Wednesday, February 18, 2009

Roubini On Geithner

Plan N, it comes for thee:
While it was not his intention, the reality is that Mr. Geithner is going to confirm the insolvency of the financial system. Once we face this truth, there really isn't much left to do but nationalize.

We are not talking about the government operating the banks for the long-term. But, as was done in Scandinavia in the early 1990s, we are talking about orderly clean up, then reselling the banks to private investors.

Didn't really consider that Timmy's plan would be bad enough to fail to hide the fact that the financial emperors have no clothes, and the bottom line is he's doing the world a huge favor. Naturally this means it's up to Helicopter Ben to screw that plan up and go back to Good Ol' Lying.
Federal Reserve Chairman Ben Bernanke on Wednesday it was challenging for government to manage banks for a long period, appearing to argue against nationalizing troubled financial institutions.

"There is a problem that if you have government-run institutions you tend to loose the franchise value of counterparties and others don't want to deal with you because they don't know your future," Bernanke said in response to a question after a speech he gave at the National Press Club.

"Whatever action that needs to be taken at one point or another, there is a very strong commitment on the part of the administration to try and keep banks private or return them to private hands as quick as possible."

Which of course doesn't fly in the face of the trillions you've given these private banks, Ben.

Scary Kroog Is Scary

The Kroog:
Everyone should be paying attention to the political/fiscal catastrophe now unfolding in California. Years of neglect, followed by economic disaster — and with all reasonable responses blocked by a fanatical, irrational minority.

This could be America next.

Scary. How scary?


Zandar's Thought Of The Day

Ruth Marcus, blathering about the GOP in WaPo: (h/t Balloon Juice):
"After the November elections the party was beat back and defenseless," GOP strategist Ed Rollins told me. "I think this allows them to stay unified and will help rebuild their financial base. They at least have a pulse."
Somebody explain to me how the party united against adding 3.5 million jobs to the crumbling economy they created is going to somehow use this to rebuild their financial base.

More Plan N

Yeah, I know, bunch of Plan N posts in the last week or so, but it's that important. Paul LaMonica at has a pretty good primer on the whole situation.
So which solution makes more sense? Nationalize to liquidate the ailing banks or nationalize to cure them?

One expert on Japan's lost decade said a marriage of these two strategies might be what could work best.

Hugh Patrick, a professor and director of the Center on Japanese Economy and Business at Columbia Business School, said there clearly needs to be more regulatory oversight of the most troubled banks. He said Japan took too long to truly take control of problem banks.

In some cases, the government may want to provide financing for stronger banks to take over weaker ones. "I wouldn't be surprised to see, either under forced circumstances or voluntarily, more consolidation in the banking sector," said Patrick.

But the only real way to fix the banking system, Patrick said, is to learn from Japan's mistakes and do what Alpert is suggesting, i.e. act more aggressively.

"If the U.S. nationalizes banks, it should be to clean up a particular institution, get its balance sheet straight and get rid of management," Patrick said. "The ultimate goal is to clean up banks enough so that private investors would be willing to invest capital in them. That is similar to what eventually happened in Japan."

Solid advice in the column and worth a read. It's also worth noting the sheer number of mainstream news sources calling for Obama to go ahead with Plan N. Both the right and the left see it as a necessary idea, and nobody's really asking anymore if we should have government control of banks, but when and how much, and for how long.

It's important to point out that more media sources are openly asking when and how this should be accomplished.

Obama's Full House

President Obama unveiled his mortgage plan for the country, a $75 billion effort to keep 9 million American homes from foreclosure.
While still voluntary, the program contains a mix of carrots and sticks for mortgage servicers and investors, both of whom have been seen as resistant to modifying loans. The program would not only give servicers $1,000 for each modification, but would give them another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.

But the administration is also wielding a big stick. It will work with Congress to amend bankruptcy laws to allow judges to modify mortgages, a step community advocates say is badly needed but that the financial industry abhors.

The bankruptcy law changes are a vital component of fixing the problem, and if the financial industry hates it, too bad. Bush should have done this six months ago, but he was too busy being a moron.
In his speech in Mesa, Ariz., a community hit hard by the mortgage meltdown, Obama laid out how foreclosures hits more than just the troubled borrower. Seeking to drum up support from those who are paying their debts, Obama said that the downturn in the housing market has claimed many companies and jobs. This, in turn, has hurt state tax revenues, which means less money for schools and other public services. And, he said, it has made it harder for everyone to get credit.

