sounds like the Treasury is trying to minimize the risk as much as possible.
      1. Hmmm how we get from the Geithner plan to this certainty is beyond me and most economists considering, as this diary points out, the depth of liabilities for these banks.
      1. HA HA HA HA. I got this bridge in brooklyn I would like to sell you. The housing prices are going to continue to drop for some time, as we haven't begun a second round of foreclosures due to rate re-sets. And the general oversupply of housing.
      1. The market loves a free lunch, which this plan is for them.
      1. Krugman is not the only economist out there who hates this plan, and he has mentioned other options (options you dismiss with your first two points). But name-calling always shows a real intellectual depth to one's thinking.

      Maybe you should consider your nonsense before you post as well.

      In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

      by Areopagitica on Mon Mar 23, 2009 at 01:05:25 PM PDT

      [ Parent ]

      •  Mr. You Know It All...do you know how much CDSs (1+ / 0-)
        Recommended by:
        Mas Gaviota

        will cost us if we Nationalize? Read Bad Bank or Nationalization: What will CDSs Cost Us? This should get you off your high horse.

        What will happen to the CDS portfolios of these behemoths if we nationalize them? Are we going to wind up paying off on some part of these bets? This is from Morgenson’s article:

           While the amount of credit insurance outstanding is around $30 trillion, Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., says he believes fully half that amount isn’t problematic because it consists of winning and losing stakes that offset each other.

           But that still leaves $15 trillion worth of contracts that may be in need of triage.

        Tell me where you plan on getting this $15 trillion!! Please don't cloud your judgment based on what you want rather be factually reasonable in taking in consideration all the factors including the political effects to the administration. We all support Obama and there are a lot of agenda's we need to tackle without crippling the Administration's hand.

        •  That number is still too high (0+ / 0-)

          See the example here.  In that example, the 'total' notional was 200 MM but actual loss (money changing hands) was only 50MM (1/4th).

          Throwing around the 30 trillion number is totally meaningless.

          Secondly, there have been arguments floated that the government takeover would be a 'change of control' so, the CDS's have to be settled immediately. Again, that is not true, as we saw when JPM took over Bear and BofA too over Merrill.  They took Bear and Merrill's CDS contracts with them.

        •  Declare the CDS market illegal (2+ / 0-)
          Recommended by:
          Creosote, keikekaze

          and all CDS contracts null and void. The bookies for the bets pay the back the money put up for the bets (if any money was put up).

          I think this should not just come from us but out of the G20 as well.

          This 'problem' is a bullshit problem, one that the US govt made illegal after the Panic in 1907, and which was undone by the Commodity Futures Modernization Act.

          These contracts are betting slips.

          In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

          by Areopagitica on Mon Mar 23, 2009 at 02:08:41 PM PDT

          [ Parent ]

        •  And again (1+ / 0-)
          Recommended by:
          keikekaze

          with the name calling?

          In every cry of every man, In every infant's cry of fear, In every voice, in every ban, The mind-forged manacles I hear

          by Areopagitica on Mon Mar 23, 2009 at 02:10:38 PM PDT

          [ Parent ]

    •  Awesome!! nt (0+ / 0-)

      If you see mistakes in this post, it's because my editor's on vacation. Sorry.

      by TKinVT on Mon Mar 23, 2009 at 01:15:02 PM PDT

      [ Parent ]

  •  I admit to being an ignoramous when it comes to (1+ / 0-)
    Recommended by:
    TL Eclipse

    the economy.

    My hell is just having to sit back, and hope that I voted for someone that will actually do the right thing.

    I'm not going to sit and pretend that I know what is a good idea, and what isn't, because frankly I'm out of my league when it comes to this whole mess.

    I just really hope Obama knows more than me.  If not, we're fucked.  

    McCain * Palin 08 - A Bridge To Nowhere!

    by Beelzebud on Mon Mar 23, 2009 at 12:02:51 PM PDT

  •  ooh, door #3, door #3 (4+ / 0-)
    Recommended by:
    TJ, Creosote, alizard, JesseCW

    When contract law is destroying our economy, we are perfectly within our rights to render parts of the contracts unenforceable.

    For those of you bailout defenders who say that's not fair or can't work, this risk is so real that it has its own name. It's called legislative risk. Every investor assumes this risk anytime they buy assets.

  •  First... (3+ / 0-)
    Recommended by:
    Jerome a Paris, JesseCW, Areopagitica

    Let's wipe out the stockholders and bondholders of the companies that made the losing bets. That IS supposed to be part of the risk of being a stockholder or bondholder in a public company, after all.

  •  So then the AIG bailout is the economic (4+ / 0-)
    Recommended by:
    Jerome a Paris, Creosote, alizard, JesseCW

    equivalent of the US being attacked by Al Qaeda and then taking revenge by invading Iraq. We're not solving the problem, but certain people on and near Wall Street are using the continuing existance of the problem for furthering their own personal interests.

  •  I still don't know (3+ / 0-)
    Recommended by:
    Jerome a Paris, JesseCW, abraxas

    why dealing with the bank liability problem is going to solve the fundamental economic problem, which is to say that too many people are either 1) too poor or 2) too much of a credit risk for a continuation of massive bank loaning to "save the economy."  What am I missing here?

    "You must do what you feel is right, of course" -- Obi-Wan Kenobi, in Episode IV

    by Cassiodorus on Mon Mar 23, 2009 at 12:11:56 PM PDT

  •  So at what point (2+ / 0-)
    Recommended by:
    ThisIsMyTime, The Creator

    are you just simply repeating yourself endlessly?

    I'm just curious because this doesn't seem much different then you last couple diaries that all were about the same thing; namely you think you're right and we're all screwed unless we do exactly as you say.

    •  oh...thank you! that was exactly what I was (1+ / 0-)
      Recommended by:
      drache

      thinking! Further, the diarist appears to have an agenda not to mention such a pessimistic view worse than Krugman. He continues to argue one dimension of the possible fall out without comprehending the trickle down effect the Administration plan is trying to tackle with as little risk as possible.

      Get a clue diarist, the DOW is loving the plan at 400+ point for the day.

  •  It's nice to know (3+ / 0-)
    Recommended by:
    TomP, JesseCW, Areopagitica

    that our entire financial system is at the mercy of ethereal wagers.

    Fucking awesome.

    In 1993, NO Republicans voted for the most successful economic program in history. NOT ONE. Wrong then, wrong now.

    by The Creator on Mon Mar 23, 2009 at 12:16:04 PM PDT

  •  None of this really matters (4+ / 0-)

    to people who have lost their jobs, then their homes, then their monetary assets.

    And none of it will be fixed until there are jobs again in this country.

    Corporate America seems determinedly fixated on the big-money guys and making a quick buck. And the government seems to be fixated on appeasing them as well.

    When are we going to start seeing jobs again? And I don't mean pie-in-the-sky "green" jobs, for which there aren't even enough training programs to go around, or short-term road and bridge building jobs, which will not last or will go disproportionately to young men.

    It's looking more and more like another "jobless recovery" to me. Which means Wall Street will suddenly take off while the little guy gets shafted once again.

    The jobs recovery can't be all on the backs of small businesses either, because they can't afford to pay the middle-class wages that we need to rebuild this country.

    This whole bunch of bankster shenanigans would have continued unabated for years if only they had provided enough decent jobs for people so that money would have been continually generated.

    Instead, they killed the goose that laid the golden eggs, and unless they find a new goose, we are all in trouble.

    "The difference between the right word and the almost-right word is like the difference between lightning and the lightning bug." -- Mark Twain

    by Brooke In Seattle on Mon Mar 23, 2009 at 12:17:07 PM PDT

  •  Tails they win, heads we lose. NY Times explains (7+ / 0-)
    If the mortgage pool turns bad and runs big losses, the private investors will be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.

    U.S. Details Plan to Buy Up to $1 Trillion in Risky Assets

    Information is the currency of democracy. ~ T.J.

    by CIndyCasella on Mon Mar 23, 2009 at 12:19:00 PM PDT

  •  Excellent diary, Jerome, (3+ / 0-)
    Recommended by:
    Predictor, JesseCW, Areopagitica

    as usual.

    "What we've seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed." -- Barack Obama

    by TomP on Mon Mar 23, 2009 at 12:22:00 PM PDT

  •  Barack Obama and Geitner... (0+ / 0-)

    are just puppets of Wall Street.  Lets bring wall street down.

    •  Control, not kill, Wall Street (1+ / 0-)
      Recommended by:
      sethtriggs

      "Bringing Wall Street down" takes down much of Main Street too.I think we have many here that really are more about hurting Wall Street, than solving the problem. And if any solution doesn't "hurt" Wall Street enough, then we get diaries like this one, with these type of self destructive comments.

      There are plenty of teachers,nurses, government workers,every day people etc... who are invested in Wall Street to some degree. Why on Earth would you want to hurt them or wipe them out?

      We are progressives, or at least some of us are, and we don't advocate for anything that would seriously hurt working people.

      I think we have two cross purposes going on with Jerome's latest diaries and the comments that follow. The first current is, "let's solve the problem the way the President has explained it to us" and give it time to work, and the other current is what Jerome seems to be expressing and that is any solution that doesn't hurt Wall Street right now isn't sufficient.

      The President said that this is a complex set of issues with many moving parts. I don't see that acknowledgment in Jerome's diaries on this issue. There is more than one way to attack/solve this crisis because there is more than just a crisis on Wall Street.

      No magic bullets here folks, it's going to be tough, and some things will work, some will fail. The President has made that clear time and again. But beware anyone who says he has all the answers.

      "Most people would sooner die than think; in fact, they do so." ...Bertrand Russell

      by sebastianguy99 on Mon Mar 23, 2009 at 12:59:44 PM PDT

      [ Parent ]

  •  Bank Execs Making Demands Regarding the PPIF (7+ / 0-)

    don't have a link yet, but saw on CNN's scroll bar that Zombie banks execs are stating they will NOT participate in Timmy's PPIF fund unless congress guarantees them there will be NO cap on executive pay.

    even more proof the wealthy investor class clearly see themselves as the privileged class, IMMUNE to laws of the land, even when they are accepting corporate welfare.

    what a pathetic Load.

    "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

    by Superpole on Mon Mar 23, 2009 at 12:24:50 PM PDT

  •  It's the derivatives, stupid (0+ / 0-)

    $3 trillion of "bad assets" or bad mortgages
    means nothing; the market in swaps and other derivatives IS TEN TIMES the size of the market
    in the underlying mortgages.

    The road to hell has not YET been paved with Republicans, but it SHOULD be -- Corrected BumperSticker

    by ge0rge on Mon Mar 23, 2009 at 12:26:18 PM PDT

    •  It means everything (1+ / 0-)
      Recommended by:
      Dog Chains

      If these firms can sure themselves up by losing the bad assets, the derivatives then become a moot point...

      •  they will not tolerate "losing" the bad assets (1+ / 0-)
        Recommended by:
        Losty

        they will insist on selling them at inflated (by current market standards) prices.
        TO YOU.  Sucker.
        And, no, the derivatives STILL don't become irrelevant.
        What does or doesn't get classed as a default event and who does or doesn't owe on THAT "insurance policy" STILL MATTERS A LOT to A LOT of people -- AND IT MATTERS TEN TIMES MORE, to most of them, than what happens with the underlying assets.

