These are dangerous times. People are losing their jobs and their homes; a few people have threatened bankers. Kos diarists have taught me a lot, especially Bondad and Jerome a Paris. Each had a recent diary with a different take on the Geithner plan. Then the Field jumped in saying that if Geithner quits or is fired we’ll have a constitutional crisis because the Republicans will drag out confirmation hearings for months and months. That reminded me of the pundits chanting we can’t pull out of Iraq because....
I tried to set my emotional reaction aside to compare and contrast what intelligent people have written about the crisis and its resolution. And, of course, since we’re talking about money, everybody has an axe to grind. Remember that CDs mean credit derivatives in this diary, not compact discs or certificates of deposit.
I studied these essays:
Bondad The Geithner Plan, Jerome, focus on the liabilities, Jamie Galbraith- the best summary of the crisis in my opinion, everyone should read his comments about entitlement reform; No return to Normal
The NYT debate between Paul Krugman, Simon Johnson, Brad DeLong and Mark Thoma, all smart cookies – Johnson worked with the IMF and DeLong with the Clinton Treasury Dept.NYT
Matthew Yglesias,break em up Robert Waldman, whose plan was it?Tyler Cowen, marginal revolution, http://www.marginalrevolution.com/...
Ezra Klein, trick play?
There are other good essays to read, such as those of Nouriel Roubini and Matt Taibbi, but I move on. If you’re interested in these things, please read them yourselves and don’t leave everything to the "experts". Let’s dip into Yglesias, Waldman, Cowen and Klein.
Waldman:
I have been asking ‘if the toxic sludge is so under-priced, why isn't Warren Buffet buying it ?’ Turns out that Mr. Buffet had a better idea, get the US Treasury to pay him to buy it -- he's one of the inventors of the Geithner plan.
Last fall, billionaire Warren E. Buffet, Goldman Sachs CEO Lloyd Blankfein and William H. Gross, (PIMCO bond honcho) approached Treasury officials about an idea to create investment funds, using public and private money, to buy toxic assets from banks
"
Now something from Elana Schor, Shocker: Media Let Wall Street Chieftain Praise His Own Idea
http://tpmdc.talkingpointsmemo.com/...
Yglesias:
My biggest concern about the PPIP approach to the banking system is that even if it works, what it does essentially is return us to the pre-crisis status quo— banks that are so large that they’re too politically powerful to regulate effective and too systemically important to be allowed to fail. That’s a recipe for dishonest transactions that produce short-term profits at the cost of blowups. One appealing element of nationalization is that it can easily be made to end in a world in which there is no institution named "Bank of America" or "Citi" and no such gigantic institution. That said, the PPIP approach doesn’t preclude taking a hammer to the institutions.
Is it bad that Buffet and Bill Gross are enthusiastic about the PPIP? Not necessarily, their interests may be aligned with those of the general public.
Is it bad that TV and radio, including NPR, breathlessly announced Bill Gross’ approval of the Geithner Plan? Yes, it shows what idiocy passes for news analysis. The Treasury will give them incentives to buy some of those toxic assets, it is implementing their plan.
Tyler Cowen passes on an important observation
If I, as a "financial institution" can participate as a bidder in these auctions I can foist off my loss onto the taxpayer. Here is how I can rig the game so as to avoid an otherwise-inevitable loss:
I become a "bidder" and "bid" on my own assets at 75 cents. I provide 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC. The loan, ex my contribution, is non-recourse. I can lose 5 or 10% of the total portfolio purchased, but nothing more.
Now the "assets" (a passel of CDOs?) turn out to be worthless. I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that's all.
(2 comments: The taxpayer gets hosed for the remaining $71.25 billion dollars. In other words, if the plan succeeds, it will unleash another wave of hatred against the banks*. It’s hard to imagine how nationalization could lead to more politicization of bank management and lending decisions than what we're going to get.
*
History provides all the evidence we need that folks will take advantage of the situation. By the time our regulators figure it out, the horse will be long gone out of the barn.
