Monday, March 23, 2009
Bank A has $500 million in toxic crap. You buy it on the Geithner Plan for $100 million because the current value is 20 cents on the dollar, you pay $7 million. Toxic crap goes up to $125 million, you just made a cool $12.5 million on a $7 million investment, more than doubling your outlay. The potential to make a crapload of money if you buy at these bargain basement prices and wait until the housing market improves in the future is nice.
There's just two problems with this.
One, Bank A is going to lose $400 million on the above deal. They don't want to lose $400 million on said deal, so there is no way they will sell at 20 cents on the dollar. In fact, the banks are going to want to make a profit on these sales, so they are going to want to sell at above 100 cents on the dollar. The bank is in fact going to want you to pay $600 million for its $500 million of toxic crap that's worth $100 million, selling instead at 120 cents on the dollar.
In this scenario, the bank gets its $500 million. It's a happy bank, because it's getting $400 million in free money. The private investor put in $42 million (7% of $600 million) and is getting something actually worth $100 million, still a damn good deal. Should the price go up, it makes money. The only loser here is the taxpayer. The taxpayer is out $400 million plus.
If this is a trillion dollar program, and all the money is spent, the banks get $850 million dollars, the taxpayer loses a mint, and private investors still make a tidy profit.
Which brings us to problem number two: the deal's still not good enough for private investors.
Investors wondered how much of Geithner's plan would pass congressional muster, and questioned whether there would be widespread participation in the asset purchases. Officials at Pimco, the world's largest bond fund, said it would jump in, but Congress's recent erratic behavior, specifically toward strings it is attaching to companies that receive bailout aid, has some leery over the government as a trading partner.Wall Street knows the government needs them to cover this bailout. They know this deal smells like rotten fish. They fully expect Congress to find a way to kill this thing. Ergo, Timmy's going to have to make them an even better deal than this is now, as ridiculous as that sounds. They want guarantees up front. They will get them. Timmy doesn't have a choice now. Wall Street has Timmy and the taxpayers just where they want them and Geithner's response to us will be "Bend over!"
"The program seems viable and I'm trying to connect the dots: Will this really help the banks normalize lending and therefore help the overall economy?" says Quincy Krosby, chief investment strategist at The Hartford. "I think the response will be positive--then you get into the next phase that is private investors working with the government."
"Given Congress's performance last week it's difficult to imagine investors will want to join the government unless there are written guarantees that the government can't change the playbook along the way," she adds.
Populist outrage over bonuses paid at troubled insurer and bailout recipient American International Group led lawmakers to discuss measures ranging from more stringent control over executive salaries to taxes approaching 100 percent on bonuses.
Such talk, as well as general apprehension over stringent controls of the financial system, sent jitters through the investment community that could reverberate should Washington start wobbling over the toxic asset program.
"It definitely is a step in the right direction, but it doesn't address the real fundamental question which is, has Wall Street become irrelevant?" Sowanick says. "Wall Street, which used to the provider of liquidity, can't do it alone anymore. The buy side has become so large that it dwarfs anything that Wall Street can do on its own, so you need an intermediary."
Enjoy. It's going to hurt. We're bailing out the banks again, only Timmy thinks we're too stupid to figure it out.
Of all the charges levied during the debate over the economic stimulus package, Louisiana Gov. Bobby Jindal (R) offered one of the most foolish. In a widely-panned national address, Jindal complained bitterly about "wasteful spending," and to prove his point, highlighted "$140 million for something called 'volcano monitoring.'"Now, why would Americans possibly want to monitor active volcanoes, anyway?
Even at the time, it was an unusually foolish thing to say. A month later, Jindal's complaints look even worse.
An erupting Mount Redoubt exploded again at 4:31 this morning -- its fifth and strongest discharge yet -- sending an ash cloud to new heights, the Alaska Volcano Observatory reported.
Ash has now been detected at 60,000 feet above sea level, the National Weather Service reported.
The AP added, "Ash from Alaska's volcanoes is like a rock fragment with jagged edges and has been used as an industrial abrasive. It can injure skin, eyes and breathing passages. The young, the elderly and people with respiratory problems are especially susceptible to ash-related health problems. Ash can also cause damage engines in planes, cars and other vehicles."
A USGS geologist confirmed to Zachary Roth that "a portion of the stimulus spending for volcano monitoring that Jindal lampooned has been slated to go to USGS monitoring Redoubt."
However, even the GOP has to admit the Dow having gained 17% in two weeks means the President is the greatest financial wizard we've ever had in the White House by their own logic, the stimulus is working, Wall Street loves Obama, etc. etc. etc...I wonder when we're going to see the wingers say that Obama gets credit for the last two weeks? I'm sure it'll be any time now.
[UPDATE] Ezra Klein on Timmy's Shiny Plan:
So the Geithner plan is really two bets in one. The first is that this is not the worst case scenario and does not require the fixes developed for the worst case scenario. The second is that if this turns out to be the worst case scenario, then we still have those fixes available to us, and the need is clarified among the actors -- like Congress and the market -- whose reaction in the absence of consensus could scotch the whole thing.In other words, it's lousy enough plan when it fails for Timmy to say "Well now we have no choice but Plan N."
Seems like a stupid, stupid idea to me...but then the whole point is to convince GOP recalcitrants and Blue Dog obstructionists, either one of them blocking Plan N is equally stupid.
We have to fail badly enough to even make the GOP see that Plan N is the only choice. Hooray!
--Kasey Pipes, Politico.com
To religious conservatives, this is called "education reform." Imagine that this passes, and textbooks in your state are changed to raise doubt on that silly evolution theory because the textbook company can't afford two editions.