        The fact that the underlying assets HAVE ALREADY declined in value (and that the derivatives have as well) is a large part of what the bailout money has already gone toward.  Toward that AS OPPOSED to toward purchasing assets.

        The road to hell has not YET been paved with Republicans, but it SHOULD be -- Corrected BumperSticker

        by ge0rge on Mon Mar 23, 2009 at 12:40:18 PM PDT

        [ Parent ]

  •  Don't Bet Against O (4+ / 0-)

    He will beat you every time.  His program is showing initial signs of working, and I'll wager he makes you look bad in the end.

    •  What signs? (3+ / 0-)
      Recommended by:
      taonow, alizard, Fabian

      Financial stocks went up because investors ct the Financial Sector to get more freebies.

      Please explain how that's a sign of economic recovery.

      "Callin' it your job sure don't make it Right, but if you want me to I'll say a prayer for your soul tonight" John Mellencamp ~ Scarecrow

      by JesseCW on Mon Mar 23, 2009 at 12:39:10 PM PDT

      [ Parent ]

    •  If Obama was some kind (3+ / 0-)
      Recommended by:
      pletzs, viscerality, abraxas

      economic policy wonk who had a track record, then I could feel comfortable betting for or against him.

      He's has no track record.  He's run no races.  He's not only never placed, he's never started.  Obama is an unknown when it comes to economic and fiscal policy.

      Proud member of the Cult of Issues and Substance!

      by Fabian on Mon Mar 23, 2009 at 12:49:13 PM PDT

      [ Parent ]

      •  Uh, he made it to President (0+ / 0-)

        Whether you like the person or not, it isn't easy to become President.

        Those of us who voted for the President did so because we trusted his judgment.

        Democrats had many choices to pick from, it could've been Clinton,Kucinich had his chance. In the end, it was Obama we picked. Or at least some of us around here did.

        Now it's time to let the guy do his job. Jumping ship after two months really is weak. Jumping ship because people we like on blogs, or the op-ed pages don't like the President's plan, is especially weak.

        I know I trust my judgment and those I trust my vote. I feel fully confident that John McCain wasn't the best choice. Apparently many here at DK aren't so sure anymore, if they ever were.

        "Most people would sooner die than think; in fact, they do so." ...Bertrand Russell

        by sebastianguy99 on Mon Mar 23, 2009 at 01:07:29 PM PDT

        [ Parent ]

        •  Sure, he's POTUS. (3+ / 0-)
          Recommended by:
          pletzs, viscerality, abraxas

          So was George W. Bush.  

          Getting elected may be not be easy, but it's just the beginning....

          Proud member of the Cult of Issues and Substance!

          by Fabian on Mon Mar 23, 2009 at 01:13:54 PM PDT

          [ Parent ]

          •  Bush didn't get 70 million votes did he? (0+ / 0-)

            Bush=Obama is really dumb.

            It is a monumental challenge to run a campaign and win.

            You said:

            He's has no track record.  He's run no races.  He's not only never placed, he's never started.  Obama is an unknown when it comes to economic and fiscal policy

            I'm just answering that old Republican talking point of "he has no record". It was b.s. during the campaign, and it's certainly b.s now that he is POTUS.

            Shame on you for using Republican talking points, that could get you HR'd.

            "Most people would sooner die than think; in fact, they do so." ...Bertrand Russell

            by sebastianguy99 on Mon Mar 23, 2009 at 01:24:24 PM PDT

            [ Parent ]

            •  I'm talking economic & fiscal policy. (0+ / 0-)

              If he had been governor or even mayor, he would have been in charge of a budget.  

              Bush actually had a track record, even if it was mostly mediocrity and failure.  Yet, he still managed to get elected.  Twice.  I think that says something about our electoral system.

              Proud member of the Cult of Issues and Substance!

              by Fabian on Mon Mar 23, 2009 at 01:54:53 PM PDT

              [ Parent ]

            •  Well, let's try Obama=Clinton. (2+ / 0-)
              Recommended by:
              pletzs, Robert Davies

              Yes, it's a farcical equivalence on the whole. But on financial policy, it's not so clear. He simply hasn't yet demonstrated by action that he's not the next Clinton in these matters, and we absolutely cannot withstand another Clinton. (It goes without saying we'd be even worse off with another Bush. But given that Clinton happily signed the two acts that got the entire shitball rolling (Gramm-Leach-Bliley and Commodity Futures Modernization), I'm damn well hoping that Obama can shake off all the Clinton in his administration but quick.)

              Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

              Shirley Schmidt: A Democrat.

              by Jyrinx on Mon Mar 23, 2009 at 02:44:54 PM PDT

              [ Parent ]

              •  Clinton? I just want the economy to stabalize (0+ / 0-)

                Honestly, I don't care how they get it done...just get it done.

                I don't have some purity test and I'm not going to act as if it was Obama who got us into this mess.

                I'm sorry that Obama is left enough for some people, but he's what we got and we ride on and see what happens.

                And if the economy get's back on track, I don't care who he's "more like".

                "Most people would sooner die than think; in fact, they do so." ...Bertrand Russell

                by sebastianguy99 on Mon Mar 23, 2009 at 11:02:49 PM PDT

                [ Parent ]

                •  The whole point is (0+ / 0-)

                  that Clinton embodies the mindset that got us into this mess. And you can't solve a problem using the mindset that created it.

                  Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

                  Shirley Schmidt: A Democrat.

                  by Jyrinx on Mon Mar 23, 2009 at 11:50:35 PM PDT

                  [ Parent ]

    •  What does a good day on Wall Street mean? (5+ / 0-)
      Recommended by:
      pletzs, Creosote, alizard, Superpole, Losty

      May I suggest today's Dean Baker column?
      Here is part of it:

      Suppose Geithner announced a new program that would tax every family $10,000 dollars and give the money to Wall Street banks and hedge funds. (Any resemblance between this hypothetical program and real world programs is purely coincidental.)

      We would expect the stock of Wall Street banks and other financial sector firms to rally based on the anticipation of higher profits.

      Reporters should remember this when assessing Wall Street's response to the plan proposed by Geithner for buying bad assets from banks. The larger the subsidy, the better the news for Wall Street. It's not clear that most of the public should be happy about seeing more of their tax dollars going to Wall Street.
      *
      I'm in the market, therefore I'm glad that stocks are up today, but that says nothing about the validity of the Geithner plan. You imply that O is smart to give this fantastic leverage to the hedge funds 3/97. I think it comes from the fact that he choose Wall Streeters as financial advisers. They believe that whatever is good for Wall Street is good for the country. I don't believe that. Paul Volcker is no liberal, but I would trust him far far more than Summers & Geithner.

      Matt Taibbi's Rolling Stone article summarizes what these problems say about our political and economic system, and you might read it if you’re not willing to trust in prayer.  Financial elites own the Government and both political parties.

      What can we do about it?

      •  WE CAN'T DO ANYTHING ABOUT IT (0+ / 0-)

        my friend, UNTIL the wide-eyed dreamers here and elsewhere in the blogosphere wake up from their dream and finally face facts:

        Financial elites own the Government and both political parties.

        the fantasy landers here STILL believe there's a significant difference between the "two" political parties, in spite of the overwhelming evidence that in several major policy areas (finance being one of them) there is NO significant difference.

        until people here finally face this, we're going right down the toilet.

        "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

        by Superpole on Mon Mar 23, 2009 at 02:09:37 PM PDT

        [ Parent ]

  •  Just dismantle it all (3+ / 0-)
    Recommended by:
    maracucho, taonow, Robert Davies

    All CDS involving the, uhh uninvolved should be brought out, invalidated, and then we can start over fresh. As is this bailout is a straight up robbery of taxpayers to fund the habits of compulsive gamblers.

    "Not dead ... yet. Still have ... things to do." -Liet Kynes

    by Stranded Wind on Mon Mar 23, 2009 at 12:52:21 PM PDT

  •  The gravy train rolls into town in England.. (1+ / 0-)
    Recommended by:
    alizard
    Tomorrow in London, England (where I live) the CEO's of the leading US and European banks are meeting with Gordon Brown to discuss the way forward. This meeting will provide the agenda for the G20 meeting at the start of April, also in London.

    The G20 meeting will likely be an historic meeting, setting a course for a New World Banking Order with global regulations and restrictions, and possibly new global currencies.

    The threads are coming together. In my view a long planned "coup" is underway. I have been reading this script for the last 5 years in what many still see as tinfoil sites. (About 1 in 20 articles on Prison Planet is actually quite good, in that it can spur a new avenue of research which adds to the understanding of a wider picture.

    There are significant levels of grassroots activity going on over here, and there will be large demonstrations in London starting April 1st.
    I expect these to turn violent. I believe we are being set up over here with lots of scaremongering in the press about a "summer of riots" based on very lazy journalism, and a rather blatant agenda.

    Anyway, we shall see...

    It feels like we are on the edge of a cliff here, but most people are just being slowly pushed backwards, and haven't looked over their shoulders and seen what lies a few paces behind them.

    Is the G20 being covered much in the US mass media?

  •  Is the government propping up the assets (1+ / 0-)
    Recommended by:
    Robert Davies

    that will be used to pay the CDS liabilities?  If so, that seems like a big problem we are not being told about, making this entire "toxic assets" plan a shell game, hiding the pea from the citizenry.  

  •  Wow. Excellent. n/t (1+ / 0-)
    Recommended by:
    Robert Davies

    For Kant, humility is the attitude that the moral agent's proper perspective on himself is as a dependent and corrupt but capable and dignified rational agent.

    by MsGrin on Mon Mar 23, 2009 at 01:04:32 PM PDT

  •  Geithner: no limits on exec compensation...sigh. (3+ / 0-)
    Recommended by:
    alizard, Superpole, Robert Davies

    Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations.

    Mr. Geithner made it clear on Monday that no limits on executive compensation would be imposed on companies that invest — unless the companies are already subject to such limitations as recipients of TARP money — because the government does not want to discourage investor participation.

    U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

    Information is the currency of democracy. ~ T.J.

    by CIndyCasella on Mon Mar 23, 2009 at 01:05:20 PM PDT

    •  This is sooooooo wrong-headed (1+ / 0-)
      Recommended by:
      Robert Davies

      The time to re-adjust the inflated compensation of financial workers across the board is now.  If not now, when?

      How about a new licensing program with teeth for all these financial workers.

    •  BEENGO!! Who's In Charge Here? (2+ / 0-)
      Recommended by:
      catfood, Robert Davies

      explain to me how this works, because I am really
      struggling:

      WE the taxpayers are giving Trillions of dollars to very dumb, greedy banks/investors and we have ZERO say as to how they run their so called businesses?

      again folks, ALL of this hideousness adds up to one stark fact: John Edwards was correct. we live in TWO Americas, one America where people take responsibility for their mistakes, and an America where privileged people, the wealthy investor class, does NOT take responsibility for their mistakes, AND congress makes sure they don't have to.

      nice system, eh?