The example provided is very direct, so my belief is that the ultimate method of gaming will be much more oblique, but just as effective.)
Ezra Klein:
I've increasingly come to the conclusion that we're paying the private market to launder both our current and eventual policies: To ensure that our prices don't carry the taint of government and our eventual judgment of insolvency, if indeed it proves necessary, does not seem the overreach of some bureaucrat...if the Geithner plan effectively co-opts the market for the next step by using their credibility to set prices and their inability to buy the assets to prove insolvency, then that might prove to have been a good investment indeed. And it's not a wild supposition. This week, the Obama administration (is) asking for the legal authority to nationalize. They may not want to use that authority, but they are certainly readying themselves for a world in which more aggressive intervention is required. The Geithner plan, whether intentionally or unintentionally, fits neatly into such preparations.
Jerome said that the banks have toxic assets but their liabilities are much greater and more important. Bondad favored the private purchase of
legacy assets... banks will decide which assets – usually a pool of loans – they would like to sell.
The Treasury plan will help private investors like Buffet and Gross buy loans or securities. Which might they buy? Loans have some value that can be estimated. Securities would be mostly or possibly only credit derivatives, creatures of uncertain value- why would any investor buy credit derivatives unless he were trying to game the system as Cowen shows us? If I were a bank, I would try to unload mixed bundles of loans and CDs. However, we can’t eliminate most CDs that way- there are too many and they are not attractive. Unfortunately, we don’t know much about those CDs, including how many each financial institution holds. If I were buying these assets I’d buy loans, like Bondad says, but bad loans are only part of the problem.
Now, consider the UFO factor. UFO means unflappable Obama aka No Drama Obama aka schoolteacher Obama. The Obama style is smooth steady pressure, not shock and awe. When we hear NATIONALIZATON, most Americans cringe. By giving private markets the chance to price and buy these "assets and liabilities", The UFO avoids the claim that the government rigged the election, although they did in one sense- they rigged the election and its financing in favor of Wall Street. Progressives rightly say "Geithner is talking about a return to the status quo ante". That’s true if the PHIP is all that the government does. Klein points out, however, that the PHIP lets the government say, "We must take over and sell this mess because it is still a zombie in spite of the PHIP". The government has no authority to take over AIG or Citi Group (it could seize Citi bank). Congress should provide that authority, but Congress is at best unreliable. Some may fear that the UFO will nationalize Wal-Mart. The UFO says, grow up - there can be no "revolution". We'll move step by step. This steady pressure may work, if Congress can be pressured to be more progressive. Krugman fears that the opposite will happen, that The UFO has only one shot.
So, Jerome is talking about one end of the seesaw (heavy end) and Bondad another (light end). The UFO won’t frighten people by talking about CDs and their major risks. Back in the late 1990s, Clinton Treasury officials said that Brooksley Born shouldn’t even mention the risk of credit derivatives (she was afraid that they would make trouble), Greenspan, Rubin & Summers squashed her http://crookedtimber.org/... Should we trust The UFO to gradually get this under control or should we demand a job for Brooksley Born? Are Geithner & Summers controlling UFO economic policy or are they Trojan horses? We can’t make Obama into a swashbuckler. He can be influenced by sustained pressure, probably not by Krugman style outbursts.
*Vandals broke windows at the home of Sir Fred Goodwin, who looted the Royal Bank of Scotland and retired on a regal pension, see attack Goodwin and his family are overseas and may stay there, like former leaders of Mexico and Venezuela, who looted their countries. The gambler manipulator megabanks should fear our wrath. We must be sure that their leaders don’t take advantage of the PHIP to loot bank assets- it's not their money.
Members of Congress, isolated in Washington, should fear the public. They dismantled New Deal protections. They prospered while average people sank down. As more and more people go on food stamps and more teachers are fired, Congress must reduce the power and size of the big financial institutions. If you think that Congress can resolve this problem without severe pressure, please read Michael Hiltzig They don't get it about the bloviating Congs, both R & D, who don’t seem to understand the problem or to be ready to learn anything.