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Eating It
Atrios pungently describes the main objection to the Geithner plan:
Aside from setting up an overly complicated plan to try to disguise what they're really doing, the utility of the Geithner plan rests (or pretends to rest, not sure) on one fundamental premise: that Big Shitpile is greatly undervalued by "the market"
and that these mortgage securities really have expected revenues which justify higher prices. One could have reasonably believed this months ago, I have no idea why anyone would believe this now. The housing bubble burst, and now recession is here. There's a lot of shit to be eaten, the question is who will eat it? Timmeh wants to make sure it's not the banksters.
Although I'm less sure than Atrios that we should accept the market's verdict on this stuff unquestioningly, he certainly might turn out to be right. But it's worth noting that taxpayers are going to eat almost all of this shit no matter what happens. If Geithner's plan fails, we eat it. If we nationalize the banks and become owners of all the toxic waste, we eat it. This financial crisis is going to cost the government a ton of money no matter what we do at this point.
Now, it's true that if we nationalize we'd wipe out the shareholders of the bad banks. But although that's the right thing to do, it's also pretty small potatoes since stock prices have dropped so far that shareholders in bad banks have virtually no equity left at this point. (Sweden didn't even bother trying to wipe out shareholders when they nationalized Nordbanken in 1992, for example. They just bought out the minority shareholders at the highly depressed market price.) What's more, a lot of those shareholders are mutual funds and pension funds anyway. The amount of bankster wealth that would be wiped out in a nationalization is probably pretty small.
It's not so much that I disagree with Atrios about this, just that I think he overstates the issue here. Nationalization would hurt bankers a little bit, and it would give taxpayers a bigger upside than the current plan. That's good. But it would also be ungodly complex and create plenty of problems of its own. It's worth avoiding if there's another solution.
If Geithner's plan fails because it turns out that the market price for all this toxic waste is really correct, then his stress tests will almost certainly show that Citigroup and Bank of America are insolvent. At that point, he's out of options and it's time to nationalize. Paul Krugman's fear about Geithner's plan is that "this will be the administration’s only shot," but I think that's wrong. In fact, far from making nationalization more difficult, its failure would make it both inevitable and broadly acceptable. All by itself, that's probably a good reason to let Geithner give this his best shot.
What IS the connection
What IS the connection between the stress test and this new plan? Is the plan going to avoid buying from banks that fail the stress test? Doubtful.
And all else being equal, I favor the plan that kicks bankers to the curb. Let them collect unemployment for awhile. Any plan that rescues bankers rewards moral hazard and takes a huge shit on the American people.
What I want to specifically know is what specifically are the toxic assets.
Are they all actual mortgages for real world houses and land?
Because we've been told that
a) paying off all those mortgages wouldn't be sufficient to cover the banks problems
b) there were these false, pseudo derivatives that were created when there weren't enough actual CDS to go around
If we're only buying mortgages to real world assets, there is at least some reason to think that they have a value > 0. But if these toxic assets include the fake, pseudo derivatives, there is absolutely no reason to think those toxic assets have any positive non zero value.
If we aren't buying the pseudo CDS, what will the numbers of unbought pseudo CDS to do us?
Bank rescue
"If Geithner's plan fails because it turns out that the market price for all this toxic waste is really correct, then his stress tests will almost certainly show that Citigroup and Bank of America are insolvent." And if the assumptions underlying the stress test are built on reality and not built to validate the goal of a clean bill of economic health for zombie banks.
Spot on
I've been immensely frustrated with how liberal commentators (whom I enjoy reading) rail about how expensive this is going to be, but never mention it contra nationalization. That's not free is it? We'd have to eat Atrios's shitpile then too, so what's so bad about seeing if we save this thing by eating it straight off? If the pessimists are wrong, then we've achieved it as cheaply as possible... if they're right, who is going to argue against nationalization then?
Won't everybody but depositors have to eat it before taxpayers
If the big banks are unwound, I still don't understand why any obligations other than FDIC deposit obligations need to be taken on by government. Use the trillions to stimulate lending by healthy existing banks or newly capitalized banks. Will the system (and almost all of us indirectly) take a hit. Yes, but is that hit really worse than the alternatives (assuming these assets have little value).
socialism is scary
This is one of the better posts on Geithner's leaked plan that I've read. Is anyone in the MSM offering a similar take? If so, I haven't seen it.