      "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

      by Superpole on Mon Mar 23, 2009 at 02:05:30 PM PDT

      [ Parent ]

      •  "You can't nice these people"- correct. (0+ / 0-)

        That's why I liked him.
        In all honesty, tho - Edwards was mixed up with the hedgers too, as it turned out, would have killed him by November if the Populist "Spreading it Around" Achilles Heel hadn't first.

        Nothing in the world is more dangerous than sincere ignorance
        and conscientious stupidity. - Martin Luther King, Jr.

        by Robert Davies on Mon Mar 23, 2009 at 07:42:00 PM PDT

        [ Parent ]

  •  Chapter 11 bankruptcy - Bebchuk structure (5+ / 0-)

    The AIG mess -- all by itself -- is a $1,600,000,000,000 fake-asset, criminally generated, artificial/synthetic plague on bank reserves.

    $1.6-trillion in balloon money. Poor little AIG FP London. All by itself.

    Bebchuk Bankruptcy provides a structured Chapter 11 to deal with this unique AIG mess.

    HERE is a summary

    Mr. Bebchuk is professor of law, economics and finance, and director of the corporate governance program at Harvard Law School.

    The opposite to amateur. Bebchuk's bankruptcy proposal limits public liability to 20% of the AIG FP losses.

    This AIG hyper-mess remains as important as it is, because Geithner knows next to nothing about bankruptcy law. Same for Paulson, Koch, Liddy, and Bernanke. Corporate governance is not their strong suit.

    Meanwhile, this new Geithner Plan moves to activate the "toxic" Mortgage Based Asset (MBA) bond market. No direct controls on the AIG FP gorilla. No Chapter 11 write-downs to push losses ahead to financial institutions.

    -- Nicey-nicey for MBA bonds.

    -- Nothing to collar the AIG FP gorilla.

    Geithner Plan puts public liability at 80% of the resulting market prices for covered "toxic" MBA bonds. If these "toxic" bonds go up, the Treasury (a.k.a., the public) doesn't make a dime of the profit.

    Surely, if Treasury taking is taking 90% of the risk, Treasury has to to get 50% of the profits. And 100% of the losses beyond the investors' pool.

    Worst part of the Geithner Plan is balloon money. That it pumps up private financial institution borrowing. Not just now. For ever. That's more of the Bush Boom balloon -- as noted by Echo:

    World central banks extracted vast quantities of forced savings from their citizens, and loaned it to the financial sector at near ZIRP to make leveraged bets. Financial sector private debt rose from 10% of GDP to 117% of GDP in the US, and Euro land was making 50 to 1 leveraged bets. Private debt for leverage cannot be allowed to grow to unsustainable levels. Private debt, especially financial sector debt, needs to be retracted to sustainable levels in an orderly fashion.

    This will leave consumers with more purchasing power, and keep total private debt at safe levels. Removing even more purchasing power from ordinary consumers (forced savings) to expand financial sector private debt even more is the wrong way to go. Stop monetizing financial sector leveraged bets. It serves no useful purpose.

    The Bebchuk Bankruptcy structure reaches in and reverses the irrational/criminal effects of that disaster -- as related to the AIG gorilla mess.

    Bebchuk Bankruptcy is also a more powerful legal tool than outright nationalization. Any contract can be nulled.

    Geithner Plan for the MBA bonds ignores the whole of the financial sector private debt problem -- as outlined in this diary -- and makes it marginally worse right off.

    Geithner can use the Bebchuk Bankruptcy structure for AIG -- so far an unlikely if-and-if -- so at least he can collar the $1,600,000,000,000 AIG gorilla.

    BTW: Krugman is off in the wilderness on this problem. Same for the pundit herd. They are technically not trained for bankruptcy.

    JdP needs the info from Bebchuk on what can be done with Chapter 11 to figure through the alternatives. Corporate governance is not exactly the strong point for economists and the finance guys.

    Droogie is as Droogie does....

    by vets74 on Mon Mar 23, 2009 at 01:09:21 PM PDT

  •  I would say stop sighing (0+ / 0-)

    cuz that sulky tone taints slightly what is a great diary.

    oh did I say, great diary?

    the greatest threat to america is its sense of exceptionalism.

    by SeanF on Mon Mar 23, 2009 at 01:17:46 PM PDT

  •  Evryone but Wall St seems to hate it.How will Fox (0+ / 0-)

    news respond.  All I know is my stock portfolio jumped 10.6% today on news of the plan.

    The only thing we have to fear is fear itself - FDR. Obama Nation. -6.13 -6.15

    by ecostar on Mon Mar 23, 2009 at 01:29:38 PM PDT

  •  regarding cancellation of 100:1 bets (0+ / 0-)

    but it is not the case (as you allude to elsewhere in your diary) that some of the counterparties are depending on getting 100 to prevent them going bankrupt themselves?

    or is the thing mostly circular, where calling "do over" and untangling the clusterf_ck will benefit all the major players as much as it costs them?

    "I don't think they're going to be any more successful in 2010 or 2012."
    -Yes On 8 co-manager

    by jethropalerobber on Mon Mar 23, 2009 at 01:38:49 PM PDT

  •  Someone has to pay. (4+ / 0-)

    No plan is going to make the toxic assets disappear, or magically be worth more.

    The only thing that can be done is shift who is going to take the loss.

    This plan shifts the loss from the banks (their shareholders and bondholders) to the taxpayers.

    Talk about a stupid plan. Talk about rewarding the incompetents that made the mess.

    Unbelievable - and from a Democratic administration at that.

    P.S. The stock market reaction tells you all you need to know - Wall Street wins. Main Street loses.

    I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

    by taonow on Mon Mar 23, 2009 at 01:45:07 PM PDT

    •  The Democratice Party Is (4+ / 0-)

      the so called democratic party is now presiding over the largest transfer of wealth from the poor to the wealthy class in world history.

      explain to me how McCain would have handled this differently?

      "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

      by Superpole on Mon Mar 23, 2009 at 02:00:13 PM PDT

      [ Parent ]

      •  It really has become merely the velocity (1+ / 0-)
        Recommended by:
        Superpole

        of maladjustment. It's a sickening REALITY. NeoConservatism is the head shot. NeoLiberalism, "Third Way", "Democrats" not worthy of the name the prolonged agony. The Party resembles NOTHING of the New Deal. Nothing. It's the truth, sad to say.

        Cheney, Bush, Rumsfeld, Gonzales, Wolfowitz, Feith, Addison, should be in jail pending trial. Libby? Gad. He could  be prosecuted still. The War Conspiracy? The Looting? They all WALKED. Why? Why are they not ALL in jail? Who controls the DOJ now?

        Nothing in the world is more dangerous than sincere ignorance
        and conscientious stupidity. - Martin Luther King, Jr.

        by Robert Davies on Mon Mar 23, 2009 at 08:01:22 PM PDT

        [ Parent ]

        •  Robert, Please ASK Your so called (0+ / 0-)

          congressional representatives.

          who's running the DOJ? what about the SEC; apparently staffed with people who think their mission statement is to aid corporations!! they "missed" the Madoff fraud?

          for years now, I've been suggesting here that 90% of incumbent democratic congresspeople be DUMPED; removed from office and replaced with actual progressives.

          no takers.

          what we have here is a congress more or less totally corrupted by corporate money, and voters who refuse to do anything about it.

          stalemate. game over. end of another "great" empire; just like the Spanish, Dutch and British empires prior to us.

          "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

          by Superpole on Tue Mar 24, 2009 at 07:58:17 AM PDT

          [ Parent ]

  •  jerome, you are wrong in a fundamental assertion (4+ / 0-)

    since you don't take the risk on Lehman anymore, you can re-use the amount you'd have normally needed to set aside for that exposure (apparently the regulators forgot to note that you took exposure on someone else instead for that amount, even if that someone else was highly rated);

    That is just not true.  Yes, you can 'reuse' that capital, but there is a very significant regulatory cost (albeit indirectly):  these contracts are marked to market thru their P & L and Income statement.

    As a consequence, there is a very real capital price that is paid - if the CDS spreads widen, then the seller of protection takes an immediate hit in their P & L and therefore in regulatory capital through the required capital models.

    AIG did not write protection because they could 're-use' capital.  In fact, their AIG FP business really has little or no capital. They wrote it because they never thought they would ahve to pay out and got caught with more than they could afford to pay.

    Taibbi put it best when he wrote that

    It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal.

    Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

    •  Thanks, cynic (0+ / 0-)

      It's nice to see someone on here who actually seems to know what he's talking about!

      •  people either forget or they dont know (0+ / 0-)

        banks were not stupid - like aig, all the derivative counterparty stuff was (is) done either thru a bankruptcy remote entity (harder to do since they needed the parent's guarantee for the rating) or as a separate subsidiary (Salomon Swapco, in the case of Citi) so they could handle the p & L away from the parent.

        Plus we give the regulators too little credit - the insurance regulators are very sharp and they stand no nonsense - CT and NY are the best, Iowa and Colorado are close behind.

        Which is why no pure insurance company is really in trouble.

  •  Still raping the unwilling taspayer (1+ / 0-)
    Recommended by:
    Robert Davies

    I get more pleasure when a random dog starts dry-humping my leg.

    My pissant life is better than the lives of most people on the planet. It's all about perspective.

    by SecondComing on Mon Mar 23, 2009 at 01:50:52 PM PDT

  •  A broken bargain amongst mortal men. (7+ / 0-)

    Think about it.

    Climate change? eh, we'll worry about it later.

    War? We've got the biggest weapons and we still can't figure out who to fire them at to make ourselves feel better and less threatened.

    And now what has the world's attention? What topic has managed to push everything off the front pages?

    Money.

    Money is nothing more than a tentative agreement about what you and I and everyone else is worth.

    We ginned up what we thought we were worth, everyone was happy while the pyramid was being built...but soon we found out that the higher the pyramid was piled there was less to go around.

    And suddenly the bargain was broken.

    The nightmare we are in right now is not only surmountable (unlike climate change or the energy crisis or food and water shortages and weather) -

    This whole goddamned, wretched, sordid, stupid fucking mess is nothing more than a planet full of people who can't shake hands and agree that we all need each other; so to save ourselves, we cut someone else loose...who, in order to save themselves, cuts someone else loose, who....

    This whole freakin merry-go-round is nothing more than a spoiled handshake.

    And amidst all the other shit that mankind truly is at the mercy of - energy sources, weather, time -

    this is the thing that pulled the legs out from underneath everyone.

    Boy, when the aliens arrive after we've fucked it all up and failed, they're never going to believe how we did it. The won't be able to grasp how fear and greed defeated the genius and ingenuity of the "smartest" species on Earth.

    George Orwell is banging on the lid of his coffin and screaming, "1984 was a cautionary tale, you dolts, not a motivational speech!"

    by snafubar on Mon Mar 23, 2009 at 01:56:48 PM PDT

    •  Exactly. Amazing. (1+ / 0-)
      Recommended by:
      snafubar

      Money is fake. It is a human invention. We can decide, right now, today, that the "toxic assets" don't exist. We can decide that the liabilities shall disappear. If the current money situation causes panic, low productivity, war, and starvation, all we have to do is ignore it.

