Monday, March 23, 2009

Krugman Fumes About Geithner's Latest Giveaway

Posted on Clusterstock by Henry Blodget:

Tim Geithner's banking fix is getting justifiably slammed by Paul Krugman, Calculated Risk, Yves Smith, et al. Why justifiably? Because the only way it will work is if hedge funds and banks get another huge gift at taxpayer expense.

Remember the crux of the problem: Banks say their assets are worth 60 cents on the dollar. The market says they are worth 30 cents on the dollar.

Geithner continues to accept the banks' argument that this huge bid/ask spread is just a temporary condition: The market just doesn't understand that the assets are actually worth 60 cents on the dollar. When it realizes this, everything will be fine. The majority of smart economists (at least the ones we read) think this is a crock. The banks are hallucinating (or worse), and most of the assets are worth what the market says they are worth.

In any event, the only way banks can be induced to sell those assets is if someone agrees to pay 60 cents (or more) on the dollar, because otherwise the banks will have to take more writedowns and require more capital. The only way someone will pay 60 cents or more on the dollar is if someone gives them a boatload of free money to be reckless with. That's where Geithner and the taxpayer come in.

Krugman:

In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem. [The taxpayer's]...

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work. Read all >

Calculated Risk slams a different part of the plan:

The FDIC plan [in which the FDIC will lend taxpayer money to investors to buy assets] involves almost no money down. The FDIC will provide a low interest non-recourse loan up to 85% of the value of the assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks. Read all >

Yves Smith offers an excellent line by line takedown of the enormous gift to private investors, which will result in an enormous gift to banks--all at taxpayer expense. Again, the private investors will put up 3% of the money. They'll then use this gift to intentionally overpay for the assets and secretly recapitalize the banks:

If the banks sell the assets as a lower level [than they're carrying on their books], it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.

So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank's reserve, which would be the value on the bank's books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over. Read all >

The New York Times, meanwhile, has the details on the program. The private investors will pay the government something for the money (phew). If those interest payments are steep enough, they will limit the amount the hedge funds can intentionally overpay for the assets. This will help reduce the amount of the taxpayer giveaway. But it will also reduce the program's ability to get assets off the banks' books (because, again, they'll only sell if they can find a sucker silly enough to pay the fantasy price they want).

Bottom line, this is just another version of the same bad plan Tim Geithner has been trying to shove through from the beginning. Find some way, any way, to bail out banks by overpaying for crap assets with taxpayer money without taxpayers noticing and screaming bloody murder about it.

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