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Geithner Plan is Dead
The New York Times reports that Tim Geithner's plan to buy up toxic assets from the banking system is dead. Basically, even at the subsidized prices the program would have offered them, banks weren't willing to sell because it would have forced them to recognize big losses, and recognizing big losses would have been bad. Ezra Klein comments:
There are two ways of understanding what happened here. The first is that banks couldn't sell their assets at current prices because doing so would have rendered them effectively insolvent. In this scenario, PPIP fails to fulfill its intended function: Saving the banks. The toxic assets survive and the banking system remains hollow and unhealthy.
The second is that banks no longer need to rush their troubled assets off their books because they're increasingly able to raise private capital, operate in a restored financial market, and wait out the last vestiges of the storm. They can, in this world, let the value of the assets rise naturally, and sell them off later. In this scenario, PPIP is no longer necessary.
I'll take door #1. It's at least arguable that the banks were justified in not wanting to sell toxic securities at the fire sale prices on offer from vulture funds and others. But Geithner's plan would have offered them considerably more than that — and they're still unwilling to sell. That means they're completely dedicated to the proposition that all their mortgage-backed junk is worth exactly what they say it's worth.
Maybe this will work out in the end. But history suggests that we'd all be better off if banks were forced to honestly account for their losses, take their lumps, and then move on. Instead, Geithner's stress tests have persuaded everyone that things are fine and losses on these securities aren't as bad as everyone thinks. Maybe so. But if Geithner and the banks are wrong, doing it this way is likely to drag the pain out over years, producing a long period of sluggish semi-recovery and slow, fragile growth.
That's basically my fear at this point. I sure hope Geithner knows what he's doing.
It is Firesign Theatre
"Shoes for industry. Shoes for the dead."
Geithner knows, but do the banks and investors?
Geithner knows the banks will remain perrenial sick men until the toxic assets mess is cleaned up, he was trying to find the most palatable way of doing it. I think the issue is that the banks have internalized their 'too big to fail' status, and therefore figure they can keep on playing chicken, confident they will never be held to account for their bad decisions. Question in my mind at the moment is what calculations the new private equity investors are making at this point which makes these investments a good idea.
Desuesi: Wouldn't runaway
Desuesi:
Wouldn't runaway inflation make these good investments? Or would it?
a bubble-icious future for the banks
The banks have apparently decided to bet their future on the re-inflation of the housing bubble.
That ain't gonna happen.
ergo: the banks have just made a misstep that will prove fatal in the intermediate future.
Protecting Wall Street
Kevin, Geithner is committed to saving the financial services industry, not the Main Street economy. He is afraid that price discovery, which would happen if banks were forced to sell these toxic assets at market value instead of the current mark to fantasy value will reveal the big banks are actually insolvent--and that would trigger legal requirements for the feds to take them over. Insolvent banks will not pay 8 figure bonus's. Or even 6 figure ones. He is protecting his own.
The refusal of this crowd of free market advocates to rely on the market reveals the truth about the whole thing.
As long as this is allowed to persist, the Main Street economy will suffer greatly.
Remember, the real world effects of this mess have only begun to be felt. When the millions of laid off people have to downsize their standards of living to get by on their new, lower paging jobs, it's going to get very hairy politically.
Meh
Geithner may be wrong on this, but it's just ridiculous nonsense to keep asserting that he's "protecting his Wall Street buddies" and their bonuses.
It's quite obvious that Geithner thinks that saving the financials is necessary to the recovery of Main Street. Perhaps he's wrong. Better minds than mine on this stuff disagree vehemently.
But it would be helpful to intelligent discussion if folks were able to make the distinction between the motivations of right-wing Bushies and generally center-left Obama administration people.
After 50 years of following politics from the left, I'm finally beginning to understand the age-old Republican complaint about "knee-jerk liberals."
The Bush administration is history. Get over it. Obama beat Hillary, without my vote btw. Get over it.
Each $1 trillion given to
Each $1 trillion given to Wall Street bankers could have provided every Social Security recipient with $20,000 instead of a measly $250. Democrats are for the Wall Street bankers, and the Republicans are for the little guy. Can't wait to punish the Democrats at the next election. AARP rules.
That sure is funny
Luther:
"Democrats are for the Wall Street bankers, and the Republicans are for the little guy."
OK, to the extent that Geithner, Summers & Co are Democrats, the first half of your statement may be debatable, but the part about Republicans is just laughable. In which dimension of this universe are you living?
Stress Tests <i>Were</i> Important
Speaking as an investor who deals with this stuff on a weekly basis, the stress tests were, in fact, that important and that reassuring. The thing that was lacking before that was "transparency". Investors had no idea who was exposed, or by how much.
The private capital that's investing in banks is now being done with knowledge, fairly precise knowledge, and the investors are getting very good rates for their money. Much better than they can get anywhere else, in fact. In this, they are following the lead of Warren Buffet, among others.
Banks will be taking losses, quite probably, but they aren't likely to be going bust left and right. That's the difference.
Coming attractions
So, what do the banks know that we don't?
If you take a long look at the numbers of upcoming Alt-A and Option ARM reset/recasts - everything backed by mortgage debt is going to plunge into freefall over the next two years...AGAIN.
These guys must really believe that the Obama administration is going to turn this cluster around, despite the condition of the fundamentals...or they are just plain stupid with greed.
Something smells.
What's the alternative?
...a long period of sluggish semi-recovery and slow, fragile growth.
But if the banks were "forced to honestly account for their losses, take their lumps, and then move on," how, and to where, would they "move on"?
If they "honestly account for their losses" at current prices, they could well be, as you observe, insolvent. What then? How does that compare to a scenario of "a long period of sluggish semi-recovery" and so on?
If they postpone the day of reckoning, they aren't immediately found to be insolvent, life goes on, the can is kicked down the road, and there is at least the possibility that things will be at least somewhat better later on.
I'm no fan of banksters, that's for damn sure! But I don't really see why your alternative is better.
What did we expect?
Not only did the banks insist on believing that their toxic assets had more value, that was the whole point of the plan. People would buy them, we were told, because they were worth more than they banks could sell them for (because of a lack of liquidity, an whatever else).
So, given that the government was saying these assets had value, and there was no pressure for the banks to sell, why would they? At the same time, they were raising money so that they could continue to pay themselves as if they were hugely profitable, and at the same time, dare Treasury and the Fed to stop with all of the market saving backstops, loan guarantees, zero interest loans, and T-Note buy backs. What a deal.
In Treasury's defense, I wonder if the idea is not so much to save the financial institutions in particular, but to avoid a situation wherein only one or two large institutions survive, buying the rest, and creating an antitrust headache for the ages.