      Unfortunately, you can't do it all by yourself. It's a collective thing. If only there were some collective force in society, some kind of entity that serves the people as directed by collective decision-making.

      Gosh, I sure wish there was some kind of institution that had that kind of power.

    •  Worthy of a diary entry (2+ / 0-)
      Recommended by:
      Creosote, Robert Davies

      You should definitely consider expanding and elaborating your thoughts in a separate diary so everyone can read.

      We may fix the financial crisis, but if we don't use this opportunity to fundamentally restructure the way the world economy works, Mother Nature will call in her loans--and when that happens, there will be no bailout from the Fed. :(

  •  Just Learned the Best Way to Read News (2+ / 0-)
    Recommended by:
    Silverbird, eddienutzak

    Whenever you read news these days just replace the word 'toxic' with 'fraudulent'. It makes for an amusing read e.g.

    http://freespeechzoneblog.com/...

  •  Thank you Jerome! (0+ / 0-)

    That is exactly what I was thinking, about just canceling all the CDS's.  Now, we just have to get CNN and the others to explain this situation correctly.  I was watching yesterday as some economic "expert" explained that the "toxic assets" are a problem because no one is paying their mortgages or their credit cards.  Graphics on the big screen and all.  I choked.  No wonder the republican meme that this is all the fault of dirty nasty poor irresponsible people is gaining so much traction.

    In fact, it's the dirty nasty RICH irresponsible people.  Greedy bastards, and damn the media for failing to explain reality (once again) to the american public.

    As long as no one understands the HUGE role of the CDS market in this, Wall Street is going to get away with the biggest heist of all time.

    "Mediocrity cannot know excellence." -- Sherlock Holmes

    by La Gitane on Mon Mar 23, 2009 at 01:59:15 PM PDT

  •  No, the real problem. . . (3+ / 0-)
    Recommended by:
    Creosote, alizard, Silverbird

    is that too much of American business has a slave owner mindset, except the slave population is more inclusive - it includes EVERYONE who has to work for a living.

    Slave Owner Mindset:  the purpose of the under(middle) classes is to work for the benefit of the upperclasses (aristocracy).

    How do I know this is true?  Because the middle class works harder and harder for less and less.

  •  Give it a chance to work (1+ / 0-)
    Recommended by:
    Seeds

    I don't know how anyone can be so sure this won't work.  Coupled with other measures such as the stimulus bill and new priorities in the budget, I think this has a real shot.

    The problem I see is that people are equating their disgust with CEO pay/bonuses with disgust on bailouts in general.  I can understand why that happens but it's wrong-headed.

    •  Give it a chance? (3+ / 0-)
      Recommended by:
      alizard, Silverbird, keikekaze

      This is the same thing Paulson proposed back in October (a bad bank to buy up assets using a reverse auction).

      Why would it magically work now that Obama is in charge?

    •  The diary can be difficult to understand (1+ / 0-)
      Recommended by:
      Creosote

      If you did you would understand that as long as Credit Default swaps are allowed to exist in the current incarnation, what was announced today won't work in anyone's lifetime or ever.

      I'm not sure why people immediately go political and assume their favorite politician is being attacked. For some people Credit Default Swaps are very easy to understand. For many people it's like a strange algebra problem. Their eyes glaze over and then the political knee jerk reaction occurs.

      Jerome has tried to put this in terms that people can understand and still it seems difficult for many to comprehend. In that way , I suppose , if we had the time , we should be patient. That in and of itself is the problem. For example lets take the "he's only been here 60 days" and using that as a way of explaining why he can't do everything at once. No one is asking him too. But we are asking him to do is to triage the problems because none of the initiatives that he brought into office will get done if we go bankrupt and the CDS market is leading us directly there at an accelerating speed.

      We don't have the luxury of time. Many people here are still relatively secure in that they haven't felt the hard bite of hunger or the thudding pain of untreated illnesses, so they suggest patience. So we get the "60 day" argument. They may feel anxious, but they have not taken a direct hit yet. The portfolio may have gone down, but they weren't planning on touching it for years? Disappointing? Yes. Emergency? No.

      Let me try one more time:  If a paramedic was called because a loved one of yours  was dying of a heart attack and they showed up 12 minutes after death with the explanation that they had just gotten a new GPS system and they hadn't figured out what colors the priorities addresses meant, would that be acceptable to you? Would you have patience for the next time with them?

      That's how serious this problem is. It's not who is getting away with what. Presumably after we stop this gushing arterial vein from from killing
      the patient we can see who the slasher was. But, if no one sees the blood pooling up and thinks that there is time to deal with it, then we have a problem that no announcement by a understaffed treasury secretary can solve.

      It's apparent the administration hasn't figured out how to triage yet. They also are still in political mode. That means that today we had a 500 point rally on an announcement that doesn't address what's killing us.

      That also means no one has even bothered to hire a driver for the ambulance much less called them,  but I promise you we are having a heart attack. We are dying. Like a heart attack, symptoms are seen by one group as indigestion. Another group calls 911.

      We are calling 911 and no one is answering and the neighbors are too worried they may have to spend $3.60 bailing someone they don't like out for their extra bathroom

      It's a long way to go , just to get to back to when it was bad.

      by Dburn on Mon Mar 23, 2009 at 07:21:57 PM PDT

      [ Parent ]

  •  Love your diaries (3+ / 0-)
    Recommended by:
    alizard, Silverbird, TL Eclipse

    and they are intersting and inciteful. But they still miss the friggin point.

    The biggest problem isn't toxic assets or banking regulation or any of the miriad of other nonsense we argue about here.

    The problem is the hyperconcentration of wealth into the hands of a very small group compounded by the creation of these investment vehicles which are nothing more than a way for these already hyper wealthy individuals to do play with other peoples money.

    The solution remains to fix the fucking tax code. Treat all income regardless of source identically. Set a nice high deductable to sheild the middle class and poor then tax the piss out of everything else.

    a heavily graduated progressive tax on all income over 250 grand culminating in 99% on every penny over a million to an individual.

    I don't even care about corporate taxes since if a company isn't paying out dividens or huge bonus's and fat paychecks to executives it will be investing that money into operations save for financial institutions that recieve bailouts which would be required to pay off those bailouts over 30 years amortized just like the fucking mortgages they sell us saps you know paying us our interest before they start widdling down the principle.

    No contracts will be broken no banks nationalized and at least we'll get a nice chunk of the interest from the asshats who escaped more direct consequences for their actions.

  •  Two classes of CDSs. (4+ / 0-)
    Recommended by:
    alizard, 3goldens, greatferm, Rumi68

    There are two classes of CDSs in play.  The first are legitimate risk-management derivatives, where either the offering party (seller) or the buyer is a party to the underlying asset.  These we probably do need to guarantee to the extent that either party plays an essential role in the financial system.

    The second are speculative, side-bet derivatives, where neither seller nor buyer are parties to the underlying asset.  Both were just betting on (or against) the parties to that asset.  These we can ignore.  By way of metaphor, a casino must guarantee its own chips, but it has no obligation to guarantee side bets.

    •  Bad analogy — (1+ / 0-)
      Recommended by:
      NCrissieB

      side bets are part of the game, and (AFAIK) are generally made using standard chips.

      </analogy-police>

      Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

      Shirley Schmidt: A Democrat.

      by Jyrinx on Mon Mar 23, 2009 at 02:46:37 PM PDT

      [ Parent ]

      •  Not that I've seen.... (1+ / 0-)
        Recommended by:
        Jyrinx

        Let's say you're at a poker table and you're bored, so you set up a side bet with someone else at the table.  If the flop has at least two black cards, you win.  If not, he wins.  You keep score on a notepad at $10 a flop.  An hour later, you're up by 4 flops and the side bet opponent says he's going home.  The dealer, pit boss, etc. have no obligation to even ask him to pay off on that side bet, let alone to pay you off on the side bet if he doesn't.  If he walks away, you don't get paid.

        •  Doesn't craps have a formal system (0+ / 0-)

          of side bets? That's what always comes to mind for me.

          Denny Crane: But if he supports a law, and then agrees to let it lapse … then that would make him …

          Shirley Schmidt: A Democrat.

          by Jyrinx on Tue Mar 24, 2009 at 10:35:42 AM PDT

          [ Parent ]

    •  A lender getting insurance on the loan... (1+ / 0-)
      Recommended by:
      NCrissieB

      ...is and always has been perfectly reasonable. If it's a one-to-one thing, and that insurance remains attached to the loan even if the loan is sold, then fine. No real problem there.

      But when CDSs started being treated like "foreclosure futures" and an unlimited number of them could be taken out on a given loan, could be taken out by entities with zero connection to the loan, the lender, or the lendee, and thus could be sold around the horn as an independent asset rather than having to stay with the loan, that's when somebody needed their ass kicked by federal regulators.

      Sadly, that ass remains unkicked to this day, even though the government is handing out billions upon billions of dollars to speculators.

      •  Exactly. (0+ / 0-)

        AIG and some other companies ended up running what amounted to a bookmaking operation, taking bets on almost anything: corporate bankruptcies, failures on investment packages, etc.  All of this was justified on the theory that the market gets useful information from the bets that are being placed.  The Pentagon used the same rationale when it planned to open a futures market for terrorist acts.  That link has a defense of the rationale, by the way.

  •  Jerome, (0+ / 0-)

    I was watching C-span yesterday and saw an author
    name David C. Korten. He has written a at least 3 books on what a new economy might look like and how
    it might be achived. I got his book called "The Post- Corporate World" today and am just starting to read it.

    Do You know of His work and if so what are Your thoughts?

    "Where are We going, why is it so hot, and what am I doing in this handbasket"

    by vzfk3s on Mon Mar 23, 2009 at 02:28:05 PM PDT

  •  When do we get around to (1+ / 0-)
    Recommended by:
    Creosote

    passing some laws that will protect our to be saved financial structure from being exploited by the greedy again?  I don't consider this to be an accident.  These financial problems were anticipated and no doubt welcome by the high ups.

    ...do the elites...actually believe that society can be destroyed by anyone except those who lead them? - John Ralston Saul -

    by Silverbird on Mon Mar 23, 2009 at 02:29:39 PM PDT

  •  Amazing to me (2+ / 0-)
    Recommended by:
    alizard, Losty

    Obama proposes a modest plan to relieve homeowners under water... and the media erupts in fury. CNBC goes nuts about "people being rewarded for bad decisions" and a loser gets his 15 minutes after a staged rant and some astroturf campaigns.

    Geithner proposes a plan to relieve banks of their garbage for more or less full price... essentially rewarding their bad decisions... and the stock market goes crazy! CNBC loves it! THE MARKET the almighty fucking market is back on track so it must be a good decision! Awesome!

    So sad... I'm so sick of this shit... is there another way around this? Not in the year 2009 with an entrenched right wing establishment and mode of thinking... maybe if this was 1949 or 1959 or 1969 or even 1979 the Right Thing could've been done and these stupid banks would just be nationalized already... so let me just say... I hope this works, and I hope Obama can implement his healthcare agenda and other things.