Obama can't just nationalize the banks... that would freak people like my beautiful old Jewish mother-in-law out (she's terrified of 'socialism'). First Obama as to convince a majority of Americans that there is no other option; that nationalization, temporary, is the only way out.
If America wasn't full of people terrified by the S-word... our MSM surely doesn't help... then I would fully support Krugman. But because America is what it is, we have to approach the whole idea of nationalization very, very carefully and strategically.
yup.
"are going to eat almost all of this shit no matter what happens"
Even if we gave all this money directly to the beleaguered home owners, the bankers would still be "bailed out", as the value of their toxic assets would soar back up, and the banks balance sheets restored.
A lot of people paid WAY too much for their homes, a lot of people can't afford the payments they signed up for, and the securities made out of these expected mortgage payment streams assumed the borrowers would pay (or that borrowers could sell into a rising market, or refi - at least not default).
Everything is stuck because this huge GAP remains between what everyone paid, and what everyone can afford, or what they are willing to pay, now that home prices have dropped. The GAP will stay there until we feed it from the top down, or from the bottom up (through the banks or through the homeowners).
The people who "created" this GAP made out like bandits.
1) Home builders - spending 50k on costs and selling for 750k, if they walked away from the gravy train at the right time, got filthy rich.
2) Home sellers or flippers who had luck or good timing.
3) Mortgage brokers
4) Realtors
5) Banks, I-banks, finance guys, who all made their fees up front.
I say bail no one out.
Who is in control, and who reaps the ultimate benefit?
> If Geithner's plan fails, we eat it. If we nationalize the banks and become
> owners of all the toxic waste, we eat it. The financial crisis is going to cost
> the government a ton of money no matter what we do at this point.
In the former case, we as Citizens control the situation, who benefits, and who (if anyone is punished). We hold the cards and we call the shots. In the latter case the _exact same people who created this mess_ (*) control the situation, decide who benefits, and not only are able to shut down civil and criminal investigation but are able to issue and enforce credible threats against the United States Government (which AIG and its traders have already done; even bin Laden didn't challenge W directly man-to-man but AIG's London office is apparently made of tougher stuff).
Which situation would you, as the taxpaying Citizen who along with your children will pay for this, prefer?
Cranky
(*) And, I would argue, have spent the last 20 years destroying the US economy for the benefit of their class.
For us idiots, how does
For us idiots, how does nationalizing a bank cost more?
Right now we have taxpayers paying TOO much for these assets and the winners are the bankers.
If we take them over the banks and sell these assets at market, that would seem to cost us nothing.
How does nationalization cost taxpayers anything?
(And where does the FDIC get the legal authority to make the loans Geithner is calling on them to make?)
new banks, fresh and clean
"Use the trillions to stimulate lending by healthy existing banks or newly capitalized banks"
This I agree with.
No time, go with a proven method
Maybe this smoke-and-mirrors, Rube Goldberg TARP v.2 plan will work, but it would probably take months to set this whole thing up and buy up the assets. And I'm not sure why this will work when TARP v.1 didn't. And I'm not sure why banks still won't be short of capital after they sell the assets at discounted prices.
Meanwhile, the economy is still on a downward path, and there will be no recovery until the financial system is fixed. So it makes sense to me to go with a proven method, just call it receivership, not nationalization, so you don't freak people out.
And a point about those close-to-worthless bank shares. They still exist (even if they are diluted), so if the banks recover, those shareholders stand to receive a windfall profit courtesy of the U.S. taxpayer. That's not right. They deserve to lose everything since they were negligent shareholders. Otherwise, we're just setting ourselves up for another fall.
Politics and Principle
On principle, the right thing to do is nationalize the insolvent banks. It's not a trivial matter as to who controls these massive institutions. They should be managed in the best interest of taxpayers, not of the shareholders and employees.
With regard to politics, I disagree with JM with regard to the political power of the S word (socialism). Both the left and right are furious about the bailouts, and see that as social compensation for the least deserving. Nationalization and re-privatization is much more palatable politically...
What nonsense Kevin.
What nonsense Kevin. Nationalization does not entail eating 1oo cents on the dollar. Counterparties can be paid at a negotiated rate.
