Nouriel Roubini: Likes Geithner's Toxic Asset Plan "Serious Step... Right Direction"

[Undercurrent]

Give credit to Timothy Geithner's new toxic asset plan

By Matthew Richardson and Nouriel Roubini

Wednesday, March 25th 2009, 4:00 AM

For the economy to be viable, the financial system must be healthy. For this to occur, the system needs to be cleansed of its poorly performing loans and so-called toxic securities backed by loans. This way, once creditworthy institutions and individuals come to the market looking for capital to borrow, financial firms will be in a position to lend them money.

Secretary Timothy Geithner's new toxic asset plan is a serious step in the right direction in that it creates a public-private partnership to buy the troubled assets of financial firms - in other words, to do the necessary cleansing. Up until now, with all the government bailouts, the financial system has been barely treading water. With this plan, it will still be a hard swim, but, at least, there is a path to shore.

The plan essentially calls for private asset management firms - private equity, hedge funds, mutual funds, pension funds - to invest side by side with the government.

The private investors need the government because there are so many bad loans held in the financial sector that only the government's balance sheet can handle taking them over. The government needs help from private investors so it doesn't get hoodwinked by the banks.
more... http://www.nydailynews.com/opinions/2009/03/25/2009-03-...

[bluestateguy]

1. Damn Nouriel Roubini! That DLC sellout!

[FrenchieCat]

2. Sometimes it takes a couple of days to come out and say something

to make sure that folks know what they are talking about....

as opposed to those who come out against a plan BEFORE the plan is actually proposed, a la Krugman.

[Jennicut]

5. Precisely.

We are such "bots".

[Zynx]

3. He lays it out very well for why the government doesn't just go out there and buy the securities

outright. If it did, it would undoubtedly get fleeced worse than it will here.

[truedelphi]

57. Except the government has already paid for these toxic assets

Just didn't bother to pick up ownership of the paper. So now the paper is still owned by the financial insitutions and it gets to all happen all over again.

[MercutioATC]

4. Yeah...the "private investors" bear almost none of the risk...and we take the losses.

...not to mention that this plan gives banks the opportunity to bid on their own toxic portfolios at inflated prices, shouldering the taxpayer with even MORE of the risk.

Brilliant plan.........if you're a friend of Geithner's (like J.P. Morgan CEO Jamie Dimon is).

[Alcibiades]

6. No wonder Wall Street liked it so much

Took them no time to make up their mind about it, either. Letting hedge funds cherrypick the "toxic assets" sounds pretty damn sweet to them. I'm sure they also like the idea of pension funds being stuck with whatever's left.

[FrenchieCat]

7. Hedge funds will be regulated.

You missed that part in you framing them as boogey men.

[truedelphi]

56. Not immediately. the hedge funds willnot be regulated for a little while

Untilt he same ol same ol goes down the pike, proving that the regulation is needed.

[Alcibiades]

69. They are not bogeymen?

I must have missed the memo between bailouts.

Yep, hedge funds are bad for the whole economy. It's worse when other financial institutions take them as a model, but they are bad in themselves. Privatize the profits, socialize the risk.

They are bad.

[MercutioATC]

9. It's even better than that...

A company...say Citi...is holding 100M of "toxic assets" on their books. Nobody really knows what they're actually worth because nobody knows for sure how many of the underlying mortgages will default. Citi doesn't want to take too big a hit on their books, so they "value" them at 80 cents on the dollar (when they're probably worth about 30 cents in today's market).

Citi can now put these assets into the toxic asset plan, bid on them (yes, bid on their OWN toxic assets)at 75 cents on the dollar, and put up 5% to 10% of the cash...with the taxpayer assuming the rest of the liability.

Should the assets remain worth about what they are now, Citi has taken a 70% loss and turned it into a 5%-10% loss...and the taxpayer gets stuck for the rest.

If they lose value, Citi's exposure is limited by virtue of their new smaller stake.

