Moon of Alabama Brecht quote
March 23, 2009

The Geithner Plans

The Treasury has now revealed its plans on how to buy up 'bad assets'.

The Treasury believes, or at least claims to believe, that some 'asset' held by banks can not be sold off because there is no market for them. That is of course wrong. There is a market for any asset as long as it has a reasonable price. The banks simply want more money for these assets then anyone is willing to pay for them.

The Treasury further argues that keeping those assets within these banks currently impairs the general credit markets. I find that a dubious claim as a. money supply and credit is still expanding and b. over-indebted households have no reason to take on more debt.

So from my point of view the Treasury is presenting a wrong view of the real problems. I like others believe that the banks are simply insolvent, i.e. they have more debt than fairly valued assets and the Treasury's real plan is to make them whole at the cost of the taxpayers.

Three plans are presented today but only the first one seems to be really determined.

The first one is the "Public-Private Investment Program for Legacy Loans"

Let's just take the sample from the Treasury site for this:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

The private capital in this case is only in the game with 7.15% of the total assets bought under this program.

If the payed price for the legacy assets turns out to be 10% above its real value, the private investor will lose just $6. The bank would have gained $8.40 more than the real value for its legacy asset. In this case how do we know the bank that sold the legacy asset is not in cahoots with the private entity here and will share its gain with it? Both would make a profit while the taxpayer would take a loss. How do we know that the private entity does not have a side-bet of this or another kind?

If the payed price for the legacy assets turns out to be 10% below its real value, the private entity will win half of the profits, i.e. $4.20. That is a return of 70% on its maximum capital at risk while the taxpayer would have a return of 5.4% on its $78 maximum capital at risk. That does not look much like 'partnership' to me.

On to the second plan which is an extension of the Fed financed TALF program that lends to private entities to buy up 'legacy securities' defined as:

non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.

What is the meaning of an "original rating of AAA" if an assets is no longer rated as such? The rating was obviously wrong in the first place and has no relevance to the current real value of the asset. So why is this made a condition?

The details of this program are still totally unclear:

Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants.

Hmmm ...

In the third program the Treasury would partner with private investors as in the first one, but the additional financing would not come from the FDIC, but from the Fed through the TALF program like in the second program.The details are again unclear.

So of relevance in this announcement is only the first program. That has skewed incentives that can either be used to screw the taxpayer or to give a highly unfair and unjustifiable advantage to the private 'partner' in the game.

All that said I am not sure I would like to take part in any of these program as the private entity. The programs will be under high scrutiny from several sides and if problems are detected with it Congress might step in and change the rules retroactively.

The program(s) may therefore fall well short of the Treasury's intended size and scope.

Posted by b on March 23, 2009 at 15:04 UTC | Permalink

Comments

Strokey, strokey, hope & change.

You gotta give em props. They have balls.

O is a goddamned liar.

Posted by: slothrop | Mar 23 2009 15:31 utc | 1

One thing that I haven't heard much about in this whole mess is the reworking of the commission mechanism for loans. Instead of paying a lump-sump commission up front, why not amortize the commission paid over the life of the loan itself. If the loan turns out to be non-performing, then so will the commission.

Look at it this way--the lender realizes its profit over the life of the loan, why shouldn't the salesman play by the same rules?

Posted by: Obelix | Mar 23 2009 16:08 utc | 2

@Obelix - on should think that would be in the interest of the lender. It was so until the securitization scheme began.

The investment banks did not care anymore about the viability of a loan as they could repackage it and sell it off. They wanted as many as they could get and resale so they gave huge incentives to the salespersons.

There are now initiatives that will demand that anyone who securitizes loans will have to keep a decent chunk of such those loans in its own book. Then those banks will again have incentives to reign in wild running salespersons by restricting their commissions the way you would like it.

Posted by: b | Mar 23 2009 17:07 utc | 3

B, you weren't supposed to open up this (these) "plan(s)" for discussion. Understand that Geithner has been forced into emergency mode, in which he has no more time to finesse deals for his cronies. The master plan has, umm, failed; I mean has shown wide cracks through which one may peer, so he must quickly stuff those cracks with some new paper; I mean plans.

This master plan called, however unrealistically, for the dumbing-down process to do its job more thoroughly <1>before the crash, not during or after. But as they often do, things got out of hand. It was hoped that German professors would simply stay quiet and watch as the govt tries to pack its secrets back in the bag.

Posted by: rapt | Mar 23 2009 17:34 utc | 4

http://www.nytimes.com/2009/03/24/business/24markets.html?hp>Hooray!

The capitalists dig the socialization of ponzi-scam losses.

Posted by: slothrop | Mar 23 2009 20:56 utc | 5

This from Felix Salmon at Portfolio.com:

"The minute the Treasury plan is put into action, we'll have a lot of public price discovery for the banks' bad assets. And if the prices don't clear -- if the minimum price the banks will accept is higher than the maximum price that the public-private partnerships are willing to pay -- then no one will any longer be able to perpetuate the fiction that America's banks are solvent. And without that fiction, the Hempton plan -- the muddle-through status quo -- is toast."

