by William Schmidt, Ph.D. www.tigersoft.com
Repeating ineffective behavior is a sure sign of insanity.
TARP-I did not cause banks
to start making loans but it did cost
taxpayers $300 billion. Why is the supposedly very smart Obama
doing a TARP-II? Obama keeps
talking about "freeing up credit from banks". His real
motivation is protecting his biggest
campaign contributors. .
Administration seeks to free frozen credit markets. Administration launches
initially buy up half-trillion in toxic assets from banks to "free up credit"
..Obama wants to
harness government and private resources to purchase a half-trillion dollars of doubtful
housing and credit card debts which "eventually could grow to $1
trillion." The plan is to
$75 billion to $100 billion from the government's existing $700 billion bailout program
the purchase of these bad debts to banks. Resources will be backed up by loans from
Federal Deposit Insurance Corp. and the Federal Reserve. "Under a typical
$100 in soured mortgages being purchased from banks, the private sector would
up only $7 and that would be matched by $7 from the government. The remaining $86
covered by a government loan provided in many cases by the Federal Deposit Insurance
Prospectively Huge Hedge Fund Profits - Putting Only 7% Up
Goldman Sachs will loves this.
Geithner Is Exaggerating The Value of
The Toxic Assets.
Hence He Is Putting The Tax Payer At
seems to believe that the problem with the assets is not that they are actually
worthless, but that they have an artificially
depressed value that will return as soon
a market for them is created. As Paul Krugman explained:
top officials in the Obama administration and at the Federal Reserve
convinced themselves that troubled assets, often referred to these days as toxic
really worth much more than anyone is actually willing to pay for them and
if these assets were properly priced, all our troubles would go away."
Financial Times reported, JP Morgan and Wachovia have studied a sample of these
"to see what the underlying loans and mortgages are actually worth, and the
outlook is pretty bleak.
recovery rates on some of the junk have
been a mere 5 per cent and even the best of it
is worth 35-40 cents
on the dollar.... Geithners plan is essentially
the same plan that Goldman Sachs
shopping around for the past month or so.
Obama Threatens The Taxpayer Big Time with
for Wall Street !
Here is what
Nobel prize winning economist Joseph Stiglitz said about the plan.
"The Geithner plan is very badly flawed (and offers) perverse
incentives." Geithner is
using the taxpayer to guarantee against downside risk on the value of these assets, while
giving the upside potential profits, to private investors. "Quite frankly, this amounts to
robbery of the American people. I don't think it's going to work because I think there'll
be a lot of anger about putting the losses so much on the shoulder of the American
Even if the plan clears banks of massive toxic debt, worries about the economic outlook
mean banks could still be unwilling to make fresh loans, while the prospect of a higher
burden to pay for various government stitimulus plans could further undermine U.S.
he said. Stiglitz is a professor at Columbia University and a former World
Bank chief economist.
There Is A Much Better Solution
not just nationalize the banks and let the taxpayers benefit from the upside?
break them up and sell them to private interests locally that know their areas.
recycle Paulson's bailout plan? Is that what the people voting for him expected?
sure looks like Obama is bought and paid for by Wall Street and they come first.
taxpayer is being asked again to resuscitate broken, corrupt and reckless Zombie
banks. Two trillion dollars is what most economists think will be needed. Who
really thinks this is the best way to spend two trillion dollars? What guarantee
have that banks will loan money as a result? Bankers have made one
mistake after another. Why should we trust them after they get the money?
R-Va., called Obama's plan a "shell game" that
hid the true cost. "As described, the plan seems to offer little incentive for
to participate unless the subsidy is made so rich that it comes at the expense of the
I: Geithner's Plan "Extremely Dangerous," Economist Galbraith Says
"...Geithner scheme would offer a one-way bet: If asset values go
up, the investors profit, but
II: Geithner, Obama Kowtowing to "Massively Corrupted" Banks, Galbraith Says
Geithner, the Treasury
secretary, has persuaded President Barack Obama to
recycle Bush administration policy -- specifically, the "cash for
trash" plan proposed,
then abandoned, six months ago by then-Treasury secretary Henry
"This is more than
disappointing. In fact, it fills me with a sense of despair.
After all, we've just been through the firestorm
over the AIG bonuses, during which
administration officials claimed that they knew nothing, couldn't do
anything, and anyway
it was someone else's fault. Meanwhile, the administration has
failed to quell the public's
doubts about what banks are doing with taxpayer money. And now Obama
settled on a financial plan that, in essence, assumes that banks
are fundamentally sound
and that bankers know what they're doing. It's as if the president were determined to
confirm the growing perception that he and his economic team are out
of touch, that their
economic vision is clouded by excessively close ties to Wall
Street. And by the time
Obama realizes that he needs to change course, his political capital
may be gone...
"Right now, our economy is being dragged down by our
dysfunctional. Right now our
economy is being dragged down by our dysfunctional financial system,
which has been
crippled by huge losses on mortgage-backed securities and other
"The common element to the Paulson and Geithner plans is the
insistence that the bad assets
on banks' books are really worth much, much more than anyone is
currently willing to pay
for them. In fact, their true value is so high that if they were
properly priced, banks wouldn't
be in trouble. And so the plan is to use
taxpayer funds to drive the prices of bad assets
up to "fair" levels. Paulson proposed having the
government buy the assets directly.
Geithner instead proposes a complicated scheme in which the government
to private investors, who then use the money to buy the stuff. The
idea, says Obama's top
economic adviser, is to use "the expertise of the market" to
set the value of toxic assets.
if they go down, the investors can walk away from their debt. So
this isn't really about letting
markets work. It's just an indirect, disguised way to subsidize
purchases of bad assets.