If, by some strange circumstance, they increase in value (remember, they're now "valued" at 75 cents on the dollar), both Citi and the taxpayer make some money.....but that's unlikely to happen because Citi submitted a grossly inflated bid (75 cents for a 30-cent asset).


Yeah, if I was a bank holding toxic assets (or the shareholder of one of those banks) I'd love this plan.

[Beetwasher]

14. Where Do You Get This?

"yes, bid on their OWN toxic assets..."

Source?

And this:

"but that's unlikely to happen because Citi submitted a grossly inflated bid.."

Did you read the plan??? There will be intense FDIC oversight of the whole process and the amount of the loans will be limited based on an EVALUATION of the assets conducted by the FDIC as well as debt/equity ratio. If there is competent oversight there should be no grossly inflated prices or bids, at least not using government loans.

Now, you may argue that you believe that there will be lax oversight and they will get away w/ shennanigans, but you don't know that for sure and it's just your opinion.

[MercutioATC]

15. You're right. It's my opinion...but nothing in the proposal prevents it from happening.

Do you really have any belief that these people will adequately oversee this program?

JP Morgan Chase just bought two new $60M Gulfstream jets and built an $18M state-of-the-art hangar for them.

We all know about the AIG bonuses.


Wasn't the TARP program supposed to be subject to "oversight"? Why would anybody expect the "oversight" of this plan to be any better...especially when the people making the decisions and their friends have a vested financial interest in looking the other way?

[Beetwasher]

16. Uh, Yes, Oversight Prevents It

And every penny spent will be under intense scrutiny from every corner of the known universe.

Obama is many things, but an idiot is not one of them. And with everything that has happened, he would truly have to be an idiot to allow lax oversight of this process. Would the Traditional Media allow him to get away with it? The Repubs? Krugman?

You may not trust Obama, but that's your problem.

[MercutioATC]

21. Ok, lemme know how that works out for you.

To clarify, it's not specifically Obama that I distrust, it's pretty much all of them.

That's not based on conspiracy theory or some ingrained mistrust of government...it's based on their track records. They have a serious financial disincentive to provide strict oversight. Even if they overcome this temptation, they're not able to provide effective oversight because their focus is wrong (and they're mostly incompetent).

The media, Krugman, and many others have already expressed deep concerns about Obama's various financial rescue proposals. Has that stopped him?

90% of the American public is irate about misspent TARP funds. Did that make Congress or the Treasury Dept. put adequate restrictions on the money?

...and, with all of the money thrown at the problem and all of the Congressional hearings and all of the passionate rhetoric thrown around in Washington, is there ANYTHING that's even starting to look good so far? I'm not talking about demanding immediate results, I'm talking about being on a path that looks like it even has the possibility to lead to a recovery.


Lots of abused women claim "He really does love me. He won't hit me again." If you want to believe that the same people who have continually screwed us, either intentionally or through incompetence, "won't hit us again" because "Obama is smart" or "they'll be under intense scrutiny", be my guest.

I can't muster that degree of blind trust.

[Beetwasher]

23. Blah Blah Blah

Who said anything about conspiracy theories?

"Has that stopped him?"

Stopped him from what? He's barely done anything yet. WTF are you talking about? How can you judge them incompetent when the plans haven't even been implemented yet? Shall we call you Nostradamus?

You don't trust Obama or his people w/ this plan, but you trust him to competently carry out and oversee massive nationalizations????

Or is there some other plan to fix this mess that you would find him and his team more trustworthy to oversee?

I await your vaunted wisdom on the plans that you personally find his team competent and trustworthy enough to carry out and oversee.

[MercutioATC]

35. Based on past conversations, you seem to have an emotional stake in this issue.

I will continue to voice my opinion and you will continue to voice yours.

I've already explained to you the issues I have with this administration's handling of this situation. Your rebuttal (if I comprehend it correctly) is essentially "Things will be different this time".

I'm not buying that, especially in light of the actions that have been taken so far.

