Tuesday, February 10, 2009

Well and Truly ...

Well, this article basically sums it up; it appears that the government game of three card monte is set to go on indefinitely, and while this will certainly help Geithner secure a position at Goldman Sachs when our depression really gets going, it's unlikely to help the rest of us avoid it.

The leader:

WASHINGTON— The Obama administration's new plan to bail out the nation's banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president's top political hands.

What did he prevail on?

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.Because of the internal debate, some of the most contentious issues remain unresolved.

This, my fellow taxpayer, makes it clear not only what he prevailed on, but who he prevailed upon.  If that doesn't sound promising, wait till you get to the meat of the proposal, which is a puzzle wrapped in an enimga inside a fig newton.

It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.

The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors who participate in the program, which some people might call a "bad bank."

A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans. A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.

Ummm ... so let me get this straight.  We're going to set up a fund so that private investors like myself can do what we all can do now anytime and in any amount we want -- namely buy discounted toxic waste on the open market.  How can this solve the problem?  I would be buying if I could get a good price where I could make some money.  Unfortunately, the banks are not offering this price because they would then have to write the toxic waste down and would be insolvent as a result.  The only way the government is going to induce me to "acquire soured mortgage-related assets from banks" is to lower the rpice or guarantee my losses beyond a certain point.  If they force the banks to lower the price, they then have to recapitalize them.  If they guarantee the assets, I'll buy them at whatever price they want, but then the government will eat the losses if they pay too much for the assets or guarantee too much of the losses.  There is NO WAY AROUND this fundamental problem.  Someone is going to take the losses on these loans that have not been marked to market (an amount estimated at $1 tillion plus right now).  It will either be:
  1. The banks, their bondholders and shareholders.
  2. Private investors who buy these things from the banks at their current book value.
  3. The government, if they buy these things from the banks at current book value.
  4. Some combination of the above.
It's clear that what Geithner wants to do here is pretend that he's not giving money to the banks (not eating their losses) by partnering with private investors so that it looks like the government is buying the assets at a discount.  Then he wants to pull a fast one by using his other hand, the FDIC, to take away all the risk that his first hand will claim these private investors have taken on.  It's a complete and total sham.  There is no other way to look at it. 

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