  •  Place your bets ladies and gents, place your bets (1+ / 0-)
    Recommended by:
    TL Eclipse

    Can we get a betting pool here?

    My money's on the Obama-Geithner horse because...oh just cuz.

    Cuz if I lose this bet...well...I won't have the cash to pay out anyway. AHHH HA HA HA HA HA HA HA HAAAA

    Come sail your ships around me. And burn your bridges down.

    by Muskegon Critic on Mon Mar 23, 2009 at 02:34:28 PM PDT

  •  Anyone who types the word "sigh".... (3+ / 0-)
    Recommended by:
    oldcurmudgeon, seanwright, josebrwn

    ...isn't anyone worthy of taking seriously.

    Jerome is again our Kossack Minister of Alarmist Rhetoric.

  •  And Obama shows his true colors again (1+ / 0-)
    Recommended by:
    Superpole

    Well one good thing comes out of this latest trillions for billionaires deal.

    At least this makes Obama's priorities crystal clear.

    We already knew that it is more important to him to protect the war criminals and traitors from the Bush junta than it is to protect human rights and the US Constitution.

    Now he has shown his hand with regard to greedy billionaires by proving that he is more interested in protecting the fortunes of fat-cat billionaire banksters than the US economy or US taxpayers.

    Next up; Getting the US Senate to kill the EFCA and after that the big enchilada, ending Social Security as we know it.

    Tell me again why I need to vote Democratic.....

    •  **audible eye roll** (0+ / 0-)

      Come sail your ships around me. And burn your bridges down.

      by Muskegon Critic on Mon Mar 23, 2009 at 02:44:47 PM PDT

      [ Parent ]

    •  sorry...that was rude. What I mean is (0+ / 0-)

      I respectfully disagree.

      Come sail your ships around me. And burn your bridges down.

      by Muskegon Critic on Mon Mar 23, 2009 at 02:53:48 PM PDT

      [ Parent ]

      •  Disagree with what? (0+ / 0-)

        Did I miss the torture indictments Obama/Holder have issued against Dick Cheney and George Bush. I have seen them on my tv machine admitting to authorizing  torture, er I mean enhanced interogation techniques. Investigations aren't necessary. No indictment/prosecution of torture = support of torture. Next.

        The Obama/Geithner plan IS the Paulson plan with the exception being that instead of taxpayers buying all the toxic garbage outright we will "lend" the very people who got us into this mess 97% of the money to buy it and if they choose to walk away all the taxpayer gets is the toxic garbage. Big fucking difference there huh bud? Next.

        OK, I admit I have to wait and see on the rest. But I would have no problem betting a hundred bucks the EFCA will NEVER pass Congress, but more importantly the "Democrats" that vote against it will never, ever pay ANY price at all for voting against The Democratic leadership.

        And with the government in default, and that was always the plan, they will finally be able to kill off SS.

        So again, you respectfully disagree with what?

        •  Of course you know that (0+ / 0-)

          the first two things require patience.

          As for the EFCA, that's not something to bash Obama about. He's endorsing it.

          And nobody is going to kill off Social Security.

          Come sail your ships around me. And burn your bridges down.

          by Muskegon Critic on Mon Mar 23, 2009 at 03:29:39 PM PDT

          [ Parent ]

  •  FIRE Geithner - HIRE Spitzer (1+ / 0-)
    Recommended by:
    Creosote

    let's get a non-Wall St. insider as Secretary of the Treasury.

    it's more than a bit disturbing Obama didn't think of this in the first place.

    http://www.tnr.com/...

    "The most dangerous thing in any economic crisis is denial". Simon Johnson, MIT

    by Superpole on Mon Mar 23, 2009 at 02:38:05 PM PDT

  •  got a question for you (3+ / 0-)
    Recommended by:
    Dburn, alizard, eddienutzak

    If the corporate charters of these institutions are revoked, then what happens to their contracted obligations?

    Mind you, I'm not talking about bankruptcy or regulatory receivership, I'm talking about charter revocation, as in the state attorney general revokes the charters and appoints trustees to oversee the organization until it can be re-chartered.

    My guess? All the "funny money" and obligations to pay real money for it disappears.

    What do you think? Contractual obligations for corporations that don't exist anymore? Or do the contractual obligations cease to exist, too?

    As I commented elsewhere, 62 trillion dollars in derivatives didn't exist 15 years ago, and IMO, it never did exist and doesn't exist now.

    Unregulated bets? That's GAMBLING, not banking, not "financial services."

    An unregulated gambling operation that these crooks are representing as legitimate securities trading? Hmmm. Racketeering, fraud, counterfeiting...multiply each offense for each dollar of funny money. Lock 'em up and throw away the key.

    You see, I don't think there is a such thing as "unregulated." If you are doing something "unregulated" with billions of dollars, then there is a name for that: CRIME.

    I don't think CRIMINALS are "unregulated traders" because they have nice suits. I'll get them a different suit. Plain. Orange.

    •  Repudiation of the swap/liability/contract (4+ / 0-)
      Recommended by:
      Creosote, alizard, taraka das, livy

      See what happened in England in the Gibson Greetings/BTSC swap deal. That was where a company got on the hook for a huge amount way beyond the value of any of the originally agreed upon deal.

      In 1998, their (Gibson's)looked at Bankers and noticed the flaw in the demand of payment for the "traded" asset: they then decided being unregulated and ultimately beyond oversight it was also possible to defy the threat of not honoring agreement, the downside to the company was so much greater (than trying to pay the multimillion dollar demand) and therefore: Risk one:renege, repudiate

      or, Risk two attempt to pay and go bankrupt.
      Remember  the bank had done a successful swap for modest fees the year before, and the idea the swap
      settlement was suddenly charged up into a demand for many millions on market activity was a threat
      to have its company liqidate itself
      in real world terms.

       That was 1998.  The banks quietly formed a pool and kept the swap system afloat, absorbed the cost.

      Now we have something thousands of times larger that imperils the entire economy, not just a corporation here or there.

      Paul Craig Roberts wrote a piece in February's CounterPunch on the threat and destruction theae things in the many trillions have caused.

      He, a former Treasury Secretary in the Reagan administration states simply: Repudiate it them, bring the bet down to manageable levels and make the gamblers take back the risk even if it costs many of them their businesses.

      Simply paying off the dealers and holders full value on their gamble is quixotic and props up the toxic bubble that is enshrined instead of being swept away.

      cast away illusions, prepare for struggle

      by Pete Rock on Mon Mar 23, 2009 at 03:33:59 PM PDT

      [ Parent ]

      •  take the matches away from the children (0+ / 0-)

        I don't see this as the end of the financial system.

        It's the end of the smarty-pantses who think they're going to take us for trillions of dollars for years to come.

        Let Geithner and Bernanhnke load these institutions up with cash. When we take them over, we'll repudiate the derivatives and put the money to good use.

      •  thanks for bringing PCR up. (0+ / 0-)

        He seems to have a good handle on this crisis, and to be worth a read.

      •  Unless it's stipulated they pay the taxpayers (0+ / 0-)

        back, which is gonna be impossible,unless they continue down with some new scam.

        "The perpetrators must be on the winning side, and never subject to prosecution for anything-by anyone. THAT is a coup d'etat".

        by eddienutzak on Mon Mar 23, 2009 at 05:29:30 PM PDT

        [ Parent ]

  •  Where do you get your info? (0+ / 0-)

    You've said it's a liability problem, not an asset problem. But how do you know this? Who wrote the CDSs? In whose SEC filings can we find details? Don't the banks have to disclose these liabilities in their footnotes? You haven't really supported your thesis with evidence.

  •  Why no MASSIVE ORGANIZING against Geithner? (2+ / 0-)
    Recommended by:
    eddienutzak, polar bear

    I don't understand when there is this much information out there, and we have people like Krugman (who are as "mainstream" as they come), there is not a massive organizing effort to stop Geithner and convince Obama, via the "roots" (as they are so anachronistically called), that this is a mistake and/or that we will not forget it if he goes down this road? It's time for people to put up or shut up. We need to flex muscle on this. NOW.

    •  Maybe its because of liberals like me ... (1+ / 0-)
      Recommended by:
      edwardssl

      who are inclined to give Obama and Geithner a chance.  I don't for 1 second buy into this bullshit about how Obama is either in the pocket of big finance or too stupid to understand what is going on.  

      There would be a lot of major consequences if the largest American banks simply defaulted on trillions in financial obligations.  I think Obama's people understand the problem better than most of the commentators and are acting based upon the following priorities: 1) putting the U.S. on a footing for long-term prosperity; and 2) sparing U.S. citizens as much pain as possible in the short-term.  

      I say too many cooks spoil the soup.  Give the Geithner plan a shot.

      I've waited too long for a President and congress like the one we have and I refuse to join the circular firing squad.  All of this cynical bullshit isn't going to get us anything accept another GWB or RR.

      •  Wrong (2+ / 0-)
        Recommended by:
        Creosote, alizard

        The Geither plan is not manifestly different from the idea of using TARP funds buying bad assets directly or the bad bank ideas.  All of these amount to socializing the losses and privatizing the profits.  No one needs to wait around giving this turkey a chance!

    •  more we yell, more stubborn he gets, imo. nt (0+ / 0-)
  •  snaufbar, (0+ / 0-)

    Yep! That is the reason none have came, they don't need our bullshit.

    "Where are We going, why is it so hot, and what am I doing in this handbasket"

    by vzfk3s on Mon Mar 23, 2009 at 02:56:54 PM PDT

  •  week to week (0+ / 0-)

    my job is teetering on being lost.  so from my perspective, if my job is saved in the process of digging the way out of this meltdown, then geithner's plan worked pretty good for me.  the day i lose my job, though, i will be onboard with some serious whining about geithner's idiotic plan.

    Go ahead...make my millennium. ~Betelgeuse

    by TL Eclipse on Mon Mar 23, 2009 at 03:25:49 PM PDT

  •  That's what I'm on about (3+ / 0-)
    Recommended by:
    Creosote, eddienutzak, polar bear

    This, exactly. This is what I've been thinking about recently.

    Why are we going to reify "assets" (CDSs) that aren't really assets and never had any value to begin with? Somebody makes a bet with $1 billion of Monopoly money and then, to prevent them from having to write down the "loss", we decide to actually give them a billion dollars.

    Your last point, that a 100:1 bet, if cancelled, means a loss of just 1, not 100, needs to be hammered home over and over again.

    I've also been wondering if some of these guys have insured themselves in a round robin fashion, perhaps without even knowing it, because the CDS market was completely unregulated, and only the counterparties know about individual agreements.

    If A has agreed to bail out B for $1B, and B has agreed to bail out C, and C is covering D, and D is covering E, and ..., and Z is covering A....

    Then all the obligations could be canceled simultaneously with no effect on anyone.

    But does anyone have the kind of God's-eye-view necessary to see that we're in such a situation? Maybe there needs to be a registry run by the government(s), and all these players would have to register their CDSs. Any that were not registered in, say, 180 days, would be null and void.

    Then, someone could plot the graph of who is insuring whom, who is betting on whom, and try to sort it out.