[Beetwasher]

37. LOL! And It's Obvious You Have A Bias And An Agenda

You've explained nothing except a completely distorted understanding of the details of the plan and then propogated that warped understanding and your opinion of it as if it were fact.

I will continue to correct the record so the actual facts of the plans provisions are separated from biased opinions about it.

[MercutioATC]

42. Perhaps you could identify the points that you feel I don't understand...

...because it seems to me that we both understand the proposal.

The scenario I presented (Citi bidding on its own toxic assets at an inflated price to shift liability almost completely onto the taxpayers' shoulders) is a completely reasonable expectation. It's not a "distortion" to claim that, based on past performance, I expect oversight to be insufficient and there's nothing directly written into the plan to prevent serious abuse.

If you trust the administration and Congress, despite their past performance , you might be correct...abuses would be limited.

I don't have that trust.

[Beetwasher]

43. I Said You Were Propogating Your Opinions About It As If It Were Fact

I just want to make sure that's clear. Your warped understanding is that it's ripe for abuse. But you assume lax oversight in order to get there.

The issue boils down to trust of Obama and his team. And you still haven't provided your explanation for how you would trust him to oversee a massive nationalization of giant financial entitites if you don't trust him to oversee this much more limited process. You think that process isn't ripe for abuse too? But you prefer that over Geithner's plan.

[MercutioATC]

49. Based on past performance, I believe the expectation of "strict oversight" is laughable.

...and the absolute fact remains that there is nothing specifically written into the plan that would prevent abuses like this. You have to "trust" that a large group of people (who have screwed up repeatedly in the past) will all throw any concerns of self-interest out the window AND suddenly become competent.

I don't feel that's a reasonable expectation.

[Beetwasher]

50. Yes, Past Performance Of Two Months And Nothing Enacted Yet

At least nothing that Obama had any input into the oversight provisions. So IOW, it's a biased opinion based on nothing.

"...and the absolute fact remains that there is nothing specifically written into the plan that would prevent abuses like this."

Total and utter bullshit. That is NOT a fact. The absolute fact is that there is ABSOLUTELY provisions for oversight written into the plan PRECISELY TO prevent these abuses. You are already assuming lax oversight in order to formulate your biased opinion.

[MercutioATC]

52. Show me the provision that prevents companies from bidding on their own assets.

Show me the provision that states a specific set of criteria by which the portfolios will be valued.

There are none.


The only thing preventing abuses is a concept that the program will be subject to some sort of "strict oversight".

Is that seriously enough to allay any concerns you might have?

[Beetwasher]

55. It's Called Oversight

And the plan requires strict FDIC oversight of the entire process.

You believe that won't happen based on your bias.

I believe it will because among other things, every penny and every transaction will be scrutinized by every eyeball in the known universe so they can find something to destroy Obama with. He would have to be a Bush sized idiot to allow lax oversight and shennanigans.

[LittleBlue]

22. I don't see anything in the plan prohibiting banks from buying other banks' toxic assets

and reaping a profit off of taxpayer welfare. Like you said.

Even if there is a subsequent amendment to prevent this, the profit will mostly flow to hedge funds.

[Beetwasher]

24. Umm, Make Up Your Mind, If They "Reap Profit"

There ain't no welfare cuz then they pay back the LOANS.

[LittleBlue]

28. Yes it is

These are non-recourse loans. They are not required to pay back the loans if the investment is lost.

If there is a profit, we get an unfairly small amount, and they get an absurdly large amount (7x what they invested)

If there are losses, they only pay 7%, while we shoulder 93%! If we put up 93% of the capital, we should get 93% of the profit. That's the way normal business works as opposed to looting the taxpayer for the benefit of hedge funds.

[Beetwasher]

29. Yeah, So? What's Your Point? That's Not "Welfare"

It's still a loan and the losses (if there are any) are less than if the gov't was %100 liable.

If you're one of those "nationalize now!" people, please explain how that would be much different in regards to losses on the assets? The losses would be GREATER because there would no private stake.

