wpe50.jpg (1913 bytes)     TigerSoft News Service    3/23/2008      www.tigersoft.com     More information later today.


                  Obama Would Give Taxpayer Trillions
                         To The Same Banking Crooks
                    That Have Caused This Depression

by William Schmidt, Ph.D.  
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                      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. .

             Having predicted Obama would give every taxpayer dollar he could to
      Goldman Sachs, CitiGroup, JP Morgan, Wells Fargo, etc, there comes a
      point where all I can do is just repeat myself as his Treasury Secretary
      sets out TARP-II.  Fortunately for America, the reader can find lots of reading
      to do that reflects a keen awareness of how Obama seems bent on fulfilling
      the Marxist prediction that eventually bankers would own everything and everybody,
      including the Government.  I will say here that any real solution should include the
      breakup of these banks, the return to 1933 Glass-Steagall laws wherein banks
      are localized and cannot own brokerages, investment banks or insurance
      companies.  Smaller private local banks know local conditions and can rebuild
      America, community by community. Obama is wedded by his biggest campaign
      contributions to Wall Street.  All his biggest appointments prove he has decided
      to give powers to those who were key participants in building a world of centralized
      monopoly finance capitalism, unregulated derivatives, hyper-reckless use by
      banks of leverage and defense of Wall Street from charges of economic
      crimes: Geithner, Summers...

             Marx was wrong about the inevitability of Communism.  But he sure seems
       correct in the trends that accompany monopoly finance capitalism:
                -- the inevitable monopoly control of production, commerce, and finance;
                -- a reserve army of exploited low-paid labor;
               -- a class struggle by the "haves" against the "have-nots;"
               -- increasing maldistribution of wealth in society;
               -- the increasingly obviousness of capitalism's biggest internal contradiction:
                       namely the exploiting and alienating of the many by and for the few;
              --   its self-destructive booms and busts;
              -- its corruption and effective control of the Government
            But Wall Street loves it.           wpe155.jpg (5088 bytes)   Stock ownership
            would seem to be an equalizer in a democratic America, in so far as many
            people have 401-Ks and retrirement accounts and pension plans that
            invest in stocks.   But when regulation disappears, corporate insiders can
            use their inside information largely with impunity and Wall Street can rig stocks
            any way they want.   Meanwhile, corporations are run by criminals who fleece
            their investor-shareholders by paying themselves and their cronies
            outrageously, taking inordinate risks with their shareholders' life savings
            to maximize their bonuses in the short run and milk their companies' assets
            totally dry.

            Goldman's Obama's Geithner's proposal:
Administration seeks to free frozen credit markets. Administration launches plan to
               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
               spend $75 billion to $100 billion from the government's existing $700 billion bailout program
               for the purchase of these bad debts to banks.  Resources will be backed up by loans from the
               Federal Deposit Insurance Corp. and the Federal Reserve.  "Under a typical transaction, for
               every $100 in soured mortgages being purchased from banks, the private sector would
               put up only $7 and that would be matched by $7 from the government.  The remaining $86 would be
               covered by a government loan provided in many cases by the Federal Deposit Insurance Corp."
               See http://finance.yahoo.com/news/Administration-seeks-to-free-apf-14718317.html

               Prospectively Huge Hedge Fund Profits - Putting Only 7% Up At Risk
               Goldman Sachs will loves this.
                wpe157.jpg (23107 bytes).
                               Geithner Is Exaggerating The Value of The Toxic Assets.
                               Hence He Is Putting The Tax Payer At Considerable Risk.
                      He seems to believe that the problem with the assets is not that they are actually
                relatively worthless, but that they have an “artificially depressed value” that will return as soon
                as a market for them is created. As Paul Krugman explained:
                             [S]omehow, top officials in the Obama administration and at the Federal Reserve
                        have convinced themselves that troubled assets, often referred to these days as “toxic waste,”
                        are really worth much more than anyone is actually willing to pay for them — and
                        that if these assets were properly priced, all our troubles would go away."

                      The Financial Times reported, JP Morgan and Wachovia have studied a sample of these
              assets, "to see what the underlying loans and mortgages are actually worth, and the outlook is pretty bleak.
              The 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....  Geithner’s plan is “essentially the same plan that Goldman Sachs
              has been shopping around for the past month or so.”
                          ( http://wonkroom.thinkprogress.org/2009/03/06/geithner-goldman-sachs/ )  

               Obama Threatens The Taxpayer Big Time with New Gifts
            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 taxpayer.
                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 tax
                burden to pay for various government stitimulus plans could further undermine U.S. consumers,
                he said. 
Stiglitz is a professor at Columbia University and a former World Bank chief economist.
                (Source: http://www.cnbc.com/id/29848741  See also
                              http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html   )

                                         There Is A Much Better Solution

               Why not just nationalize the banks and let the taxpayers benefit from the upside?
               Then break them up and sell them to private interests locally that know their areas.
               Why recycle Paulson's bailout plan?  Is that what the people voting for him expected?
               It sure looks like Obama is bought and paid for by Wall Street and they come first.
               The 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
               do we 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?

               Republican Response:  Cantor, R-Va., called Obama's plan a "shell game" that
                hid the true cost.  "As described, the plan seems to offer little incentive for private investors
                to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," 

            Here are articles worth reading:
Stephen Lendmen, Systemic Failure: Capitaliism "Lays An Egg"
Part I: Geithner's Plan "Extremely Dangerous," Economist Galbraith Says
       Part II: Geithner, Obama Kowtowing to "Massively Corrupted" Banks, Galbraith Says        

      Nobel Prize winning economist Paul Krugman writes:
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 Paulson.
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 has apparently
                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 assets...
                     "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 lends money
                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.

                    "...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. 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 fact.
                 "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

From The 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 Secretary’s plan “extremely dangerous.”]


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 taxpayer.

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 banks.

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.


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