    We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.

    by dconrad on Mon Mar 23, 2009 at 03:29:13 PM PDT

  •  Sigh about sighs (1+ / 0-)
    Recommended by:
    seanwright

    Just in passing. Am I the only one who hates the arrogance of the use of "sigh" in postings.

    Unless I am very stupid it means "how can anyone be so stupid as to disagree with me?" or "Do I really have to waste my energy in stating how blindingy obviously true my opinions are?"

    Nothing to do do with the rights or wrongs of this particular post just a general comment.

    "Sigh, are you really that arrogant?"

    •  Maybe if you take a moment (1+ / 0-)
      Recommended by:
      Creosote

      to read Jerome's diary from yesterday, you'll see why the "sigh" is appropriate in this case.  Just a suggestion.

      "The true measure of a man is how he treats someone who can do him absolutely no good." --Samuel Johnson

      by joanneleon on Mon Mar 23, 2009 at 04:40:18 PM PDT

      [ Parent ]

  •  Madoff: $19 billion not $65 billion (3+ / 0-)
    Recommended by:
    Creosote, pat bunny, eddienutzak

    The actual money lost in the Madoff ponzi scheme was about $19 billion- the rest is just the paper lies that Madoff promised to his suckers.

    The CDS scam is a little like that, except that instead of 1:3, the ratio of real money invested to fake losses is 1:100 or more.

    Time to take Jerome's Option 3- write off the liabilities and let the hedge funds go under- they are parasites on the system.

    Time to go back to actual banks that work to help US citizens instead of working to blow up huge bubble salaries for themselves.

  •  How many times will we pay for the toxic assets? (0+ / 0-)
  •  How many times will we pay for the toxic assets? (1+ / 0-)
    Recommended by:
    joanneleon

    It's an excellent question, and I'm totally confused.
    (trying to post again)
    I've heard both Jon Stewart and Keith Olbermann wonder on the air if we aren't paying twice: once for the bad mortgage, and once for the CDS?

    I have to wonder what the Geithner plan covers.

    It's my understanding that the banks don't hold mortgages, but sell them on the secondary market where they are bundled and securitized to create mortgage backed securities (MBS).  These MBS were sold to Wall Street where they were resold to investors around the world.  At various points in the process, CDS were issued to guarantee the MBS.  As underwriting standards dropped, nmortgages began defaulting, and the market for MBS dried-up.

    So, does this cover mortgages that the banks hold and can't securitize?  Or does it cover MBS that are in danger due to defaulting mortgages?  

    What about the CDS?  How many times do we have to pay for a defaulted mortgage?  

    Does anyone understand this well enough to 'splain it to me?

    •  Look at it this way (0+ / 0-)

      If the horse pays $90 to win or 90-1. The track has to pay 90 dollars to each better who bet on that particular one horse no matter how many bets.

      That in a nut shell is how you take a controllable problem and turn it into a financial Armageddon. Directly? He's agreed to pay the $90 off to all comers

      It's a long way to go , just to get to back to when it was bad.

      by Dburn on Mon Mar 23, 2009 at 07:37:37 PM PDT

      [ Parent ]

      •  Oh, I get the general concept. (1+ / 0-)
        Recommended by:
        Dburn

        That's what made the unregulated credit default swap the financial "instrument of mass destruction".  

        But I want to know some particulars.  How many times have taxpayers paid for any given foreclosed property?  

        Presumably the money that's been given to AIG has been going to make-good CDS related to mortgages that have already defaulted, and the programs in place will help control further foreclosures.  

        And another question, Geithner talks about assets held by banks ... mortgages aren't held by banks.  They're sold on the secondary mortgage market.  I got my mortgage through a bank, but Fannie Mae now owns it.  So why are is Geithner talking about bank assets?

        •  Let me see if I can answer (0+ / 0-)

          How many times have taxpayers paid for any given foreclosed property?

          There isn't any limit. Lets take the aggregate total paid to Goldman Sachs of 12.7 billion and they still have 6 Billion of open Swaps with AIG of which AIG has been forced by Goldman to post collateral of 4 Billion.

          There is no break-out of what was paid (if anything) for Securties or Mortgages that Goldman had a financial Interest in. It was well known that Goldman sold the Triple AAA rated securties at the same time it's trading desk was shorting the banks stock and buying credit default swaps even though Goldman had no liability for the Securities. They got a 7% fee on the face value of the security. So if they sold 5 Billion worth, they got 350 Million in commissions . That was the tip of the iceberg. They made money on the credit default swaps and they made money by shorting Bank stocks.

          Presumably the money that's been given to AIG has been going to make-good CDS related to mortgages that have already defaulted, and the programs in place will help control further foreclosures.

          I wouldn't assume anything here. We have a surge of ALT-A, NinJa and Option ARM mortgages that are resetting this year and mostly next year. The default rate is 70%. Credit default swaps were sold on all of these including the banks themselves. The problem with the banks is they weren't careful in who they bough the Swaps from. Since anyone could sell them, many of the sellers took the money and closed shop.

          The money put in thus far is historical in nature . In other words it is targeted at what has happened but not what is coming. Furthermore , the bail out was not accompanied by legislation like the resurrection of the Glass Steagall Act or the Financial Modernization act or a rollback on the toxic bankruptcy reforms bought and paid for by the banks from 2005.

          In other words the Govt took no action to prevent a recurrence nor did they take action to stop the losses from future defaults that had Credit Default Swaps on them. Keep in mind that a CDS has an average time of 5 Years on the contract but some have gone as far as 18 years.

          And another question, Geithner talks about assets held by banks ... mortgages aren't held by banks.  They're sold on the secondary mortgage market.  I got my mortgage through a bank, but Fannie Mae now owns it.  So why are is Geithner talking about bank assets?

          Simple enough. Fannie and Freddie had a 45% share of the market for secondary mortgages. Some smaller banks hold mortgages to maturity. But the overwhelming reason a bank may have a mortgage on it's books is they have to buy back the mortgage from the security or pay an equal amount into the security of the face value of the mortgage. Many banks had Credit Default Swaps to protect them in the event this happened, but the Swaps were never paid, so they now own the mortgage or the equivalent of the mortgage when it defaulted.

          It's a long way to go , just to get to back to when it was bad.

          by Dburn on Tue Mar 24, 2009 at 08:37:08 AM PDT

          [ Parent ]

  •  Is The Plan Rigged? Do we Bend over again? (0+ / 0-)

    I for one am tired of this fuck me one,twice,three,four,and infinitum.....

    Bad Deal for the Taxpayer?

  •  i'll take door no. 3!!!! please, please tell me (0+ / 0-)

    that this is being considered, Jerome.

    one that acknowledges that the issue is liabilities rather than assets, and that focuses on the fact that a lot of these liabilities are wholy unrelated to any economic or financial activity, and are contingent rather than actual - ie nobody loses anything if they are cancelled. If a 100:1 bet you made is cancelled, your actual loss is not 100, it is 1 - something that could be paid back to you.

  •  Simple elegant solution Jerome (1+ / 0-)
    Recommended by:
    polar bear

    Dude, you're a genius. There's a bunch of people on the upside of those bets that would really not want your solution to happen, but it's a really good solution and would save the country (and world) a ton of money.

  •  Beautifully explained (1+ / 0-)
    Recommended by:
    alizard

    But comes up against what seems to be what the marxists used to call the "dictatorship of capital". They want all their money. They "own" it. They will not settle for the bet money back, they will bleed it out of the world's peoples.

    Their greed will bring about their downfall, but with a tremendous, tremendous amount of pain and suffering for most of us, and ignite terrible political instability in the bargain.

    There may not be any other way, given the short-sightedness and commitment to the financiers the politicians present.

    Great diary, Jerome. The best on the subject I have read!

    War is the statesman's game, the priest's delight, The lawyer's jest, the hired assassin's trade Invictus

    by Valtin on Mon Mar 23, 2009 at 05:10:35 PM PDT

  •  I got it now. We are totally screwed. (3+ / 0-)
    Recommended by:
    Dburn, alizard, whoknu
  •  i've been meaning to ask you (0+ / 0-)

    what you think of the episode of "This American Life" that tried to explain the toxic asset situation in 57 minutes in terms even an economics-challenged layman like me can understand.

    it's long--I'm hoping you've heard it already and have an opinion about it.

    Politics is like driving. To go backward, put it in R. To go forward, put it in D.
    President Barack Obama. At last.

    by TrueBlueMajority on Mon Mar 23, 2009 at 06:10:48 PM PDT

  •  Thanks, Jerome. (0+ / 0-)

    There's so much hot air being blown around this site and elsewhere about how out of line people are for pointing out the invisible nature of Geithner's new clothes, and it's good to see that you've cut through the crap and highlighted where and what the real tumor in our economy actually is.

    To butcher the old Clinton campaign battle cry, "It's The Derivatives, Stupid!"

    Not only is the focus on toxic assets (oh, I'm sorry... this week we're supposed to call them "legacy assets") something of a red herring (the bad assets are a problem, but a secondary one) but Geithner's not even making sure there's regulation in place to prevent NEW leveraging of derivatives before he hands Wall Street investors all this additional money.

    That to me is just mindboggling. Okay, fine, if it's just a matter of a different triage approach and the idea is to go after the small bleed first before taking on the Big 'Un, at least Geithner and company should be making sure that their efforts don't simply start another bleed somewhere else. Force major restrictions on the financial industry's ability to exploit CDSs and CDOs (which is how we got into this mess) and make sure that they don't just take this new money and piss it away at the same old roulette wheel as before.

    But they can't even be bothered to do that. Forget about their actually admitting that the derivatives losses are what's killing the economy rather than the bad assets, they can't even get their small-ball game right.

    It's so senseless for us to be blowing every chance we have of fixing the economy. None of this shit needs to be going down the way it is.

  •  Couple of comments (0+ / 0-)
    1. You say -

    this is what brought AIG down: as signs of trouble started to build, it lost its AAA-rating, which triggered obligations to pay collateral to all its counterparties on its portfolio of CDSs. It is those obligations, all coming at the same time on a large pile of CDSs, that bankrupted it and led government to step in to make the necessary payments.

    I agree with that. But actually, most of AIG is fine. It's a perfectly OK insurance Company that, had it not built its Financial division, would be doing quite well as insurance companies tend to do. If you look at the Financial division, it seems that the credit-rating-dependent calls on collateral were the bear. But it must have been obvious to Treasury that the solution was for the government to acquire AIG Financial for a dollar. There is no credit downgrade associated with the US government, so no need for collateral. The Treasury could then sit on the CDS until the underlying contracts expired, right? So why didn't they do that? The only thing I can think of is that the default liability to which the US would be exposed must be so huge that even the US government can't handle it, and that is pretty darned scary if that's the case.

    1. Paulson shouldn't be painted as a bad guy in all of this. He went to many, many analysts, investment banks, etc to see whether they thought the problems he was seeing were legit. They all turned away and told him they didn't want to know. What's an investor to do? Run off the cliff with all the others? I also saw this coming but, unlike Paulson, I didn't have $22 million to bet with. Nevertheless, I don't begrudge someone making dough from the stupidity of others. If that's some new moral standard, explain doctors.

