Posts Tagged ‘financial rescue plan’

Rearranging the icebergs on the Titanic

3 April 2009

OK, the Geithner 2.0 plan officially looks wretched.  When I’m agreeing with the top Republican on the House Financial Services Committee, you know there’s a problem.  And the problem is not merely that the plan is a lousy deal for the taxpayers because it throws lavish subsidies at institutional buyers of toxic assets and grossly overpays the banks who would sell those assets; that’s all been said before.  The new problem is that it wouldn’t even remove toxic assets from the banking system! As the Financial Times reports:

‘US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.’

Can you say “playing with the house money”?  Unfortunately, that would be your house and my house.

It’s not completely clear that Geithner’s Treasury will allow this to go forward, as a Treasury official says that a bank’s supervisors will weigh in on whether the bank is healthy enough to buy assets.  But Geithner and Obama have implied that all of our big banks are fundamentally sound (shades of Herbert Hoover, John McCain, and Lake Wobegon), so I suspect that the ink is already wet on those supervisors’ rubber stamps.

Seems like we’ve made literally zero progress since Halloween 2008:  captured regulators attempt to prop up insolvent banks with hundreds of billions of dollar bills and won’t even consider that some of them might need to be closed.  Cue Mark Fiore’s “Zombie Bank” cartoon.

Geithner 3.0: What a difference a day makes

24 March 2009

This is the most sensible thing I’ve heard from him yet — a proposal for FDIC-type powers for the government to temporarily take over too-big-but-failing-anyway financial institutions like AIG, clean house, and sell off their remaining assets.   I once thought the FDIC already had those powers, but apparently that’s so only for regular commercial banks, not bank holding companies or other financial Goliaths.   (FDIC Chairperson Sheila Bair explains it here.)

The new proposal doesn’t necessarily conflict with anything in yesterday’s plan to subsidize the worst financial institutions by overpaying for their worst assets, but it does suggest that the Obama Administration really does have plans to regulate them and is not kidding itself (Pollyannish recent rhetoric  to the contrary) that all of them are fundamentally sound.

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Geithner 2.0

23 March 2009

The fleshed-out Financial Rescue Plan hit the streets today, and the stock market loves it (Dow, Nasdaq, and S&P all up about 7% today).  As Dean Baker points out, why wouldn’t they? The plan is a huge gift to dodgy financial institutions, as the Treasury, Fed, and FDIC will be subsidizing gross overpayments for about $1 trillion (by Treasury Secretary Tim Geithner’s estimate) in toxic assets (or “legacy assets,” the latest euphemism.  I preferred “troubled assets” — sounds like a Capitol Steps number waiting to happen).

Paul Krugman has some unpleasant arithmetic about the plan, which takes as its starting point the way the plan would subsidize the private institutions (not individuals) that would buy those toxic assets.  Reportedly the subsidy would take the form of “non-recourse loans” in which the borrower (and toxic asset buyer) would only have to put up 15% of the price paid for the asset, the asset itself would be the collateral for the loan, and if the asset went bad the lender could default and owe only the bad asset.  Just like a 15% margin loan, except some margin loans allow the lender to demand repayment of the whole thing.

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