The probelm with Geithner is he is intent on payong the Wall Street Masters of the Universe 100 cents on the dollar.
I think you are simply flailing here to justify your absurd earlier post.
Stop and think before you write.
Exactly WRONG
The "banksters" may not lose much more from stock, but that doesn't mean they should continue raking in large salaries and bonuses! These folks have it made right now-- they run institutions into the ground, contribute nothing to society, and the government pays them billions to do it!
The "banksters" should be unemployed as well as wiped out.
I know this is so totally 2
I know this is so totally 2 days ago, but remember that little dust up about AIG bonuses ? The issue is not the shareholders; they lost long ago. It is the managers. Will they be able to pay themselves £11 million a year (and claim it is $1 million ?). Will they be masters of the universe or subordinates of the subordinates of Geithner ?
CEO compensation is a tiny amount of money, even in banking. Total compensation over $250,000/yr for all employees is not. That's the money Atrios is after.
Managers at banks don't want banks to be nationalized. Geithner is willing to give hedge fund managers tens of billions of US dollars to protect the sacred power of the Bank managers who messed up.
Also, shares are worth nothing now, but, if the Geithner plan works, they will be worth a lot. So will shares in nationalized banks. But if we nationalize the value shares which are actually worth something will go into the Treasury. Geithner's plan is not to keep zombie banks staggering around forever. If shareholders are not wiped out and if the plan works as promised, they will end up with a huge amount of money given to them out of your tax dollars.
Large percentage of profits
> CEO compensation is a tiny amount of money, even in banking.
Banking isn't like manufacturing, where you are lucky to get a velocity of 6. Banking handles huge numerical amounts of money with very high velocity, making these "small percentage" arguments seem reasonable. But executive compensation alone, much less {executive + down to the director level} compensation, is currently a very large fraction of what should be the gross and net profits of a commodity business.
Cranky
Atrios, S---tpile, and the last 2 years
The other point to keep in mind is that Atrios has been talking about the Big S--tpile and its consequences for the last 2 years. Everything he has said during that time has been dead accurate and every prediction he has made has been borne out. So who do you think has a better understanding: the Serious People or Atrios?
Cranky
Reminds me of something... oh yeah, 2002/2003. When Atrios was right about Iraq and the Serious People were wrong.
how much it's worth
I always thought a thing was worth what you could sell it for today and if you are bidding on a thing as an investment then how certain you are about the future is reflected in today's bid. wouldn't you expect those smart boys on wall st. to be buying up some of that stuff if it looked good to them? if it doesn't look good to people likely to have a lot more inside knowledge than I do then why should I think it is worth more than it appears to be? for example I see berkshire hathaway is sitting on around $25b in cash, but I sure haven't read that buffett is sinking money into toxic waste.
It's not so much that I
It's not so much that I disagree with Atrios about this, just that I think he overstates the issue here. Nationalization would hurt bankers a little bit, and it would give taxpayers a bigger upside than the current plan. That's good. But it would also be ungodly complex and create plenty of problems of its own. It's worth avoiding if there's another solution.
Nationalization would hurt bankers a lot, by hitting them right in the ego. Not to mention the potential criminal charges.
If Geithner's plan fails because it turns out that the market price for all this toxic waste is really correct, then his stress tests will almost certainly show that Citigroup and Bank of America are insolvent.
If he conducts them honestly, which he won't. The reason he won't is that a failed stress test would cause a run. So all the big banks will come up 'safe', but still needing bailouts. The stress tests were just a time-buying maneuver anyways, so they could come up with a plan to do what they want to do. (Or another words, I second above, somewhere.)
But it's worth noting that taxpayers are going to eat almost all of this shit no matter what happens. If Geithner's plan fails, we eat it.
Excepting we get to eat the entire cost of the losses of the banks, plus whatever losses there were to find out that the stuff we got was crap. And if it turns out Geithner's plan doesnt work, we'll get Geithner's plan version 3, which will be the same as version 1 and version 0, but with different names. In fact, the difference between the cost of nationalizing and the cost of bailing out is the time and money premium we pay to keep the bankers in charge plus the loss on looted funds. Which should be 20-30% for the looting, and another 20-30% for the time cost. (The time cost is the loss to GDP of a continuing collapse of production + loss of employment at the current rate.)
