How Plan N Might Go Down

Eric Dash at the NY Times posits that Timmy's "bank stress test" could be cover for Plan N.

Regulators plan to assess the potential losses a bank could face over the next two years, rather than the typical one year, according to government officials close to the situation. They are also expected to look at banks’ exposure to derivatives and other assets normally carried off their balance sheets, and make sure that banks also carry an additional capital cushion. Their assumptions will be guided on a “worst case” basis.

The exams could be used not only to determine which large banks would receive additional aid but also to help weed out small, unhealthy banks, hastening consolidation in the industry.

Analysts said the program hints at a creeping nationalization of the banking industry. “There is no way you can survive the failure of the stress test without having the government inject large amounts of taxpayer money,” said Jaret Seiberg, a policy analyst at the Stanford Group in Washington. “That means the government will own a majority of the bank.”

Paul J. Miller, a longtime banking analyst with Friedman Billings Ramsey, said the test might provide the government with political cover to take a more heavy-handed approach. “It gives them the mechanism they need to take giant steps with capital infusions,” he said.

“Maybe the thought is that we will put in so much capital that even under these stringent circumstances, this bank will not fail,” added Martin Lowy, a banking lawyer who advised the Federal Deposit Insurance Corporation on troubled banks during the savings and loan crisis of 20 years ago.

“That will take a huge amount of capital if they are going to do it honestly,” he said. “Why that is different from nationalizing, I don’t know.”

This does seem to be a logical way to implement Plan N from both a political standpoint as well as a financial one. Over at CalcRisk there's an excellent argument as to why the key to Plan N is to both complete the "stress test" quickly (in say 30 days) and then publicly announce the results:

Just to repeat, the key lesson in crisis resolution is transparency. I hope the results of the bank stress test will be made public, and the zombie banks clearly identified.

There's the rub. Will it be politically feasible to publicly call out America's largest banks as zombies? I don't think there's any other way to do it, and that actually might be Obama's trump card.

If Obama keeps the results of these stress tests secret, then the rumors will leak and seriously harm the banks. If however he releases the results for all banks simultaneously, he can then implement Plan N on the worst offenders while identifying "safe" banks at the same time.

If either the list of safe banks or the list of truly insolvent ones leaks before the other, the markets will eat all the banks alive.

This would at least give Obama cover for Plan N.

If It's Thursday...

It's time for another 623K new jobless claims and another 23-year high on the 4 week jobless average.

Job losses are accelerating dramatically, folks.

Roubini And Plan N

Nouriel Roubini lays out the most coherent and intelligent argument yet that Obama will have no choice but to nationalize insolvent banks before the end of the year. The most interesting passage is why Roubini believes Obama hasn't made the move to do so yet: (emphasis moi)

So why is the US government temporizing and avoiding doing the right thing, i.e. take over the insolvent banks? There are two reasons. First, there is still some small hope and a small probability that the economy will recover sooner than expected, that expected credit losses will be smaller than expected and that the current approach of recapping the banks and somehow working out the bad assets will work in due time. Second, taking over the banks – call is nationalization or, in a more politically correct way, “receivership” – is a radical action that requires most banks be clearly beyond pale and insolvent to be undertaken. Today Citi and Bank of America clearly look like near-insolvent and ready to be taken over but JPMorgan and Wells Fargo do not yet. But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit in a matter of six to twelve months even JPMorgan and Wells will likely look as near-insolvent (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).

Thus, if the government were to take over only Citi and Bank of America today (and wipe out common and preferred shareholders and also force unsecured creditors to take a haircut) a panic may ensue for other banks and the Lehman fallout that resulted from having unsecured creditors taking losses on their bonds will be repeated again. Instead if, as likely, the current fudging strategy - of temporizing and hoping that things will improve for the economy and the banks - does not work and in 6-12 months most banks (the major four and the a good part of the remaining regional banks) all look like clearly insolvent you can then take them all over, wipe out common shareholders and preferred shareholders and even force unsecured creditors to accept losses ( in the form of a conversion of debt into equity and/or haircut on the face value of their bond claims) as the losses will be so large that not treating such unsecured creditors would be fiscally too expensive.

So, the current strategy – Plan A - may not work and the Plan B (or better Plan N for nationalization) may end up the way to go later this year. Wasting another 6-12 months to do the right thing may be a mistake but the political constrains facing the new administration – and the remaining small probability that the current strategy may by some miracle or luck work – suggest that Plan A should be first exhausted before there is a move to Plan N. Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently Plan N is not yet politically feasible.

And that's the bottom line: Obama can't nationalize now or the panic will wipe out the financial system. However, by delaying nationalization now, he is effectively assuring that major national banks and almost all the regional banks will be taken over before the end of the year, or by early 2010 at the latest.