The Texas Board of Education will vote this week on a new science curriculum designed to challenge the guiding principle of evolution, a step that could influence what is taught in biology classes across the nation.
The proposed curriculum change would prompt teachers to raise doubts that all life on Earth is descended from common ancestry. Texas is such a huge textbook market that many publishers write to the state's standards, then market those books nationwide.
"This is the most specific assault I've seen against evolution and modern science," said Steven Newton, a project director at the National Center for Science Education, which promotes teaching of evolution.
Texas school board chairman Don McLeroy also sees the curriculum as a landmark -- but a positive one.
Dr. McLeroy believes that God created the earth less than 10,000 years ago. If the new curriculum passes, he says he will insist that high-school biology textbooks point out specific aspects of the fossil record that, in his view, undermine the theory that all life on Earth is descended from primitive scraps of genetic material that first emerged in the primordial muck about 3.9 billion years ago.
He also wants the texts to make the case that individual cells are far too complex to have evolved by chance mutation and natural selection, an argument popular with those who believe an intelligent designer created the universe.
It's stupid by proxy. The article goes on to explain that supposedly educated Texas state officials, the people in charge of educating the children of a huge state like Texas, will almost certainly end up voting 8-7 one way or another.
The fact that this is even up for debate is staggering. Other countries are laughing at us over this, and we wonder why America's place in the world is that of "dangerously stupid titan with a child's mind".
In the end, it's all about a bunch of people who had no problem with Bush lying, killing, spying, breaking the law, torturing people and generally being an asshole. They just want to pin it on the colored fellow with the ethnic name.
[UPDATE] Let's also not forget that just two months into Barack Obama's term, we have GOP lawmakers calling for an "armed and dangerous" response and adopting "insurgent tactics" in response to the Democrats being in charge.
Only takes one, folks. Our history is full of Presidents who did not survive their terms.
It's getting kinda ugly. I'm still with Kroog on this for various reasons, but Brad is right as far as the political aspect of the issue is still a consideration and must be part of the solution. Both arguments are compelling.
Kevin Drum has another perspective:
If Geithner's plan fails, we eat it. If we nationalize the banks and become owners of all the toxic waste, we eat it. This financial crisis is going to cost the government a ton of money no matter what we do at this point.Which really is a good point, and something BooMan said over the weekend. The argument is that we should let Timmy do his thing because since the taxpayer is screwed anyway and that the diminishing returns of implementing nationalization is not worth it compared to the hassle of implementing it, plus the risk to Obama's agenda should Obama publicly fire the guy, means we should give Timmy a chance for the plan to work.
But again, that's putting political stuff over the financial stuff, and in the long run we'll be stuck with the same problem. The thing with Plan N is that the government can make sure what needs to get done actually gets done, as in "breaking up the bad banks and unwinding toxic crap". If we just went ahead and did Plan N two months ago instead of fiddlefarting around trying to solve the unsolvable No Right Price problem, we'd be that much closer to a real solution and a working economy by now.
It's a good thing Madoff plead guilty, because the nice US attorneys kind of missed the Nigerian Bank Scam e-mail on page 36 of the e-mails.
No, I'm not kidding. The same government who apparently overlooked a $50 billion plus Ponzi scheme can't tell the difference between an actual victim of the scheme and a e-mail fraud scam that's been around for literally years now.
The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.Keep in mind when Timmy says that the government is "sharing risk with the private sector" he means "assuming 85 to 97% of the risk". Also keep in mind when Timmy says "private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets" then the Government has put the No Right Price problem squarely on the heads of the market.
The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.
Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.
This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.
What I mean by the "No Right Price" problem is this: There's no right price that can satisfy the two goals of the program: a price that is both high enough to make sure the banks get paid enough for their toxic assets so that they don't suffer a massive loss, and a price low enough to make sure the US taxpayer assuming the vast majority of the risk here doesn't lose money.
If the price is too low, then banks won't sell their assets because they will be sold at a confirmed loss. If the price is too high, then the taxpayer is on the hook for billions in losses...and the private partners running the funds won't buy either knowing some of their skin in the game will be lost as well.
SOMEBODY has to lose on this deal, either the banks (and they collapse), or the public-private partnership (and the taxpayer loses hundreds of billions). That is a hard and fast rule. If there was a right price, the market would have determined it by now. In fact it has, but Timmy on one hand says that the current market price for these toxic assets is too low (the market is broken) and on the other, he's depending on the private partners in this plan to determine a market price for these assets by throwing government money at it (the market works perfectly fine).
Timmy's plan is based off a paradox. Practically, he's decided that the taxpayer losing several hundred billion is better than the banks collapsing. It's a moral hazard brand bailout of the banks using these funds as the middleman, but he has plausible deniability because he's not the one setting the price.
The practical upshot is that most likely the plan will fail miserably because the private fund managers aren't going to pay the banks' crazy prices for this toxic crap. The fund managers can honestly say "If I pay what the banks want, I will lose money and the taxpayer will lose money. I refuse to do that." The fund managers will not buy unless they can make a profit. The banks can honestly say "If I sell at the price the fund mangers want, I will have to close my doors and the country will lose thousands more jobs. I refuse to do that." The banks will not sell unless they can make a profit.
Standoff. Nothing happens...other than more time is wasted. That's the part where we all lose.
- A single engine plane crashed near Butte, Montana, killing 14, including 7 children.
- Obama will allow some of the 240 Gitmo detainees to settle on US soil.
- The U.S. program to stop AIDS is buying cheaper Chinese condoms, putting 300 Alabama workers out of a job.
- Obama's latest Pakistan aid plan would link help for the country to assistance with the war in Afghanistan.
- The President commits $2.4 billion to the goal of one million plug-in hybrid cars by 2015.