[LittleBlue]

30. That's corporate welfare

No sane person would make this agreement. It's an attempt to alleviate the banks of their debts by paying inflated prices for garbage securities.

Keep this in mind: the IndyMac portfolio, aka their loans, were worth about 30 cents on the dollar. If IndyMac is any indicator, this could be a $1 trillion debacle where taxpayers are saddled with the bad debt we are not responsible for.

This is just another attempt by the corporations to evade responsibility for their immoral banking practices by shifting the losses to us!

[Beetwasher]

33. It's Not Welfare Just Because YOU Say It Is

These are loans. The government loans money ALL the time, in fact, non-recourse loans are NOT unheard of or extremely unusual. This plan in fact is unusual because the gov't actually has an equity stake as well, and if/when the economy recovers and the MBS are productive again, the gov't stands to make some money in addition to getting the loans back plus interest.

"It's an attempt to alleviate the banks of their debts by paying inflated prices for garbage securities."

Please explain what makes you think they are going to pay inflated prices.

If you're one of thos "Let them fail!" people, please explain how THAT doesn't lead to massive economic chaos, which would be extrmemely costly, more costly probably than Geithner's plan.

[LittleBlue]

39. These kinds of non-recourse loans are unheard of

You're talking to a guy who used to audit banks. No bank in their right mind (this is assuming sanity) would lend a corporation 13 times its total assets!

You put $700k into a corporation. Do you think some bank is going to lend this corporation, with no previous profits or operations, $9.3 million non-recourse?! Ha! Don't make me laugh, that's absurd. This is ignoring the fact that the interest rate is 1%-3%. Which American can get this kind of loan for 1%? Anyone who's worked in banking knows this loan is absurd.

The hedge funds will pay inflated prices because they have an inordinate upside potential!!! Any time you have profits at 7X invested capital ratio, you're going to have a frenzy of buying! Even if there is significant risk of loss, which won't even be borne by them, so why should they worry?

[Beetwasher]

41. How Will They Pay Inflated Prices If The FDIC Limits The Loans

Did you read the plan?

Do you think the FDIC is just going to lend them as much as they want w/ no oversight? Read the plan for goodness sake, there are limitations based on evaluations and debt/equity ratios.

[LittleBlue]

46. They are not going to value these portfolios before buying them

The banks signaled their unwillingness to sell at 60 cents on the dollar. Considering the IndyMac portfolio, 60 cents on the dollar is almost a 100% overpayment!

The only way to know if you're paying an inflated price is to value the securities, something the banks have dreaded because it would signal their insolvency!

[Beetwasher]

47. You Didn't Read The Plan Obviously Because They ARE Doing JUST THAT

Read the plan then get back to me.

[LittleBlue]

64. Cite please?

I would like one. I have read it, and have found no independent body to value these securities.

Please let me know.

[Beetwasher]

66. FDIC Is Evaluating Them

Read the plan.

[Beetwasher]

78. Here's The Specific Cite, Care To Eat Crow Now?

"* Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets."

[LittleBlue]

87. Hahaha, "an analysis." Of what?

All it says is that an analysis will be done to determine how much funding they will allot for the enterprise, not to determine the worth of the portfolio. It doesn't say they will value those mortgage-backed securities.

The 6-1 debt-to-equity ratio is simply the loan to capital from the private sector ratio.

[Beetwasher]

90. LOL! Umm, In Order To Determine What They're Willing To Fund

They need to evaluate first.

What do you think the analysis will consist of? Some dice rolling?

[truedelphi]

58. Thank you for fighting the good fight.

Yo might be enhearteded to know that both Democrats and Republicans tried to get answers out of Geithner yesterday, and couldn't.

So don't feel bad if some here refer to you as RW or selling out. Every so often thinking people on both sides of the aisle understand when a swindle is going on down.

[FrenchieCat]

8. Death to capitalism!

And Nationalize.

