Hostage Situation On Wall Street

The gang at TPM Muckracker have gotten a hold of an internal memo from Deutsche Bank that details an interesting plan: convince Treasury to either overpay for toxic assets or face the consequences.

In the memo -- one of Deutsche's daily "Economic Notes" sent out to the firm's clients, and to some members of the press -- Joseph LaVorgna, the bank's chief US economist, essentially, appears to warn that if the government doesn't pay high prices for the toxic assets on the books of Deutsche and other big firms, there will be massive consequences for the US economy.

Writes LaVorgna:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the
economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives.

We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

One leading economist described the memo to TPMmuckraker as a "ransom note" to the US government. And David Kotok of Cumberland Advisors, who writes such research memos for his own clients, acknowledged that the memo, like all such communications, could be interpreted as an attempt to influence policy-makers.

It's the notion that Treasury has no choice but to overpay for these assets or face a "prolonged deterioration in the economy" that bothers me. The banksters take no responsibility for the situation, instead smugly inferring that Treasury will magically fix everything and let the banks operate as normal or face a situation where impending collapse will ruin the country.

The teeth-grinding truth is the way Treasury is playing the game right now, LaVorgna is 100% correct. As long as Obama refuses to consider Plan N, the other options on the table are overpay for toxic crap, or let the banks collapse. Collapse of course is the least politically and economically tenable situation, so that leaves giving banks the money or else.

Does this not mean that the inherent moral hazard of Treasury buying toxic assets now makes Plan N absolutely necessary?