Treasury Secretary Timothy Geithner's plan to fix the bank problem is coming into focus this weekend. Based on initial reports it appears the Obama administration is going to attempt a variation of the "bad bank" cum "private investor" approach that was employed during the Texas Savings and Loan meltdown twenty years ago. This is probably why Paul Krugman is so teed off today:
The Geithner plan has now been leaked in detail. It's exactly the plan that was widely analyzed -- and found wanting -- a couple of weeks ago. The zombie ideas have won.....To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad -- I mean misunderstood -- assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.
And,
But it's immediately obvious, if you think about it, that these funds will have skewed incentives. 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. Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.
Krugman is exactly right (did I say that?). In fact this plan is every bit as much a moral hazard as the mortgage bailout plan because it fails to punish the parties that necessarily should accept the risk for participating in the upside of the credit excesses that preceded the crash: the stockholders and bondholders of the financial institutions that will be selling the assets under Geithner's plan. Without getting into the minutiae of bankruptcy and creditor law that has served this country well for over a hundred years it must be said that turning this well informed area of the law on its ear in a time like this is insane.
In Geithner's plan large banks and financial institutions will sell "toxic assets" to buyers that will pay for their purchases with what is essentially taxpayer dollars because the Obama administration proposes to lend the buyers the funds on a non recourse basis. Even my eight year old understands that the currency in this game is no different than the notes I handed her last night when we played Monopoly.
Tim Geithner is getting rolled by the banks on this. Tax payers are going to ultimately fund a scheme that will enrich the very guys that helped create this problem and the only thing standing between this proposed heist and déjà vu all over again is a Congress with a spine. It would be helpful if there was a Republican out there with the sense to see what this clueless administration is advocating, but I'm beginning to resign myself that it may be necessary to destroy the place in order to save it. Sigh....
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Comments (14)
"...it fails to punish...."... (Below threshold)1. Posted by GarandFan | March 21, 2009 4:32 PM | Score: 4 (4 votes cast)
"...it fails to punish...."
Yeah, that would be CONGRESS. Funny how they managed to divert the process.........
1. Posted by GarandFan | March 21, 2009 4:32 PM |
Score: 4 (4 votes cast)
Posted on March 21, 2009 16:32
2. Posted by hyperbolist | March 21, 2009 4:39 PM | Score: -2 (8 votes cast)
This financial clusterf*ck really should be uniting everybody with half a brain against Tim Geithner and, insofar as he's giving him a vote of confidence, Barack Obama. It's no surprise to me that you agree with Krugman, as he has been a vocal and credible critic of setting giant piles of taxpayer money on fire as opposed to wiping out shareholders and temporarily nationalising financial institutions that are "too big to fail".
2. Posted by hyperbolist | March 21, 2009 4:39 PM |
Score: -2 (8 votes cast)
Posted on March 21, 2009 16:39
3. Posted by marc | March 21, 2009 5:14 PM | Score: 7 (7 votes cast)
"little capital but lots of government-guaranteed liabilities"
Gee, where have I heard a variation on that?
Oh Yeah... fanny and freddie mac.
The only difference is instead of "guaranteed liabilities" it was guaranteed financial support for other banks liabilities and piss-poor lending policies.
3. Posted by marc | March 21, 2009 5:14 PM |
Score: 7 (7 votes cast)
Posted on March 21, 2009 17:14
4. Posted by marc | March 21, 2009 6:05 PM | Score: 4 (4 votes cast)
AJ says it best:
4. Posted by marc | March 21, 2009 6:05 PM |
Score: 4 (4 votes cast)
Posted on March 21, 2009 18:05
5. Posted by GarandFan | March 21, 2009 6:31 PM | Score: 4 (4 votes cast)
Can we trust the Dem Congress to avoid this disaster?
Hahahahahahahahahaha! NO.
5. Posted by GarandFan | March 21, 2009 6:31 PM |
Score: 4 (4 votes cast)
Posted on March 21, 2009 18:31
6. Posted by retired miltiary | March 21, 2009 7:45 PM | Score: 5 (5 votes cast)
Hyper
"This financial clusterf*ck really should be uniting everybody with half a brain against Tim Geithner "
All those with half a brain or more voted for McCain. We are already against Geithner and Obama.
