By Jove He's On To Something

Josh Marshall takes a look at this morning's NY Times story on Obama's "bad bank solution" to the financial crisis and plays the chessboard ahead a couple of moves (emphasis mine).

The message they're clearly sending is: we're not going to 'nationalize' the banks.

What I wonder, though, is whether or not we're running into a semantic dead end that is obscuring some more pertinent questions.

The core problem is that many, perhaps most of our major financial institutions are insolvent. They have more liabilities than assets. A functioning financial system requires solvent banks. And only the government has the resources to manage the massive recapitalization to get the key institutions back on their feet. At that level of generality, the issue assumes a degree of clarity.

You'd think that, but the reality is clarity is the enemy of the current financial system and the evidence is that the Obama financial team agrees with that assessment. Clarity in this situation is in fact the last thing the guru of Obama's current financial team wants to see. Former Clinton Treasury Secretary Robert Rubin was the mentor of Tim Geithner and was the guy behind the curtain for getting Clinton to sign the Gramm-Leach-Bliley Act.

Rubin's latest complaint? Telling the truth about the sharply decreasing value of toxic derivative assets banks are holding, which is basically the accounting practice of valuing these assets at what the market last paid for them, is known as "mark-to-market". And Rubin apparently is blaming this practice for the economy right now.

Robert Rubin, who quit his post as senior counselor at Citigroup Inc. this month, said an accounting rule forcing companies to mark down assets every quarter to reflect market value has “done a great deal of damage.”

“I spent my whole life at Goldman Sachs believing in mark- to-market accounting, and having said that, if you look at the experience from the last two years, I think mark-to-market accounting has led to terrible vicious cycles in asset prices,” Rubin, the former U.S. Treasury secretary, said during a discussion at the 92nd Street Y late yesterday.

Companies including Citigroup and American International Group Inc. say mark-to-market, also known as fair-value accounting, doesn’t work when few buyers are willing to trade assets like subprime mortgages. Proponents such as the U.S. Financial Accounting Standards Board say the rule adds to transparency and gives investors information about companies.

Rubin joined Citigroup in 1999. Earlier this month, he announced he won’t stand for re-election to the board. Rubin, 70, proposed that a “reserve” accounting standard be adopted, which drew applause from the audience.

Citigroup received a $45 billion bailout from the U.S. government after reporting more than $85 billion of credit losses and writedowns from investments tainted by the subprime-mortgage crisis.

People ask me "Zandar, why do you think Obama's stimulus package is going to fail?" The answer? The people giving Obama economic advice are the people who learned the game from guys like Robert Rubin. If Rubin says "Gee, wouldn't it be great if banks and other companies could pretend the toxic derivative crap on our books was worth what we think it should be worth and not the actual market value" and invent billions, if not trillions of assets out of thin air, then you have to honestly consider that Obama's crack team of financial nerds will try to convince the President that this is somehow a really, really good idea.

If Obama buys that idea, our economy is over. As it is, the 'bad bank" idea already on the front burner is a terrible one, because as Josh Marshall points out:

What that sounds like is that we'll nationalize most of the banks because we have no choice. But we'll allow the current management to run the nationalized banks and the current shareholders to own the nationalized banks.

What am I missing?

Nothing, really. That is most certainly the "logical" endpoint of the plan, banks that have their bad debts nationalized and assets privatized, under private control, with privately held stockholders.

But you combine Bad Bank with the end of mark-to-market, and the results would be catastrophic. The government under bad bank would have no choice but to overpay for the toxic crap on banks' books, and then the banks can turn around and get themselves right into the exact same mess again. Meanwhile, the American taxpayer gets stuck with a government bank full of exactly nothing. It's a back-door bailout of the banks...again.

As I've said time and time again about Obama's econ team, they are made up of the people who helped get us into this mes over the last decade or so. What makes anyone think they will be able to provide an objective solution that's good for the American people, much less a solution that actually works?

Not me. When Bad Bank fails, what then?