Timmy's Plan Is An Abject Failure

Let me say that again. The Treasury Secretary's plan to save the economy will not work. It's terrifying if you thinkg about it. It works like this:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

But the details have been treacherously difficult, politically and financially, and some of the big decisions are the same as those that bedeviled the Treasury Department under President George W. Bush last year.

Timothy F. Geithner, the Treasury secretary, provoked scathing criticism from investors in February by announcing the broad outlines of the plan without addressing the tough questions, like how the government planned to share the risk with investors or arrive at a fair price for the assets that would neither cheat taxpayers nor harm the banks.

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The bottom line is instead of giving the banks $2 trillion for toxic assets, they give $1.95 trillion or so to big investors to buy the crap from the banks. On the rare chance the assets make money, the investor scores huge returns. If the assets continue to lose value (and they will) the taxpayer has to pick up the tab.

It's nothing more than a $2 trillion bailout for the banks...oh and taxpayer money will then go to private investors. It solves precisely nothing. It is, quite literally, robbing Peter to pay Paul. The toxic assets continue to decay radioactively. The banks pretend they are solvent again. The investors pretend they are solvent. The taxpayer is decimated, and the economy continues to spiral down into hell as the money America needs to reform health care, education, and the enviroment instead goes to Wall Street.

It's the financial system that's broken. Timmy is trying to fix a car with no engine, no transmission, no brakes, and no steering by pretending the gravity making the thing roll downhill is all it really needs.

And on top of everything else, the plan is the very essence of moral hazard. The government is going to be setting up these private investors with decent returns if they make money, but staggering returns if the assets lose money all at taxpayer expense. On top of all THAT, the bidding process absolutely ensures that the government will be overpaying for these bad assets because if the banks sell the toxic crap for less than what they paid for it, the banks will lose money. Ergo, the banks have every reason to sell this stuff way higher than what they are assessing it for and make a profit off the American taxpayer's back. It's a direct bailout. Period. It's a travesty of the highest order and it will not work in the long run.

Now the government will lose trillions on this deal. Trillions.

Let me say that one more time: Abject failure. The Kroog, CalcRisk, Jim Galbraith, John Cole, and Yves Smith have more, and they all hate it.

I hate it. If this is truly Obama's plan, he will be a one-term President, and we will be in a depression for years.

Mark this one, kids. I hate to say it, but Barack Obama is about to bury this country. in the long run this will explode because the housing market will continue to fall, and as it does, America's credit rating will disintegrate until our foreign creditors say "We'd like to be paid back now, please."

Then it ends.