" The likely cost to taxpayers aside, there's something
strange going on here. By my count,
this is the third time Obama administration officials have floated a
scheme that is essentially a rehash
of the Paulson plan, each time adding a new set of bells and
whistles and claiming that they're doing
something completely different. This is starting to look obsessive.
" But the real problem with this plan is that it won't
work. Yes, troubled assets may be
somewhat undervalued. But the fact is that financial executives
literally bet their banks on the
belief that there was no housing bubble, and the related belief
that unprecedented levels of
household debt were no problem. They lost that bet. And no amount of
financial hocus-pocus --
for that is what the Geithner plan amounts to -- will change that
"Obama is squandering his credibility. If this plan fails -- as
it almost surely will -- it's unlikely
that he'll be able to persuade Congress to come up with more funds
to do what he should have
done in the first place. "( See also http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/
|Articles That May "Disappear" And So Are Quoted Here.
Posted Mar 23, 2009 11:08am EDT by Henry Blodget in Investing, Newsmakers, Recession, Banking
Business Insider, March 23, 2009:
Tim Geithner has finally revealed his plan to fix the banking system and economy.
Paul Krugman, James Galbraith, and others have already trashed it.
[We spoke with noted economist Galbraith
this morning. In the accompanying segment, he calls the Treasury Secretarys plan
In short, because the plan is yet another massive, ineffective gift to banks and Wall
Street. Taxpayers, of course, will take the hit
Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has
been trying to get approved since last fall?
In our opinion, because Tim Geithner formed his view of this crisis last fall, while
sitting across the table from his constituents at the New York Fed: The CEOs of the big
Wall Street firms. He views the crisis the same way Wall Street does--as a temporary
liquidity problem--and his plans to fix it are designed with the best interests of Wall
Street in mind.
If Geithner's plan to fix the banks would also fix the economy, this would be
tolerable. But no smart economist we know of thinks that it will.
We think Geithner is suffering from five fundamental misconceptions about what is wrong
with the economy. Here they are:
The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble
because American consumers and businesses took on way too much debt and are now collapsing
under the weight of it. As consumers retrench, companies that sell to them are
retrenching, thus exacerbating the problem. The banks, meanwhile, are
lending. They just aren't lending as much as they used to. Also the shadow
banking system (securitization markets), which actually provided more funding to the
economy than the banks, has collapsed.
The banks aren't lending because their balance sheets are loaded with "bad
assets" that the market has temporarily mispriced. The reality: The banks aren't lending
(much) because they have decided to stop making loans to people and companies who can't
pay them back. And because the banks are scared that future writedowns on their old
loans will lead to future losses that will wipe out their equity.
Bad assets are "bad" because the market doesn't understand how much
they are really worth. The
reality: The bad assets are bad because they are worth less than the banks
say they are. House prices have dropped by nearly 30% nationwide. That has
created something in the neighborhood of $5+ trillion of losses in residential real estate
alone (off a peak market value of housing about $20+ trillion). The banks
don't want to take their share of those losses because doing so will wipe them out.
So they, and Geithner, are doing everything they can to pawn the losses off on the
Once we get the "bad assets" off bank balance sheets, the banks will
start lending again. The
reality: The banks will remain cautious about lending, because the housing
market and economy are still deteriorating. So they'll sit there and say they are lending
while waiting for the economy to bottom.
Once the banks start lending, the economy will recover. The reality: American consumers still have
debt coming out of their ears, and they'll be working it off for years. House prices
are still falling. Retirement savings have been crushed. Americans need to
increase their savings rate from today's 5% (a vast improvement from the 0% rate of two
years ago) to the 10% long-term average. Consumers don't have room to take on more
debt, even if the banks are willing to give it to them.
The two charts below from Ned Davis illustrate the real problem: An explosion of debt
relative to GDP. The first is Nonfinancial Debt To GDP. The second is Total
Debt To GDP.
In Geithner's plan, this debt won't disappear. It will just be passed from banks
to taxpayers, where it will sit until the government finally admits that a major portion
of it will never be paid back.
Part II: Geithner, Obama Kowtowing to
"Massively Corrupted" Banks, Galbraith Says
Posted Mar 23, 2009 12:07pm EDT by Aaron Task in Newsmakers, Banking
Like it or not, many people seem to be
resigned to the idea there's no
alternative to the public-private investment fund scheme Treasury Secretary Geithner
detailed this morning. (Click
here for part one of our discussion of the plan.)
That's hogwash, says University of Texas professor James Galbraith, author of The
Predator State. Of course there's an alternative: FDIC receivership of insolvent
Aside from being legally proscribed, the
upside of FDIC receivership is the banks are restructured and reorganized for
potential sale (either in whole or parts), Galbraith says. Such was the fate in 2008 of,
most notably, Washington Mutual and IndyMac.
Crucially, FDIC receivership also means new management teams for insolvent banks; and
Galbraith notes new leaders will have no incentive to cover up the fraudulent or predatory
lending practices of their predecessors. Given the entire system was "massively
corrupted by the subprime debacle," the professor believes criminal prosecutions on
par with the aftermath of the S&L crisis - when hundreds of insiders went to jail - is
a likely (and necessary) outcome of the current crisis.
But don't expect to see many "perp walks" if Geithner's current plan comes to
fruition. That's one reason Galbraith called the plan "extremely
dangerous" in part one of our interview.
So why isn't the Obama administration pushing for FDIC receivership? "Political
influence of big banks," the economist says.