OK. We got it!

[MercutioATC]

10. Nope, just follow existing process. Send insolvent institutions to bankruptcy court.

Break them up and sell off the assets to healthy institutions.

Sucks for the shareholders and the bondholders, but that's all part of the risk of investing in equities.

[Undercurrent]

12. No one has the power to

"send" a finical institution to bankruptcy court. The FDIC can seize an insolvent bank, but as of now, there is no government entity can take over a non-bank, or force it into bankruptcy.

[MercutioATC]

13. They can, however, seize and liquidate their assets.

Which is, essentially, the same thing.

[Beetwasher]

19. Whose Assets? Not AIG's, Only Banks

They are asking for that power though.

http://www.washingtonpost.com/wp-dyn/content/article/20...

[MercutioATC]

25. True, large conglomerates are problematic as things stand now.

Truthfully, I don't know enough about corporate law and government regulations to be able to propose a quick fix.

My point is that we don't have to nationalize the system, we just have to stop bailing them out. Seize them (if that takes legislation, so be it), break them up, and sell them off.

[Beetwasher]

27. "Truthfully, I don't know enough about corporate law and government regulations"

Oh, that's obvious.

"My point is that we don't have to nationalize the system, we just have to stop bailing them out. Seize them (if that takes legislation, so be it), break them up, and sell them off."

Umm, seizing them, breaking them up and selling them off is nationalization.

Perhaps you need to know more about corporate law and government regulation before you act like you think you do know what you're talking about? Just a suggestion.

"Because I like to know what I'm talking about before I speak"

[MercutioATC]

32. The traditional use of "nationalization" entails the government owning and running an industry...

...but you're correct, "nationalization" can also be construed to mean the act of seizing private assets by the government (which would make every personal bankruptcy in the U.S. a "temporary nationalization").

So yes, I'll clarify. I'm using the universally-recognized preferred definition of the word "nationalization". There's no need for the government to own (either wholly or fractionally) or operate the banking industry. A better solution would be to seize the assets of insolvent banks and sell them to healthy private entities.

Is that a little clearer?

[Beetwasher]

34. Uhh, What? We're Talking About Nationalizing Non-Bank Financial Institutions

"A better solution would be to seize the assets of insolvent banks and sell them to healthy private entities."

Umm, the way they do that is by nationalizing them. So, no, it's not clearer what you're trying to say.

[MercutioATC]

36. It's the same plan with non-bank financial institutions.

Yes, it may require legislative change, but the insolvent institutions should be broken up and sold off.

...and that doesn't require government ownership or operation any more than a personal bankruptcy does.

[Beetwasher]

40. You Are Talking About Seizing Their Assets

Do you know what that entails?

If they voluntarily go into bankruptcy, there is no reason to seize their assets.

But that's not what you're saying.

You are talking about seizing assets and forcefully breaking them up and selling them off. That is accomplished through nationalization. In order for the government to do that, they have to take control (nationalize) of the entity.

"...and that doesn't require government ownership or operation any more than a personal bankruptcy does."

Personal bankruptcy, or bankruptcy in general is a voluntary decision. There is no need to seize assets.

[MercutioATC]

44. Fine, we'll play the semantics game.

Whether assets are voluntarily surrendered or seized, they're liquidated by the government. That entails the government having temporary control over those assets (if only long enough to value and sell them).

If you want to insist on that being called "nationalization", that's fine...but it's not nationalization under the accepted interpretation whereby the government takes ownership of and operates a business.

[Beetwasher]

45. It's Not A Semantics Game

There's a difference between voluntarily going before a bankruptcy court and having a judge handle the matter and having the FDIC come in and seize your assets and take control of your organization and auction the assets.

A big difference.

[MercutioATC]

51. There's no difference in terms of the definition of "nationalization".

The process may be a little different, but neither implies any governmental operation or extended ownership.