Wow. Now there's a nightmare scenario.

http://preview.tinyurl.com/de6u25

Posted by: vachon | Mar 23 2009 21:47 utc | 6

Yeah, 'anyone who securitizes loans will have to keep a decent chunk of such those loans in its own book,' but the issuing banks very often got stuck with the CDO equity tranches because they couldn't find anyone stupid enough to buy them. Didn't stop them, though. They kept piling up the worst dregs even as the underlying loans got worse and worse. This nonrecourse loan-plus-matching nonsense seems intended to replace the soft credit provided by mercantilist trade surpluses, making it profitable again for private elites to speculate on worthless assets. So the end result is that domestic investors piss away free money for our shittiest assets and when the cost of subsidized speculation debases the dollar, our foreign creditors swoop in and buy our remaining productive assets cheap. Sounds fair to me. I hope Carlyle sells China BAH and the other beltway bandits so they can attain complete geopolitical dominance. They're better at dealing with corruption than the Feds, they take crooked bankers out and fucking shoot them.

Posted by: ...---... | Mar 23 2009 21:50 utc | 7

to watch capitalism collapse as it is doing every day is a kind of wonder - because it has revealed once & for all, the absolute emptiness at its heart. the realisation that no matter how hard you have ridiculed them - they are even shallower, less competent than you first thought. you know that conspiracies by these elites of casual carnage - are quite impossible - because they are too stupid - infinitely infantile - since september all we have heard from them is cackling & crying. they are all covered in their own poopoo & still they try to pretend at leadership they have lost forever

the horror they are bringing to everyday life for the majority of people is genuinely tragic - but they themselves are without meaning, they are kitsch as is clear with figures like madoff, paulson, & all the ceo's of rien de tout who roam their royaumes rutting against each other in committee hearings

they are such a fucking joke

again tonight i hear a commentator saying it has reached the bottom. every day for these last five months - they say they have arrived at the bottom

they would be well advised to read about the bottom from the polish poet tadeusz rocewicz - he knows a little of the bottom

the only bottom they know now is the one of the orifices from where their caca comes

Posted by: remembereringgiap | Mar 23 2009 22:21 utc | 8

A Voice (translation: Czeslaw Milosz)

They mutilate they torment each other
with silences with words
as if they had another
life to live

they do so
as if they had forgotten
that their bodies
are inclined to death
that the insides of men
easily break down

ruthless with each other
they are weaker
than plants and animals
they can be killed by a word
by a smile by a look

tadeusz rocewicz

Posted by: remembereringgiap | Mar 23 2009 22:27 utc | 9

& in a recent poem, 'the gates of death',

the secret of their construction
is that the gates are not there
and at the same time that they are
wide open to all
they are so narrow
that they must be squeezed through
in the sweat of one’s brow
in bloody labor
for years on end squealing
or screaming in fear

Posted by: remembereringgiap | Mar 23 2009 22:31 utc | 10

Tadeusz Różewicz "and once again"
Translated from the Polish by Bill Johnston


"It's past and gone [...]
Best would be to go mad."
(Tadeusz Konwicki, Afterglows)

And once again
the past begins

best would be to go mad
you're right Tadzio
but our generation doesn't go mad
our eyes stay open
to the very end

we don't need to be blindfolded
we have no use for the paradises
of faiths sects religions

with broken backs
we crawl on

yes Tadzio at the end
we have to relive everything
from the beginning
you know that as well as I
at times we whisper
all people will be brothers
in life's labyrinth
we encounter
distorted faces of friends
enemies
nameless

you hear me
I'll tell you an image from the past
again I'm running away
from a specter who
wrapped in a gaberdine of sky
stands in a green meadow
and speaks to me in an unknown language
I am the lord thy god
who led thee out of the house of bondage

everything starts from the beginning

once again Mr. Turski
my singing teacher
looks at me with the handsome
sweet eyes
of Omar Sharif

and I sing
the apple tree has blossomed (...)
red apples did it bear ...
I know I'm out of tune
but Mr. Turski has been smiling
at me since 1930
and I get an A
Mr. Turski in a fragrant
strange cloud
exotic and mysterious
for an elementary school
in a provincial town
between Czêstochowa and Piotrków Trybunalski
smiles
and takes his mystery
to the grave

when will the past
finally end

From: Szara Strefa [Gray Zone], Wydawnictwo Dolnoœlskie, 2002

Posted by: remembereringgiap | Mar 23 2009 23:29 utc | 11

Thx r'giap


---
Geithner plan will rob American taxpayers: Stiglitz

The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.

"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

"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."

Posted by: b | Mar 24 2009 12:54 utc | 12

b

i knew the poems were ot but in this case i thought their resonance with our current situation is so exact, & exacting. with that poet like another poet, paul celan - there are no illusions in this world or the next

Posted by: remembereringgiap | Mar 24 2009 18:03 utc | 13

@r'giap - poems are never OT :-)

Posted by: b | Mar 24 2009 19:58 utc | 14

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