If we don't nationalize, we can't tell what's getting written down, so we can't write anything down.... which is the point. The bankers can keep coming back to the well, over and over. In no event will they lend funds again for at least two years.
max
['And if this plan fails, I guarantee you, Geithner and Summers will still oppose nationalization.']
p.s. I know we have to eat, but how we eat it is at least as important as how much.
Biggest problem is that
Biggest problem is that we'll eat it TWICE under this plan, and Wall Street will make a killing both times.
Once on the non-recourse loans, once again when nationalization protects their investments.
Stop thinking about this being solely an issue for shareholders of Citi, AIG, BoA, etc. There's a lot more here at stake for them than just those investments. The quadruple bailout (AIG, TARP, Geitner, and inevitable nationalization) gives them four bites at the apple AND saves their hides.
Free Market Approach
tagged as:- solution
Why don't we ask all those economists or 'wannabe' economist like Larry Kudlow, Heritage Foundation, EIA, etc... and find out how the FREE Market would resolve this disaster WITHOUT any tax payer funds on the line?
All they seem to be agreeing on is that the Obama Administration is going about it the wrong way, but none of their suggestions are Free Market based either. Why would we now take their suggestions when they have nothing to do wit Free Market Capitalism?
Why not tell ALL the banks to look at one of the banks in Washington State (forgot the exact name of the bank) and how they are dealing with their toxic assets. They got 124 million dollars through TARP which they will be paying back at 5% interest. - In other words, the tax payer is NOT on the hook for this one. It's a loan that has a decent conservative return on investment.
BUT the beauty in how the bank is using is is novel. They are offering loans at 3.75% to all the builders and 'about to go into foreclosure' homes they have on their OWN books. Unless you have one of their loans, you can't qualify. The way the bank's owners/managers see it. It's a preemptive step to avoid worse scenarios of more foreclosures. Sure they're loosing about 1.25% on that money, but the way they look at it: It's limited to 1.25% loss, and it frees up other capital they can now use to make profitable loans. Not to mention that their balance sheet is now looking a lot healthier.
I think Obama needs to evaluate that system and tell Citi and BofA that's the way it's going to be. Just think, how all of a sudden, it will be much easier to evaluate those toxic assets, once they realize they better start evaluating each individual loan in their own portfolios and offer better terms to the people underwater.
I don't believe that it is impossible to find out what the values are on those derivatives. In our community, some values have dropped by 50% from their unrealistic heights 2 years ago. As long as the government is not using the BIG stick (Free Market) hanging over their head that would bankrupt their company, their is no reason for them to actually renegotiate better terms for the homeowners.
In my opinion, the big banks are playing chicken, knowing very well that government usually gives in. Why solve the problem yourself when their is Uncle Sam to do it for you?
Tell the banks they need to re-finance all their loans, and Fanny/Freddy will guarantee them, once they've been evaluated at market rates. You'll be amazed how quick banks will scramble to clean up their portfolios. The ones that don't, deserve to fail, as they'd be a drag in the so called Free market too.
Valuing the toxic assets
The actual value of the mortgage-based securities is dependent on the actual value of the houses that are used as collateral. The median value of the houses in an area is some multiple of the median household income (use the historic ratios from non-bubble years). Using these ratios, the toxic assest can be priced.
Use these prices to stress test the financial institutions. Entities that are regulated by the FDIC that fail the stress test will be taken over by the FDIC. Non-FDIC regulated entities should be nationalized.
Charming ignoramuses
I dearly love the Left Chicken Littles.
The values of mortgage backed securities is not the value of houses, my dear idiot.
Like any debt security, the value is the net present value of the cash flows - mortgage payments for non-defaulting mortgages and any residual value in case of default and foreclosure on the asset - the houses. The value of the houses only enters into the equation in case of default, else it doesn't bloody matter at all. Jaysus you bloody idiots are dim opinionated gits.
Advocating massive policies based on no bloody understanding at all of what you are on about.
Hey Lounsbury
Hey Lounsbury douchebag,
What's the npv of a mortgage for a house that the bank loaned out $500,000, that the homeowner has not defaulted on, yet, when the market values that home at $100,000 for months at a time.
