Geithner’s plan is now out of the bag, and you’ve no doubt heard what’s in it: nothing new. It’s simply a rehashed version of Paulson’s old bad bank plan dressed up in drag with a lot of lipstick. Admittedly, it’s a con.
Paulson’s plan actually repackages the infamous Master Shafter original plan, which goes like this: we broke it, you bought it, we’ll fix it. Regardless of the the tagging, we must give William Shakespeare his due and state outrightly that a rose by any other name is still a rose. This rose smells like Goldman Sachs all the way from Washington to the Street. It was Goldman’s men inwho worked earnestly to create another wealth conduit to siphon prosperity from the poor and the middle class to Wall Street.
Indeed, Treasury chief of staffwas a Goldman lobbyist who fought Mr. Obama’s attempt to curb executive compensation abuse, first when Senator Obama attempted to curb executive compensation and now as an insider within the administration.
“This will help banks clean up their balance sheets and make it easier for them to raise private capital,” Mr. Geithner said.
The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair as much as $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Mr. Geithner told reporters the plan could reach $1 trillion in size over time.
“We have to complement this program with a range of approaches to help get these securities markets back to a point where they’re working again,” Mr. Geithner told reporters Monday morning.
The new program will address both the legacy loans banks are holding on their balance sheets and the legacy securities backed by mortgage-related debt clogging the balance sheets of financial firms.
Under the legacy loan program, investment funds will be created to purchase pools of assets. Treasury will provide 50% of the equity capital for each fund while private managers retain control of asset management subject to FDIC oversight. Treasury said it will approve up to five asset managers “with a demonstrated track record of purchasing legacy assets,” but it might consider adding more managers depending on the quality of applications received.
This means means taxpayers will be defenseless while financing the transfer of all the piles of junk from all the balance sheets of every bad bank and underhanded hedge fund on this side of the universe to Uncle Sam’s balance sheet. It’s another page from Thain’s playbook at Merill Lynch. This scam didn’t save Merrill and it definitely is not intended to help the US economy.
Of course the whole notion of repairing bank balance sheet is a lie and misdirection. The balance sheets we should want to see repaired are household balance sheets. Banks have failed us profoundly. We want them reorganized, not repaired. A world in which the banks are all fixed but households are still broken is worse than what we have right now. Too-big-to-fail banks restored to health are too-big-to-fail banks restored to power. The idea that fixing legacy banks is prerequisite to fixing the broad economy is a lie perpetrated by legacy bankers.
The plan as advertised goes beyond Paulson’s plan in that it creates a market where one does not exist.
“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,” Mr. Geithner wrote. “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.”
Pardon our disobedience, but a market does already exist. The problem is it may be some 50% lower than than Geithner’s bankster buddies would prefer, so Timothy The Terrific sticks it to the taxpayer while cynically proposing to save the economy.
Under the legacy securities program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage-backed securities that were originally rated triple-A and outstanding commercial mortgage-backed securities and asset-backed securities that are rated triple-A.
Originally rated Triple-A, whether they should have been are not, they are clearly junk or they would not be on the banks’ balance sheets. Providing financing for non recourse junk bonds is not intended to help the economy. It’s the classic example of the slave who builds and then pays for his own imprisonment. Gotta love it.
The Government has agreed to finance 93% of the loan, and it is a no recourse loan. This provision is in place for one reason only: To insure that investors overpay for bad bank assets, at taxpayer expense.
Unfortunately, taxpayers are the slaves in this case. The balance sheet we want repaired is the one that Goldman Sachs’ golden boy wants to take a wrecking ball to by providing a conduit to let the losses flow to the taxpayer while profits flow to the elites. It is the finest form of socialism.
The elites have finished gouging the public, so when the lowly taxpayer turns to his servant government to right the wrong, he finds no one there who cares. They have all been bought. Then this administration as the last raises confidence in a system in which there should be none, and cynically holds out false hope knowing full well that if the banks have their way, there is no hope for anyone else.
President Barack Obama expressed confidence in the plan, but he cautioned that a financial recovery won’t happen overnight. “You are starting to see glimmers of hope in the housing market,” helped by historically low interest rates, Mr. Obama told reporters Monday after meeting with his financial advisers at the White House.
The president need not be so cautious, the plan won’t work.
Nobel-prize winning economist Paul Krugman said in remarks published on Monday that the latest U.S. Treasury bailout program is nearly certain to fail, triggering a sense of personal despair.
U.S. Treasury Secretary Timothy Geithner on Monday unveiled a plan aimed at persuading private investors to help rid banks up to $1 trillion in toxic assets that that are seen as a roadblock to economic recovery.
“This is more than disappointing,” Krugman wrote in The New York Times. “”In fact it fills me with a sense of despair.”
“The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt,” the Princeton University economist said, citing weekend reports outlining the plan.
“This isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets,” he added.
“This isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.” See how that conduit keeps popping up? But the worst is yet to come.
My guess is that behind the scenes, Geithner has arranged a kind of J.P. Morgan moment. You know the story. During the Panic of 1907, J.P. Morgan locked a bunch of bankers in a room and insisted they lend to stave a panic. We’ve already seen one twisted parody of this event, when Henry Paulson locked a bunch of bankers in a room and insisted they borrow money from the Treasury. This second one is more clever. I don’t think the scandal of the Geithner plan is going to turn out to be the subsidy to well-connected investors embedded in the non-recourse loan put option. On the contrary, I think that Treasury has already lined up participants for the “Legacy Loans Public-Private Investment Fund” and persuaded them to offer prices so high that despite the put, investors will expect to take a major loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the world, the asset managers who do well by “shaking hands with the government“, will agree to take a hit on relatively small investments in order first to help make banks smell solvent, and then to compel and provide “good optics” for a maximal transfer from government to key financial institutions.
Consider a hypothetical asset manager, PIMROCK. PIMROCK reviews a pool of loans held by the bank J.P. Citi of America, and its analysts determine they are worth 30¢ of par value. The bank holds them at 80¢ on its book. PIMROCK agrees to put down $10B to purchase loans from the pool at 82¢ thrilling stock markets everywhere. It was all just a bad dream!Under Geithner’s plan, PIMROCK’s $10B permits a $10B equity investment from the Treasury. Then the FDIC levers the whole thing up, providing $6 of debt for every one dollar of equity. So, $140B of bad loans are lifted from J.P. Citi of America, nearly $90B of which is sheer overpayment to the bank.Of course, as cash flows evolve, PIMROCK’s $10B is wiped out entirely, as is the Treasury’s investment. The FDIC gets repaid in a bunch of securities worth about $50B, taking a $70B loss. But, as Calculated Risk, likes to say “Hoocoodanode?” These were real market prices, Geithner or his successor will argue. Our private partners lost everything. There was no subsidy here.Meanwhile, taxpayers will be out around $80B.Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they’ve received assurances that if we can get the nation out of the financial pickle it’s in, there will be no haircuts on those bonds. “Shaking hands with the government” means that nothing ever has to be put in writing.
Yeah, shaking hands with the government means there is a conduit to siphon wealth from the taxpayer to the parasitic elites, as well as carry the waste water filled with regurgitated assets from Goldman and its golden ones, to splash on the backs the serfs. It flows downstream, you see. And who are we little ones to complain, we don’t even need to eat anyway.