Dude, Ditch The Dollar Part Deux

When America's largest creditor publicly says the world should dump the dollar as reserve currency and make up a new one, and that's the second time in four days that we've seen such a suggestion, somebody in charge might want to pay attention.

Just sayin.

Bend Over, America

Here's what bothers me the most about the Geithner plan. Private investors only have to put in 7%, but get 50% of the profit. That's a ratio of more than 7 to 1. Should you buy the toxic crap at 20 cents on the dollar and the price improves to just 25 cents on the dollar, you just made 150% on the return. Sick, huh?

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.

"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."

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!"

Enjoy. It's going to hurt. We're bailing out the banks again, only Timmy thinks we're too stupid to figure it out.

Epic Legislation Of Volcanic Activity Failure

Volcano wins in a KO.

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.'"

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."

Now, why would Americans possibly want to monitor active volcanoes, anyway?

EPIC FAIL.

The We Love Timmy Club

Pretty much everything you need to know about the subject of Timmy's Shiny Plan equaling free money for Wall Street can be summed up by the Dow jumping roughly 500 points.

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.

Yes?

[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!

Dear America:

"We'd be willing to discuss Obama's inclusion into the Sensible Centrist Club if he tells his base to eat shit and die and kills the Employee Free Choice Act. Otherwise...well...bad things may happen to him. Very bad things."

--Kasey Pipes, Politico.com

As Goes Texas's Biology Texbooks...

...so goes the nation's.

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.

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.

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".

Zandar's Thought Of The Day

Hey folks, let's not forget for a second what all this Tea Party Movement stuff is really about.

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.

Hooray For Despair

Dow's up 250 plus on Shiny Geithner Plan, and Brad DeLong and Kroog are slugging it out over the thing. Brad thinks the political aspect is more important (can't fire Geithner now, Obama's agenda is at risk, etc), Kroog thinks the financial one is more important (no right price problem, recycled Bush/Paulson plan).

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.

Another Milepost On The Road To Oblivion

The nice government folks prosecuting Bernie Madoff released a series of e-mails supposedly from the victims of Madoff's nefarious schemes to make it clear to the judge deciding the terms of Madoff's plea that Bernie needs the book thrown at him.

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.

Jesus wept.

Timmy Talks To The World

Timmy takes to the WSJ today to explain his plan for saving banks. I'm actually glad to see this, Timmy The Invisible Boy seems to be trying to be visible. In his own words:

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.

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.

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.

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.

StupidiNews!

• 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.

Last Call

Obama on 60 minutes was pretty interesting stuff. Most telling quote:

“One of the things that I have to do is to communicate to Wall Street that, given the current crisis that we're in, they can't expect help from taxpayers but they enjoy all the benefits that they enjoyed before the crisis happened,” Obama said. “You get a sense that, in some institutions that has not sunk in. That you can't go back to the old way of doing business, certainly not on the taxpayers' dime.”

And I shake my head because the Geithner Plan seems to me like it's the old way of doing business, only precisely on the taxpayers' dime.

Wanting to limit executive pay across the board is one thing, but that's sturm und drang signifying nothing if the taxpayer is the one stuck with the bag should Timmy's plan come up snake eyes.

And there seem to be an awful lot of ones on the sides of those dice.

The Battle So Far

There's basically two lefty blogosphere camps now on the Geithner Plan.

One is the Brad DeLong/BooMan/Kevin Drum camp, which basically says the problem is that toxic assets are critically undervalued and the solution is the Geithner Plan, it's as good as we can hope for, there's a decent chance that it'll work, but that the real problem is the Left is insane for attacking Geithner now and is making a critical mistake: it will only assure that the plan fails along with the rest of the Obama agenda.

Ergo, the correct plan of action is to stay cool and be practical, let Obama and Geithner get to work, support them on this, and pray it works. We don't have much choice: There's a greater than zero chance the plan will work, and a zero percent chance the plan will work if Geithner resigns and the GOP is able to block a replacement, assuring that zero work gets done to save the economy, leading to economic failure.