Thanks for playing shithead.
Couldn't afford when they took them
> The values of mortgage backed securities is not the value of houses, my dear idiot.
>
> Like any debt security, the value is the net present value of the cash flows -
> mortgage payments for non-defaulting mortgages and any residual value in
> case of default and foreclosure on the asset - the houses.
The people who took those $500k mortgages couldn't afford them when they took them. And to make it worse many were ARMs with reset provisions. The takers and the makers both expected that the value of the house would keep going up and they could sell or refinance to advantageous fixed terms later. To make worse even worse, the takers took any leftover cash and spent it on Lexus', big-screen TVs, and dinner out.
Now the houses are worth 1/3 the original "value", one or both of the couple have lost their jobs, the resets are coming due, and the repo man is hauling away the Lexus which is going to make it a bit difficult to find a new job. Now do you see why the mortgages don't have the value their calculated-three-years-ago NPV and default probability would suggest?
Of course, the homeowners have one trick up their sleeves: when the sheriff arrives to evict demand to see the original mortgage paperwork. Oops.
But don't believe me: get out of your chair and take a drive from Ontario to Riverside CA, zig-zagging north and south between the mountains. Report back on what you see. Try calculating the average age of those townhomes (hint: 3 years) and compare it to the population and earned wage growth of the LA metro area from 2000-2008. Note that those townhouses were originally priced "from the low 350s!!!".
Double oops.
Cranky
But you knew that
But you knew that, of course. You were just hoping some bafflegab, condescension, and chest pounding would stop the discussion of topics and solutions that make certain people uncomfortable.
Cranky
The GOP Continues to Commit Treason Against America
Kevin, always remember one thing, everything that is going wrong today was caused by the republicans during the Bush presidency and the republicans are continuously trying to lie their way out of taking responsibility and accepting accountability for their never-ending failures and treason.
Now President Obama is stuck with fixing the failures, betrayals, corrupt actions that the republicans committed for the last eight years, failures, betrayals, and corrupt actions that they still continue to commit to make it as impossible for Obama to fix as they can.
Never in American history have so many acts of treason against We The People been committed by any group until the Bush administration and republican congressmen committed treason for eight years and counting.
Ah-ha. Now what was buggin
Ah-ha. Now what was buggin em about all this has now trickled into awareness.
All this fancy dancing around the methods we're going to use to give a bunch of free money to banks resembles nothing so much as all the various snow that was thrown in 2005 over the social security fight. People advocating for putting social security money into stock kept coming up with new ways to say that the money would be safer and we'd all be rich, when of course, the entire point was to provide the ponzi scheme of a stock market with new sucker investors. (That fight was more or less occurring at the same time Alan Greenspan got up in front of Congress and told them to that ARMs would ensure furthe rprosperity in the housing market. Heh.)
So of course, people kept inventing new schemes whereby money would be 'safely' invested in the stock market thus ensuring no one would profit from it, except the government. When one scheme got shot down, another would arise, this time proving that moving the social security funds into stock would neither be crooked nor risky.
Likewise, now people keep coming up with ways to say 'we should trust Geithner to bailout wisely' but in any event, we must bail them out. Only this time instead of Republicans incessantly pushing new unworkable theories, it's Democrats incessantly pushing new unworkable theories! Yay! Curiously enough, both schemes' benefits would accrue to the same class of people.
max
['I knew something was bugging me about this.']
soy sauce...
tagged as:- solution
and just a dash of coriander. Pan fry in hot peanut oil until the smell of it improves. Yum.
New Era
I think we'll see a populist backlash this coming week of the likes we haven't seen in this country, ever. It will cross partisan lines and change American politics forever.
Obama doesn't get it, nor does Rush. Frank Rich does, and calling this a Katrina moment for Obama isn't far off the mark. Probably we'll end up the worse for it, but the blame belongs with Obama and the Wall St. crowd who thought we could maintain business as usual by tapping the working stiffs, who aren't too happy right now.
Looting
Kevin - You are consistently overlooking looting by the current management.
As Simon Johnson has explained at Baseline Scenario, until you remove the people with the incentive to make as much before the music stops (think Merrill's $3.6 BILLION bonuses) the looting goes on.