"In the end, all of us are paying a price for this home mortgage crisis," Obama said. "And all of us will pay an even steeper price if we allow this crisis to deepen -- a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit."

He's right, but we also have to remember that manipulating the housing market is how we got into this mess to begin with. Caution is needed here, and artificially boosting home prices may cause us much more headaches down the line. Still, to fly a crashing plane, you have to at least get the thing to level off first, and we're still nowhere near the bottom of the housing market (and the commercial real estate market is only just beginning to crash.)

Obama however is dead on that if the housing market doesn't at least level off soon, many more states will end up like California. Of course, mortgage plan or not, this may happen anyway.

The Big Boys And Plan N

Here's the Yahoo Tech-Ticker guys talking to analyst Chris Whalen about Citi and BoA ending up in Plan N territory before the end of the year.
What would this mean, exactly? The government running our banks for the next decade?

No, says our guest Chris Whalen of Institutional Risk Analytics. "Nationalization" is a poor word to describe the process. "Receivership and restructuring," along the lines of what the FDIC did with WaMu, is the right way to think about it.

The biggest concern of those opposed to the RECEIVERSHIP route is that the debt markets will seize up again as debtholders realize that their capital is at risk. Chris Whalen thinks this fear is overblown.

Which is correct, because there's far more at risk than just shareholder debt and intraparty contracts. The whole thing is rotten, top to bottom. A strong plan that deals with these issues is what the financial sector wants to see and what the American people deserve to have.

Roland On Down The Road

The hue and cry for Sen. Roland Burris to step down is growing very, very loud.
Mr. Burris's story has more twists than the Chicago El, and none of them good. Caught in a swirl of accusations of perjury and calls for his resignation from state Democrats and Republicans alike, Mr. Burris said yesterday, "I welcome the opportunity to go before any and all investigative bodies, including those referred by Illinois Attorney General Lisa Madigan and the Senate ethics committee to answer any questions they have." When that opportunity arises, why should anyone believe him?

From the moment that Mr. Burris was selected, he strove to portray himself as a blameless public servant. The sad pictures of Mr. Burris being cast out into the rain by the Democratic leadership of the Senate, which initially refused to seat him, turned public opinion in his favor. Mr. Burris got his seat. But this latest revelation makes a mockery of his professions of no quid pro quo. It is a violation of the public trust. The people of Illinois have suffered enough. Mr. Burris should resign.

And as Steve Benen points out, Burris is in some pretty serious trouble.
As of yesterday afternoon, Burris is under investigation by a state's attorney's office in Illinois and the Senate Ethics Committee. Illinois Gov. Patrick Quinn (D) has said publicly that Burris owes voters an explanation.

The Chicago Tribune has called for Burris' resignation. So has the Washington Post. Expulsion seems unlikely, but it's on the table.

George Stephanopoulos noted that Burris is poised to face some intense pressure from every corner, and quoted one Democratic source saying, "He's in deep sh*t."

I should note, no one has accused Burris of corruption, per se. The problem here is that he wanted the Senate seat, and was apparently afraid if he disclosed his contacts with Blagojevich's office and attempts to raise money for him, Burris would be tainted by the impeached governor's scandal. The senator seems to have decided, then, to hide relevant details, even when asked about contacts under oath.

This won't end well for him.

No, it won't. It's not going to end well for any of the Democrats involved, or any of the legislation Obama needs to pass, unless Burris goes away. This is something I'm thinking Democrats are going to have to bite the bullet on, especially in the wake of Blago's impeachment. Not only is it the right thing to do, but it's the smart thing to do...and really, the only thing to do.

I'm going to have to say that he's got to go. Illinois is one-strike territory politically right now, and Burris already has Blago around his neck.

I don't see how he's going to survive this.

Plan N Gains Ground

A pair of articles in the Financial Times detail some unlikely champions of Plan N: DC politicians, and Alan Greenspan.
The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

Now, before you get all impressed that Mr. Bubble has finally seen the light, he has some caveats that are worth examining:
But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

The notion of protecting "senior debt" is amusing: if all the banks are insolvent, and they all owe each other money, who is going to pay that debt off? Increasingly it's looking like the price for allowing Plan N is making sure as few banks as possible die. The problem is they're all terminal. Selective rehabilitation without systemic reform means that the banks that survive will still be insolvent without trillions of taxpayer dollars.

We're closing down Peter so that Paul doesn't have to pay him back. Perhaps the pile of banks in the country needs to be whittled down to a much smaller number in order to have a financial system small enough that it can be saved. But again, when they are all insolvent, who decides who lives and who dies?

We'll see.


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