    Ambition is when you follow your dreams. Insanity is when they follow you.

    by Batfish on Mon Mar 23, 2009 at 06:22:05 PM PDT

  •  The pooch is screwed (1+ / 0-)
    Recommended by:
    Robert Davies

    I for one am breaking out the bottle, turning up the music and laying on the floor in a stupor until someone wakes me up and says it is over.

    On the other hand, it sure is interesting to watch and wonder where the hell we are all going to end up.  Not fun, but interesting.

    Nature's laws are the invisible government of the earth - Alfred Montapert

    by whoknu on Mon Mar 23, 2009 at 06:27:58 PM PDT

  •  necessary, not sufficient (0+ / 0-)

    Jerome thanks. Always learn something from your posts.

    A question arises:

    Is it perhaps the case here is that the restoration of the asset side of the balance sheet will limit the explosion of the liabilities.
    Is it the case that as the "toxics" were leveraged 30x and that the leveraged bets are now liabilities that create additional failures and liabilities?

    So that stopping the deterioration in the value of the underlying assets is a necessary first step toward halting the growth of liabilites?

    And - hopefully - that the reset value of the assets may actually be sufficient to actually restore some liabilites on the books to the asset side?

    •  That's the same question I had (0+ / 0-)

      I am an uninformed layperson when it comes to these financial WMDs, I trust most of us are. The only thing I can suppose is that this is exactly Geitner's strategy - to muddle through by limiting the amount of CDSs that actually have to be paid off on - eventually restoring faith in the holders of these instruments and those insured by them.  However, it also appears to be one fine mess. I don't know if this is true, but I've read that CDSs have been issued up to the cubed level (CDSs on CDSs on...) and the big question is how much of a chance is there that the plan could actually succeed? - is Geitner trying to muddle through on the cheap (er, everything is relative) by gambling that this will work, and figuring he can try something else if it doesn't?  If so, in the NYT times today someone posted that his subsequent moves would be severely restricted not only by bailout fatigue, as Krugman discussed in his column today, but more importantly by the "Winstar" decision, which I was not familiar with (Google it).

      So I have another question - as best as an ignoramus like me can figure, the main blowback from not paying off the CDSs to the hedgies like Jerome suggests will be the inability to use these instruments in the future. On the whole, they've been horribly misused, but I guess they have some legitimate uses, and have expanded the housing market to some good risks who otherwise would not have qualified. I think this is a trade we'd be willing to make though. Would there be other blowback? - after all these monstrosities really seem to be the real problem.

      "The only thing we have to fear - is fear itself." - Franklin Delano Roosevelt

      by orrg1 on Mon Mar 23, 2009 at 06:53:02 PM PDT

      [ Parent ]

  •  When does the bottom-up approach begin? (3+ / 0-)
    Recommended by:
    Creosote, Robert Davies, polar bear

    The TV hypnotized masses are still waiting for the trickle-down philosophy(i.e.bank bailouts etc.) to start working.
    I thought we were going to demonstrate how the bottom-up approach works. I thought we were going to explain how no transaction(business) can occur until there is a customer with money(i.e. disposable income) to spend. I thought we were going to explain how our economy can only be fixed from the bottom-up!
    Will there ever be a serious bottom-up approach(before we run out of money)? Obamanomics is starting to look a lot like Reaganomics.

  •  you know what (1+ / 0-)
    Recommended by:
    Creosote

    you know what i'm 100% confident in...

    that Jerome knows more than Geithner, Bernake, Summers, Romer, Volker, Obama.

    I'm sure he does. Him and Krugman could rule the economic world if someone would let them.

  •  It has to be part of the plan (3+ / 0-)

    The Obama administration has got to be smart enough to realize that they have to wipe these pig men out to make this work. This isn't the Bushies. There really is not choice. I am sure at some point they will announce this once they have a handle on how much is held.

    Impossible is nothing

    by DrSpike on Mon Mar 23, 2009 at 07:06:40 PM PDT

  •  here is the size of the problem (3+ / 0-)

    did you know that Citibank has a notional value of $37 Trillion in liabilities on its balance sheet right now? (Go ahead google Citibank notional value of derivatives).If it records a 15% loss it would be $3.7 Trillion and no bailout a la AIG of $170 Billion would help. JP Morgan has notional value of derivatives of $149 Trillion or about 10x US economy and 5x global economy. If they had a 10% loss... well

    Notional value of derivatives is about $700 Trillion or about 23x global economy. Bankers will tell you dont worry most of it is perfectly hedged. But you cant hedge counterparty risk (hey I was hedged with Lehman, but they went bust and so did my hedge!)

    Basically we are screwed.  

  •  Among all of the chatter (2+ / 0-)
    Recommended by:
    Robert Davies, polar bear

    Surrounding these issues today I found this interesting and revealing tidbit.
    http://www.ft.com/...

    As for Mr Geithner, he was choosing his words very carefully on Monday. "We need to balance the basic objective that we do not reward failure against the hugely important imperative that we get the financial system doing what it needs to do," he said.

    It would appear as though our Treasury Secretary is saying that we need to get past the idea of moral hazard if we are to be of any help to the banks.

    Great.  Just great.

  •  Actual losses are bigger than 1 (1+ / 0-)
    Recommended by:
    Creosote

    They made a 100:1 bet on heads.  And another 100:1 bet on tails.  Then grabbed 5 off the table.  Telling their backers they had 98 in the bag and deserved the 5.

    So the actual loss is 7.  Most of it stolen.

  •  ya know, after watching all the talk (1+ / 0-)
    Recommended by:
    Creosote

    about the plan on pbs, i am still furious.

    These institutions knowingly bought, chopped up, and bet on all these mortgages.  They sat by and watched Americans go bankrupt trying to make their payments.  

    Now we are going to let these same people, who took in all that desperation money, buy the property for pennies on the dollar.  Not only that, we will subsidize and guarantee these buys.

    Investigate the fraud.  Pay the liquidation price to those who deserve it, as you say.  i just get steamed.

  •  Actually "toxic assets" ARE the biggest problem. (0+ / 0-)

    If Geithner's plan is successful and the mortgage based securities that are tying up so much capital can be be monetized and marketed, it is like the spring thaw and suddenly the financial markets are liquid again.

    The diarists idea that good regulation of financial markets is needed is correct but that is not what is required to fix the current liquidity crisis that has our financial system bound up.

    We'll get good financial regulation out of Obama no matter what but the No. 1 economic problem is breaking up the mortgage security logjam and Obama looks to be getting that done based on market reaction of a 15% rise in value over the last 25 days.

  •  Gordian knot cutting: (1+ / 0-)
    Recommended by:
    Creosote

    Given the framework of constraint, both financial and contractual, I'm wondering if there's some way to cut the knot.

    Is there any way that these stupid (stupid, stupid, stupid) bets could be recast?

    That is, could CDS be recast so they are forced to add on an extra ten years?

    I'm imagining the Obama admistration unilaterally shifting (somehow, since they own the financial system) the terms of the contract -- somehow saying, "ok, but not right away -- in ten years extra"....

    I know it wouldn't please the bankers and financiers among us, but...

    IF we can get through the next ten years (given the strenuous stresses the world economy will go through because of ecosystem disruptions);

    IF we can recalibrate the financial system to accomodate a sustainable reality;

    IF we can reframe a society based on sustainable, rather than seeming-free energy;

    IF we can retrench ourselves into a new order that recognizes world-scale limits;

    IF we can survive...

    well, heck, then you'll profit.

    Can there be any scenario that allows that, which the financial world could swallow?

    All the news that scares us silly: ApocaDocs.com

    by mwmwm on Mon Mar 23, 2009 at 07:53:21 PM PDT

    •  Important statement. (0+ / 0-)

      Real limits exist, even to sustainability.

      I'd like to read a diary-length, expanded version of your post - because of nearly all other posts in this thread it draws on the widest human and global landscape.

  •  Chasing your tail (1+ / 0-)
    Recommended by:
    Creosote

    I've watched terminally unsound companies slowly disintegrate. It happens in a stepwise fashion. First they show big losses and they have a layoff. They then show profits for the quarter following the one-time layoff charges. Sure enough, since their sales are on a downward helix they start showing losses again, and the cycle repeats until they are bankrupt or bought on the cheap.

    Buying up the current "toxic assets" only stems the tide if the tide is stem-able. As the economy shrinks, as more mortgages are underwater, as more workers are laid off or underemployed more assets become toxic. As credit cards become more of a potential toxic asset, banks will become stingier and stingier at offering credit. The fundamental problem, at least looking only at toxic assets not liabilities, CDSs or derivatives, is that $7B of mortgages have been written into a speculative housing bubble.  All of our bailout schemes are designed to preserve wealth and thus debt, replacing individual debt with taxpayer debt. Even through bankruptcy or nationalization, debt is preserved. I don't see how we get out of this, and perhaps that's why it took more than a decade to get out of the Great Depression Mark I.

    •  " All of our bailout schemes are designed to (0+ / 0-)

      preserve wealth and thus debt, replacing individual debt with taxpayer debt. Even through bankruptcy or nationalization, debt is preserved. I don't see how we get out of this, and perhaps that's why it took more than a decade to get out of the Great Depression Mark I."

      As staggering as the actions Obama has taken are, to try and clean up the ALL or A LOT OF the debt/liabilities would take multiples of the dollars they are spending. So I agree to this point: that isn't a practical and probably not a feasible option.

      As we all know, the economy is in a steep dive. Obama's actions hopefully will arrest the freefall so that we don't hit as deep a bottom as we would otherwise without intervention. At that point, we'll still have a number of problems but some upward trend towards at least partial recovery should be underway.

      At that point, I think we'll see elements of what his stimulus is trying to do start to kick in: a renewable energy industry, an auto industry in a more sensible direction and hopefully other industries able to contribute.

      If we look at a country like a business, there are two ways it can create wealth: dig goods out of the ground and sell it to other countries or provide value added goods and services to other countries. The combination of those two things should exceed what is acquired from other countries if wealth is being accrued.

      Reducing our dependency on oil and stimulating competitiveness in selling goods and methods for generating alternative energy is a decent start to get that value added gain against the trade deficit underway.

      It's also in his plans to make trade agreements fair in terms of labor standards, environmental and safety standards, etc. Obama has also stated efforts for tighter enforcement of trade agreements and improved protection of proprietary engineered designs, etc. Those steps should also help to reduce the trade deficit/assist American companies to be more competitive globally.

      As those things happen, some the current assets will rise in value which will further improve liquidity and help to offset the debt/liabilities.

      If Obama can get that underway in his first four years producing some bottom line results, he'll have done a heck of a job in terms of what I think is realistic in that time frame.

      To expect much more than that seems unrealistic to me. In fact, even if he's re-elected, in 2016, the president who follows him will still need to be working along that general path to sustain longer term prosperity.

      It's still very difficult because health care costs for example make it almost impossible for American labor to compete in a global market (another item on his list to reduce in terms of cost per unit of labor) - as does the cost of living relative to the rest of the world. But Obama had to start somewhere.

      A bunch of what Obama is trying to do makes a lot of sense to me given the constraints that he has under the present circumstances. It's going to take a long time to turn the big old ship around.