So, it may not be the biggest problem with Geithner's dithering, but it isn't nothing, and it just feeds the outrage as it becomes known, poisoning other, better alternatives.
The point of nationalizing
The point of nationalizing is not to wipe out the shareholders. The point is to get govt control, kick out management, open the books, etc. As long as the people who created this mess are in charge they will be giving themselves big bonuses and salaries, lending themselves tons of money that they may never repay, and otherwise looting the banks at taxpayer expense.
Looks like someone else made
Looks like someone else made the point about looting. But I also forgot to mention that as long as the culprits are in charge, there is nothing preventing them from digging the banks and the taxpayers into deeper holes. And the Geithner plan sounds like a blueprind for a hole to China.
I agree
g. powell - I agree. Maybe not next week, but certainly soon. Of all the bad timing, April 15 is right around the corner - when taxes move to the forefront of people's minds. Nobody likes paying taxes in the first place, but this pill has become almost too bitter to swallow for the masses.
Well said Kevin
Well said Kevin. I'm amazed at how eager everyone (really everyone) is so eager to cry doom over the Geithner plan. The fact is all roads are really ugly from here. I'd give the Geithner plan a 30% chance of success. So I guess it makes sense for all these commentators to predict failure and probably end up making themselves looks smart.
The trouble is all alternatives are really bad. Nationalization seems the most favored, but will be very ugly and most likely cost much more than the Geithner plan, becuase the assets will still have to be written off, capital will still have to be injected into the banks and market pricing as bad as it is now will impode. I think your conclusion is right Kevin. Lets give Geithner his chance. If it succeeds it will be one of the best ways out of this mess. If it fails then everyone is going to get their lovely nationalization anyway. And while its true that we should address this as soon as possible, the fact is the economy is not going anywhere for a few years anyway, and the FED is helping to address immediate credit demand issues.
Calling all empaths
Who wants to read Tim's facial expressions? He has no game face. The fourth-grader who wonders if the teacher knows he cheated on the test.
"Never in American history
"Never in American history have so many acts of treason against We The People been committed by any group until the Bush administration and republican congressmen committed treason for eight years and counting."
I sympathize with the sentiment, but there was this thing called the Civil War...
The fact that large sections of the country (including most GOP supporters) consider what happened in the 1860s to have been quite acceptable, to consider Lee and Davis as heroes, and the sad history of reconstruction, mean that Obama et al have to be very careful going forward. I've no idea what Obama's true feelings are (or for that matter Geithner's, Bernanke's, etc), but I suspect they are all savvy enough to know the political history of stabbed in the back arguments, whether in Germany after WW1 or the US after Vietnam. Regardless of the final destination, they have to do everything they can to ensure that the equivalent arguments, (and they will be made) over the next twenty years, are the province of loonies and cranks, not part of the mainstream discourse.
I think the choice that
I think the choice that Atrios, Krugman, et al. present us with is having the government suck it up and eat Big Shitpile via nationalization and spend a ton of money recapitalizing the banks, or having the government spend a ton of money to subsidize Wall Street hedge funds and investment bankers by having them eat Big Shitpile, thereby still costing taxpayers billions, but at the same time transferring huge sums to Wall Street in the form of loan guarantees, bonuses, etc. It's about cutting out the middlemen -- namely the Wall Street geniuses that caused this crisis in the first place -- versus the Geithner/Summers plan for helping poor Wall Street geniuses resurface the helipads at their Hampton cottages with taxpayer money.
I tell ya, if I were in charge of some big hedge fund right now that was in on this deal, this would be the best day of my life.
Wait A Minute, Kevin
Kevin said, "If Geithner's plan fails, we eat it. If we nationalize the banks and become owners of all the toxic waste, we eat it. This financial crisis is going to cost the government a ton of money no matter what we do at this point.",
But aren't the following points true? I'm not an economist so I'm really asking:
1) Under Geithner's plan, we bid up the price of the assets before we bail them out thus jacking up the cost to the taxpayers, and since, as Stiglitz says, they are $2-3 trillion in the hole, if Geithner's plan works it costs us somwehere in that neighborhood of $2-3 trillion, which is no small amount of money
2) Under Geithner's plan, taxpayers don't end up owning the assets and benefiting from any future appreciation in their value