I call that one the "Deep Impact" quandry. In that movie where an asteroid is hurtling towards the Earth, the President, played by Morgan Freeman, can't tell the world that a rogue asteroid is going to destroy much of the life on Earth, but if he does, the economic and political impact of the resulting panic will result directly in death...and there's always a chance the NASA guys could be off by enough that the asteroid could do less damage than expected.

Obama's facing a similar situation with our banking system. It's going to get wiped out within a year most likely, but admitting that it's going to happen means the banking system will be wiped out now instead.

Obama's going for the current plan on the .01% chance it'll work, because Plan N involves admitting a massive problem and then trying to fix it in the middle of a huge financial panic. We're insolvent, but people aren't aware of it yet. Obama pulls the trigger on Plan N, and everyone will know.

Bank runs? Stock crashes? Looting? Who knows? 300 million people, some of them are likely to start doing something stupid.

So, when does Plan N become politically viable? That's the quadrillion-dollar question.

New tag to follow the path of world bank nationalization: Plan N.

Oh And For The Record

I'm completely sane compared to these guys (h/t Balloon Juice):

But tax cuts actually are the answer. The economic weakness is a forgone conclusion, because it results from de-leveraging. You can’t put that genie back in the bottle.

The most radical, and effective, thing we could do for the economy right now is this: Stop collecting all forms of Federal business, income and payroll tax. EVERY PENNY OF IT. RIGHT NOW.

Gasp! Yes, I said it, and I meant it. Go on an absolute, 100% Federal tax holiday. That’s a real shot in the arm that would suddenly inflate the economy by a solid $1.5 trillion or more per year.

Anyone out there in comments want to take this one? I've got about 48712 responses in my head to this and they're all piled up like a huge, multi-car freeway accident.

At least 32,000 of those responses involve the term "exciting new paradigms in douchebaggery".

Object Lesson

Couple of observations:

One, even in the Age of Democrats, a Senate bill like the stimulus never gets "filibustered by Republicans" in the Village media. Instead, it "needs 60 votes to pass". It does not. It needs 60 votes to stop Senate Republicans from blocking the bill with a filibuster. But even with Democrats running the show, the Village continues to cover for the GOP at nearly every turn.

Two, Remember if Democrats had taken it upon themselves to seat Al Franken and Judd Gregg's replacement had been a Democrat, we wouldn't of had to see Susan Collins get to strip a whistleblower protection provision from the bill, Olympia Snowe remove executive pay limits from the bill, and Arlen Specter cutting $30 billion in spending from the bill.

As Digby says, Obama's sharing his leadership duties with Republican moderates (and Ben Nelson). Pray we can make some serious inroads in 2010. BooMan's got an early handicap of that race, and once again Ohio and Kentucky are prime targets for the Dems.

Of course, by November 2010 the economic picture is going to be much, much worse. It may be all the Dems can do just to hold on.

StupidiNews!

• The stimulus bill has cleared reconciliation for votes this weekend and could be on Obama's desk by Monday.
• More than one in four unemployment claims are being blocked by employers to save companies money.
• Sirius XM Radio is the latest company considering bankruptcy.
• Florida's top disaster relief official may be Obama's pick for FEMA head.
• Microsoft is not-so-quietly urging businesses to upgrade to Vista.

Last Call

If countries like Japan are getting rocked even harder by this global economic crisis than we are, and we can barely stay functional, who's going to help them should they collapse completely...and who will help us in turn when we lose viable trade partners and the countries we owe trillions to call in our debt markers because they have no other choice?

This Man Is An Idiot

Here's Mitch McConnell saying with a straight face some entirely made up statistics about government spending and the impending "Europeanization of America" should the stimulus pass.

Got 2 for Mitch.

First, you can't possibly claim a "vibrant private sector" in America when our financial system is insolvent and we have bankster CEOs explaining very nicely what they did with our hundreds of billions in taxpayer money instead of using it to give loans, you moronic douchebag.

Second, the Europeanization of America if this bill passes (and honestly, get used to the idea of nationalizing huge chunks of our broken economy, Mitch) is better than the Zimbabwefication of America if it doesn't pass.

Epic Double Secret Twitter Fail

How not to use Twitter for political gain:

Yesterday the Virginia GOP came very close to taking control of the state Senate, nearly luring a Democratic Senator to switch parties and put them at a 20-20 tie, which would have been broken by the Republican Lt. Governor. Then Jeff Frederick, a state legislator and the party chairman, ruined it all by Twittering this:

Big news coming out of Senate: Apparently one dem is either switching or leaving the dem caucus. Negotiations for power sharing underway.

The Dems then read the message, quickly mobilized to talk the renegade out of it, and stopped the GOP coup before it could happen.

EPIC. FAIL.

Some Needed Perspective

The guys over at Yahoo Tech Ticker have been blogging up some pretty decent economy analysis lately, enough that I'll add them to the list there. For the most part I agree with their take on the current disaster, and to their credit they've often been talking to folks like Nouriel Roubini and taking what he has to say seriously (and have been well ahead of other folks.) A short commentary on the Geithner plan is worth checking out.