The other is the Digby/Kroog/John Cole camp, which basically says the problem is that the assets don't matter, the fact that one financial entity can cause a near collapse of the system is, and that the Geithner Plan is whistling past the graveyard. The real problem is that people refuse to see the system is broken, the banks are insolvent, and that Geithner's plan does nothing to address the issue. At best the same entities survive to cause problems down the road, at the worst we give away trillions into the black hole of moral hazard and the economy follows.

Ergo, the correct plan of action is to dump Geithner (for somebody who does see that the question of undervalued toxic assets is like wondering what temperature the lava is when it's flowing right towards you from the volcano) and then replace him with somebody ready to break up these Too Big To Fail institutions. There's a greater than zero percent chance replacing Geithner and instituting Plan N will save the economy, and a zero percent chance that the Geithner Plan will work, leading to economic failure.

The problem is one of these two groups is right, and making the wrong choice here more or less leads to total financial ruin. I happen to believe the second camp is correct, but I have to respect some of the arguments of the first camp. It boils down to which do you see as the larger risk, keeping Geithner and his plan, or dumping him and trying to make a new one?

Only Obama gets to make that choice.

The Pros And Cons Of Timmy's Plan

Brad DeLong takes up the pro position on it, The Kroog takes up the con with his response to DeLong. Both are very much worth reading. DeLong's basic theory is that, well, the Geithner plan looks really good on paper.

Q: Why is the government making hedge and pension fund managers kick in $30 billion?

A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.

Q: Why then should hedge and pension fund managers agree to run this?

A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.

Q: Why isn't this just a massive giveaway to yet another set of financiers?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion--and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

And that's a good argument. But it's based on the assumption that the problem is the toxic assets are critically undervalued. If the value of the assets goes up, the government makes money. If it goes down however, the government loses literally a mint.

The bottom line is this: the public-private partnership hedge fund beast by definition has to pay a premium price for these toxic assets and hope that the prices manage to go up above what the bank valued them at in the first place. Geithner has to.

The only way that happens is if the government creates and sustains another mega-housing bubble causing home values to explode across the country again, which will capsize the dollar completely in the process causing hyper-inflation to go with it.

This plan seems to be not only conducive to causing that scenario, but in fact it seems to be absolutely counting on it to happen. If Timmy doesn't pay the banks a massive premium, they won't sell, and they'll go under. This is nothing more than a giant accounting error, in other words...which is such a ludicrous assumption that it makes my chest hurt.

And that, ladies and gentlemen, is why the Gethner plan won't work. If all this was was an accounting error, then why not just absolve the banks of the accounting error and move on? It's because our entire economy is built on the shadows and assumptions that these trillions in toxic debts are real money that somebody owes somebody else. Without all that money actually existing, our economy ceases to exist.

Hell, we can't even figure out who owes whom what and how much!

And we're throwing trillions of real money into to hole to see if enough of it magically makes these assets worth something again.

Obama Goes After Executive Pay

This is going to be a hard measure to put through, and the arguments against the government doing this are pretty simplistic: what CEO would want to take the risk to innovate now when you know being successful means you'll get your pay capped? We'll drive the best and brightest away from the boardroom!

The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.

Increasing oversight of executive pay has been under consideration for some time, but the decision was made in recent days as public fury over bonuses has spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could range beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

One proposal could impose greater requirements on the boards of companies to tie executive compensation more closely to corporate performance and to take other steps to assure that outsize bonuses are not paid before meeting financial goals.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. Last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses exceeding one-third of their annual pay.

It hasn't occured to a lot of folks on the right that sharing that success with the rest of the company might encourage more innovation, productivity, and loyalty, but as conservatives will tell you, the CEO is the only person in a corporation that actually matters, and it's perfectly fine for that CEO to make thousands of times the salary of their entry level workers.

The only thing unrestricted greed has gotten us here in 2009 is an economy on the brink of failure. Guys like Bernie Madoff and Sir Allen Stanford. Guys more interested in playing the system for maximum personal benefeit than the benefit of their own employees. So yes, if this measure drives these "best and the brightest" away from the corporate boardrooms of America, then Obama's doing us a favor.

"Innovations" like collateralized debt obligations and credit default swaps and subprime loans ruined America, and we'll be paying for it for the rest of our lives. The free market Galt kids were running fast enough to get government bailout money, declaring they were too big to fail.

If you're too big to be allowed to fail, you're too big period.