  •  But by containing the bad assets (0+ / 0-)

    most of the cds's may be unwound. This is the next step. First, refresh the banks' balance sheets, so they can start lending again. Then, you can begin to pick off the liabilities due to the derivatives trading. You eat and elephant one bite at a time, and when eating more than one elephant, you eat them one at a time.

  •  Bondad, this is too complicated (0+ / 0-)

    In this case I think you are making the situation look more complex than it really is. Obama and Geithner are, as they must, using the only method a government can fall back on when faced with huge but collapsing inflation in various widely distributed assets: they are massively inflating the currency so that the overblown prices and debts can be paid off in cheaper dollars.

    Naturally Obama's finance people are trying to accomplish this by means of some recondite methods that are sufficiently confusing to guarantee that most of the population will be completely baffled about what is going on.

    To put the matter another way, Obama's team is trying to matching the current inflation in the value of housing and financial instruments, with dollar inflation, hoping to partially re-balance all those overpriced assets in diluted dollars.

    To use an analogy, Geithner & Co have decided to drop a few hundred tons of newly-made chips down more or less at random on the casino floor, hoping that soon most people will scoop some up and pay off their markers, then go back to happily standing at the craps table, drinking cheap booze and tithing their pathetically little amounts of now-worthless money to the god-like owners of the casino.

    This whole episode is not about doing what's right. It's about doing nothing until the rubes all cash in and clear out.

    "This document is totally non-redactable and non-segregable and cannot even be meaningfully described." *

    by dratman on Mon Mar 23, 2009 at 08:20:50 PM PDT

  •  C'mon Jerome - you can't be serious (0+ / 0-)

    Your third alternative would lead to complete and utter chaos.  You can't simply arbitrarily cancel CDS based on the notion that the liability is "contingent". You also can't come up with some test to determine which counterparties "deserve" to get the protection that they paid for. Somebody might have shorted Chrysler to hedge their GM risk, somebody might have shorted subprime mortgage to hedge their alt-A risk, etc.  

    In the case of AIG you might be able to entice some counterparties to accept a below market payout on their CDS if the Feds could credibly suggest that AIG might go under.  I'm surprised that they haven't found a way to only backstop only those portions of AIG which are most crucial.

    Most importantly, almost none of these CDS are directly with hedge funds, there is almost always a bank or Wall Street firm in the middle.  I don't see how these firms can avoid being dragged under while this is all being figured out.

    What did you do with the cash Joe?

    by roguetrader2000 on Mon Mar 23, 2009 at 08:25:02 PM PDT

    •  I think what Jerome is saying (0+ / 0-)

      is that a lot of CDS buyers are not stakeholders, but simply gamblers. They stand to lose nothing but the fees they paid for the CDS, since they have no interest in the underlying debt, if the CDS contract is canceled. If that's the case, I don't think taxpayers need to be paying off those gamblers.

  •  I am told the total worth of the U.S. is measured (0+ / 0-)

    in the hundereds of trillions of dollars according to this
    guy in his book "the next 100 years." I'm trying to find out if this is true. If so, then what's the big deal? $10 Trillion is insignficant.

    He thinks this is a class struggle. Happens every 50 years according to Author George Friedman. Intriguing book but long term stuff.

    Basically says the Noblity rules for another 15-20 years (This dynasty started with President Reagan). President Obama can't do much about it.

    Bottomline
    I disagree. Every so often Pharaoh "sways the world" with mixed results.

  •  Thank you for an excellent summary n/t (0+ / 0-)

    While Democrats make intellectual points, Republicans are busy throwing shit then exclaiming to voters: "Look, my opponent stinks!"

    by Johnathan Ivan on Mon Mar 23, 2009 at 09:21:21 PM PDT

  •  The toxic assets are the problem. (0+ / 0-)

    Ecosystems empowerment for the rural poor.

    by 1Eco on Mon Mar 23, 2009 at 10:20:37 PM PDT

  •  Details daily of more toxic asset deals go bad (0+ / 0-)

    Is that ok with you?

    Ecosystems empowerment for the rural poor.

    by 1Eco on Mon Mar 23, 2009 at 11:28:46 PM PDT

  •  Good Diary. It raises an issue I've been (0+ / 0-)

    thinking about:  if a CDS is basically a reckless side bet between a couple of traders with the help of some sophisticated lawyers and number crunchers, why should anyone honor them?  Couldn't there be a general agreement that they disappear, everyone walks away and no one gets hurt?

    The CDS' were not insurance policies as advertised, but actually morphed into a speculative wager.  This is because the purchaser of the CDS was not actually insuring against any risk but simply betting on some events happening, while the issuer was looking for some extra cash and didn't see the risk of the triggering conditions actually happening.  The buyers got in because of the risk-reward ratio and the sellers got in because they wanted extra money to cover and supplement the mortgage payments.

    It's as if a buddy of mine and I sat in a restaurant/bar and took a bet as to whether my buddy could get the phone number of the girl at the other end of the room.  If I bet yes, then I win $1 million.  If I lose, I buy him a beer.  Why should that bet be honored when there is no real stake for me.  It's simply for my amusement.

    Perhaps I don't have all the variables in mind, but I'm simply asking - isn't it conceivable that both sides to a bet could mutually agree to not honor it, and then no one would be out of pocket?  

    The problem with the CDS' is that they magnified the losses resulting from a failed mortgage by a huge multiplier effect.  What Geithner is doing is good to get properties out on the market that will have value at bargain basement prices (and subsidized loans) to some purchasers.  However, if banks are going to be solvent, it seems to me that Geithner is basically telling them that they have to figure their way towards some sort of mutual detente and debt forgiveness resulting from CDS transactions in order to get back on a path to sustainability, or just simply break up.  I can't disagree with what Geithner is doing from that perspective.

    Alternative rock with something to say: http://www.myspace.com/globalshakedown

    by khyber900 on Tue Mar 24, 2009 at 12:26:50 AM PDT

    •  Why should anyone honor them? (0+ / 0-)

      In receivership they would not be honored just as AIGFP should not have been honored and will no doubt be clawed back.

      The U.S. Taxpayer has nothing to do with these bad bets and should not pay anything close to face value.

      Ecosystems empowerment for the rural poor.

      by 1Eco on Tue Mar 24, 2009 at 03:37:29 AM PDT

      [ Parent ]

  •  Hmm... (0+ / 0-)

    "Of course, it means taking the shiny toy away from the hands of the hedgie kids."

    Geithner and Summers would never betray their buddies.  Might Obama?  Based on what we've seen so far, don't hold your breath.

    Fascism is capitalism in decay. -- Vladimir Lenin

    by GiveNoQuarter on Tue Mar 24, 2009 at 12:51:46 AM PDT

    •  The Pres. is only playing the hand dealt (0+ / 0-)

      It is We the People that must first get Wise to this Massive Con Job.

      Then we must find leadership in Congress to make effective change. Then and only then will the Pres. be able to stand with the People for Hope and Change.

      We must become the CHANGE WE SEEK.

      Galbraith's call to action is a much needed first step...

      http://www.dailykos.com/...

      Ecosystems empowerment for the rural poor.

      by 1Eco on Tue Mar 24, 2009 at 03:40:39 AM PDT

      [ Parent ]

  •  A cop walks into a craps game (0+ / 0-)

    what happens?

    All the bets on the table are off.

    Same thing should happen here.  

    "The Universe is change; our life is what our thoughts make it." Marcus Aurelius

    by Mosquito Pilot on Tue Mar 24, 2009 at 04:09:20 AM PDT

  •  what happens to some of these bets... (0+ / 0-)

    when an asset is sold?  Does the cds survive the transfer?

    If you want to truly understand something, try to change it. - Kurt Lewin

    by anim8sit on Tue Mar 24, 2009 at 04:41:11 AM PDT

  •  Are we just sticking our collective fingers (0+ / 0-)

    in the leaky dike?  There is a whole lot about this mess I don't understand.  But some elements seem to be coming into focus.  I'd been worried for some time we, the American people, would be on the hook to finance the payout of derivative insurances, this reverse ponzi scheme, to prevent the major institutions underpinning the economy from destruction, thus guaranteeing the flow of all remaining capital out of our economy.  There seem to be two imminent catastrophes hanging in the balance.
      The first is already in progress as the financial markets, from the lowly mortgage issuers all the way up to the major international financial conglomerates wait to see if they will default, fail, and send geysers of money and legal control shooting into the hedge funds.  The hedge fund managers can afford to wait for their ships to come in.  They already control hundreds of billions of dollars... who wouldn't be patient as they wait to cross the gap from being incomprehensively rich to literally having the world's economy as your bitch?
      The second is what happens to the remainder of our international debt obligations when we have no economy of our own?  Paying back China would be a strain on a healthy economy, but one that decides to financially intervene on the deathbed of the the financial titans is predicating doom on gloom.
     And is that what we are doing?  It seems that the best aspect of the federal plan is that by backing overvalued assets so they don't fail, they avoid those hundred-fold tranch insurance liability payouts by us or by the companies.  It's like covering your junkie kid brother's gambling debts so he doesn't end up in the East River.  The enormous downside is that it reinforces the legality of the whole mess.  And with Alito and Roberts on the bench, it may be the only legal way out.

    •  And BTW, Cheney is attacking Obama's (0+ / 0-)

      military policy to undermine his overall authority and cast him as weaker on the financial issues.  Mr. "My old company moved overseas" is shepherding the process to a financial Krakatoa.

  •  Wouldn't a fourth option simply be to (0+ / 0-)

    take a small portion of the trillions we are wasting and use it to set up a brand new bank that had no liabilities at all and let it start lending to businesses and individuals and just let the current defacto bankrupt banks and insurance companies just go bankrupt the old fashioned way?

    That is how the free market is supposed to work after all - reward success, punish failure not the other way around.

  •  And so after walking all the way around the park. (0+ / 0-)

    ...here and at ET, we end up on the same page.  There are three options: Give money to the banks, give it to their pas de deux partners, or take what's behind door number three, acknowledging that these "legacy assets and liabilities" are really just fire starter and treating them accordingly.  There will be losses, though, because all these instruments were leveraged, but do we really care about anyone who would borrow money against a lottery ticket, and more to the point, do we really care about anyone who would loan money secured by a lottery ticket?  We'll need a little order to this reorganization though, which is why I advocate a series of involuntary bankruptcies.  Work them hard, move them fast, cram down plans that strip all this off the books.  What do I figure the odds are that this will happen?  About the same as all counterparties covering their CDS positions.

  •  If you showed up at the track (0+ / 0-)

    and tried to put $10 million on a 100-to-1 shot, they'd laugh you out of the place, or worse. They limit bets to keep a lid on liability, but if you're operating in the Neverland of perpetually rising collateral (housing) values, that sort of thing just doesn't cross your mind, apparently.

  •  Why does the Diarist believe... (0+ / 0-)

    ...that CDS obligations are a bigger problem than bad loans?

    I've never seen any source showing exactly how much each institution is exposed to CDSs.  If nobody knows how many CDSs Bank X has written, how can anyone say that that number is the "biggest problem"?

  •  ... because the hedgie kids are (0+ / 0-)

    running Treasury?

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