In this critical regard, Obama and Geithner's policies continue to evince a massive disconnect between the economic reality - some big banks are insolvent - and the fanciful idea that the problem is just one of liquidity and confidence, i.e. the belief toxic assets are merely temporarily mispriced and might someday return to their peak values, or thereabouts.

Unless and until policymakers and politicians are willing to face up to reality, we are simply repeating the same mistakes Japan made in the 1990s and allowing "zombie" banks to live off the government's largess.

These banks will have an insatiable appetite for funds and, like all zombies, will try to eat our brains. From the looks of what's coming out of Washington, maybe they already have.

Simple and to the point. Keep an eye on Aaron Task and the Yahoo Tech-Ticker crew.

Ticking Time Bomb

America is being threatened by terrorists, but it's not the hardcore Middle East variety that are the clear and present danger to us. There are plenty of crazed right-wing nutjobs out there who believe Barack Obama is the enemy of America and must be stopped at any cost. And unfortunately, the lengths some of these crackpots will go are nothing short of terrifying (h/t Steven D at the Frog Pond)

James G. Cummings, who police say was shot to death by his wife two months ago, allegedly had a cache of radioactive materials in his home suitable for building a “dirty bomb.”

According to an FBI field intelligence report from the Washington Regional Threat and Analysis Center posted online by WikiLeaks, an organization that posts leaked documents, an investigation into the case revealed that radioactive materials were removed from Cummings’ home after his shooting death on Dec. 9.

The report posted on the WikiLeaks Web site states that “On 9 December 2008, radiological dispersal device components and literature, and radioactive materials, were discovered at the Maine residence of an identified deceased [person] James Cummings.”

The section referring to Cummings can be read here.

It says that four 1-gallon containers of 35 percent hydrogen peroxide, uranium, thorium, lithium metal, thermite, aluminum powder, beryllium, boron, black iron oxide and magnesium ribbon were found in the home.

Also found was literature on how to build “dirty bombs” and information about cesium-137, strontium-90 and cobalt-60, radioactive materials. The FBI report also stated there was evidence linking James Cummings to white supremacist groups. This would seem to confirm observations by local tradesmen who worked at the Cummings home that he was an ardent admirer of Adolf Hitler and had a collection of Nazi memorabilia around the house, including a prominently displayed flag with swastika. Cummings claimed to have pieces of Hitler’s personal silverware and place settings, painter Mike Robbins said a few days after the shooting.

This isn't Baghdad, Iraq. This is Bangor, Maine. These aren't "Islamofascists" looking to kill Americans whenever possible. These are Americans looking to kill Americans. They're not Muslims corrupting the teachings of Islam. They're white supremacists embracing the teachings of Hitler.

How many people forget Tim McVeigh and Eric Robert Rudolph when recalling terror attacks on US soil. It'll only take one of these bastards getting the Devil's own luck and they'll go down in infamy. Let's talk about the real sources of hatred and evil that drives extremists to attack our country, like right-wing hate radio, shall we?

Or will it take another American leader slain for us to consider it?

Zandar's Thought Of The Day

Who will get the blame for the failure of TARP II: Economic Boogaloo the Financial Stability Plan when it, you know, doesn't stabilize the country's financial sector?

Obama's not stupid. The number one reason to keep Timmy G around at this point is that the proverbial bus will need somebody thrown under it in about, oh, say six months. He knows this. Not sure if Geithner does.

He will not be Treasury Secretary by the end of this year, I can guarantee you that.

Two Sides To The Coin

One one hand, the Republican PACs are savaging anyone who dares to support the stimulus. On the other hand, the Democratic netroots have yet to be able to show that level of coordination in any real attack against bad Democrats (prime example, Nebraska Sen. Ben Nelson.)

Money talks, bullshit walks, as tristero says. Bullshit also apparently votes for FISA, torture, expanding the wars in Iraq and Afghanistan, and taking millions of jobs out of the stimulus bill.

Just A Number

Having crunched what few details available, the NY Times has come up with $2.5 trillion for TARP II: This Time We're Serious the Financial Stability Plan (FSP). My favorite part?

Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.

So yeah, if you want to visualize the bailout, take the Uruk-Hai creation scenes from Isengard in The Two Towers, and then overlay the goofy factory music from Warner Bros. cartoons. Edit in big fat stacks of cash everywhere and the Monopoly guy in a hot tub.

It's pretty much like that. We're going to try to Weimar Republic our way out of this mess. You have no idea how bad it's going to be in just a few months.

StupidiNews!

• Major bank CEOs go in front of Congress today to defend their actions on TARP spending.
• New Interior Secretary Ken Salazar has blocked more Bush oil drilling regulations.
• Both Livni and Nethanyahu are claiming victory in yesterday's Israeli elections.
• The UN is calling for a truce in troubled Sri Lanka as the government's war on the Tamil Tigers turns deadly.
• In Colorado, a conference on Internet regulation is drawing heated debate.