6. Posted by retired miltiary | March 21, 2009 7:45 PM |
Score: 5 (5 votes cast)
Posted on March 21, 2009 19:45
7. Posted by GarandFan | March 21, 2009 10:25 PM | Score: 2 (2 votes cast)
The Obamabots appear to have taken the day off. I was expecting at least one tearful post "to leave Timmy alone!"
7. Posted by GarandFan | March 21, 2009 10:25 PM |
Score: 2 (2 votes cast)
Posted on March 21, 2009 22:25
8. Posted by TalithaTwoBlade | March 22, 2009 12:43 AM | Score: 0 (0 votes cast)
Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!
http://fargoneworld.blogspot.com
8. Posted by TalithaTwoBlade | March 22, 2009 12:43 AM |
Score: 0 (0 votes cast)
Posted on March 22, 2009 00:43
9. Posted by WorldCitizen | March 22, 2009 1:14 AM | Score: 1 (1 votes cast)
It has been almost three months already. Why isn't everything fixed???
Throw the bums out. Lets have a recall!!!
9. Posted by WorldCitizen | March 22, 2009 1:14 AM |
Score: 1 (1 votes cast)
Posted on March 22, 2009 01:14
10. Posted by Steve Crickmore | March 22, 2009 5:20 AM | Score: -1 (5 votes cast)
As I recall, conservative supply sider HughS liked Geithner the most of Obama's cabinet picks, when he was chosen. He gave Geithner a glowing A+. That had me worried.
10. Posted by Steve Crickmore | March 22, 2009 5:20 AM |
Score: -1 (5 votes cast)
Posted on March 22, 2009 05:20
11. Posted by HughS | March 22, 2009 7:16 AM | Score: 2 (2 votes cast)
He's got an F right now, Steve.
To borrow a phrase from that ubiquitous UPS commercial, "Take him straight to detention".
11. Posted by HughS | March 22, 2009 7:16 AM |
Score: 2 (2 votes cast)
Posted on March 22, 2009 07:16
12. Posted by Steve Crickmore | March 22, 2009 8:36 AM | Score: -1 (3 votes cast)
It seems to me that Geithner has a very difficult.. well impossible task...On the one hand, he is being criticized by the right, for advocating too much government interference/ infusion of public money /executive pay caps etc. and then on the left, (more my point of view), of not being radical enough. Mark Kleiman sums up that point of view:
12. Posted by Steve Crickmore | March 22, 2009 8:36 AM |
Score: -1 (3 votes cast)
Posted on March 22, 2009 08:36
13. Posted by Oyster | March 22, 2009 9:09 AM | Score: 3 (3 votes cast)
"The decision to put Tim Geithner at the Fed was a decision to try to cooperate with the financial-services industry in working out the problems;..."
Sure. Better that he worked with Obama's guys. Guys like Franklin Raines, Jim Johnson, etc. What do they care? They got theirs.
Here's how your quoted paragraph should look to me:
The decision to put Barack Obama in the White House was a decision to try to initiate a new era in politics - bi-partisan cooperation - in working out the problems; Barack Obama was their guy, which is why his Ayers/Rezko/Wright/ACORN problems were survivable when McCain's problems weren't. But now the special interest folks who boosted him have made it clear that they're in it for whatever money for their social projects they can carry away,...
Need I go on?
13. Posted by Oyster | March 22, 2009 9:09 AM |
Score: 3 (3 votes cast)
Posted on March 22, 2009 09:09
14. Posted by Oyster | March 22, 2009 9:11 AM | Score: 0 (0 votes cast)
In Geithner's defense, he's tried to offer a better alternative than this 90% tax issue. But people are screaming for blood. They don't care who they get it from.
14. Posted by Oyster | March 22, 2009 9:11 AM |
Score: 0 (0 votes cast)
Posted on March 22, 2009 09:11