[Beetwasher]

54. Dude, Quit While You're Behind, You Don't Know What You're Talking About

Man oh man are you wrong. The Process Is Not A Little Different, It's Much Different And In Terms Of Definition It's completely different.

Why do you think one is called nationalization and one is called bankruptcy? There are two different things.

Nationalization absolutely implies governmental operation. WTF are you talking about? That's what it is.

Bankruptcy has no such implication whatsoever.

[MercutioATC]

60. Well, one of us is certainly off the mark.

If you feel that the government seizing an insolvent institution, valuing its assets, and selling off the pieces constitutes "governmental operation" or "government ownership" of that institution, your assessment differs from almost everybody else's.

Our stake in AIG (an actual equity position) constitutes a partial nationalization of AIG.

If the government used it's equity position to directly control the business operations of AIG, that would constitute "government operation"...or "nationalization".


Taking control of assets temporarily in order to value and liquidate them...whether voluntarily or involuntarily...does not meet the accepted definition of "nationalization".

[Beetwasher]

65. So Sayeth The Guy Who Thinks There's No Difference Between Bankruptcy & Nationalization

Oh but please do go on, your backpedalling, rhetorical gymnastics, semantic games and obfuscation is truly spectacular.

[MercutioATC]

67. Semantics aside, what issue do you have with seizing them and breaking them up?

Again, I'm not talking about owning them or operating them...just valuing the assets and selling them to healthy institutions.

[Beetwasher]

68. You Have The Issue Not Me

You're biased against Obama and don't trust his oversight.

You need to reconcile that, not me.

[MercutioATC]

70. Ok, so we're agreed. Insolvent institutions shouldn't be bailed out...

...they should be seized, broken up, and sold off.

...and I'm not biased against Obama. I don't trust anybody's "oversight" unless the terms of that oversight are clearly spelled out.

...plus, the people doing the "overseeing" hardly have good track records...

...plus, I don't think this program, even if executed exactly to plan, will work.

[Beetwasher]

71. So You Trust Obama To Oversee Natinalization?

But not Geither's plan? How bizarrely hypocritical.

I wouldn't say I'm in agreement with you. I agree with Roubini. Nationaization is on the table and Geithner's plan can serve as a precursor whichbcan mitigate some of the issues and allow it to happen, if found necessary in a more orderly fashion with less shock to the system than if rushed into it headlong.

[MercutioATC]

72. I trust the government to do what it's done millions of times already.

Take a set of assets, value them, and liquidate them.


...well, "trust" might be a strong word, I believe they have a better chance of success doing that than they do with this untested "partnership" with the private sector.

[Beetwasher]

73. LOL! Well then You Support Geithner's Plan

Cuz that's what it does. How do you think assets are liquidated? The get auctioned off to third parties. Except if in this case no one will buy the assets without government support so the government would have to eat them all. You prefer that?

[MercutioATC]

74. No, it doesn't.

It forms public/private partnerships that hold assets.

That's a far cry from liquidating assets by selling them to private entities.

[Beetwasher]

75. It's A Better Deal

We share in tv upside and mitigate the losses as opposed to eating all the losses. The added bonus is it stabilizes the system. Your hypocrisy is astounding. There's much more oversight and abuse potential in the massive nationalizations you say support as well as a much bigger downside for the taxpayer who could potentially be on the hook for 100% of the losses. Funny that that doesn't concern you.

[MercutioATC]

76. It allows a corparation to selectively shed bad debt and pass the loss to taxpayers.

The company remains operating...with little or no restrictions...and keeps their profitable assets.

The "toxic" assets, once the responsibility of the company (and, by extension, its shareholders and bondholders) are now almost entirely the responsibility of the public.

Even if ALL of the assets were part of the program and we were equitably sharing in any gain or loss, it would still be an inferior plan to just selling the assets to healthy companies...but all we're getting is a disproportionally large share of the BAD assets.

You actually seem to be stating that having a big share of the toxic assets and none of the good puts us in a better position than selling off all of it, good and bad. How do you figure that we DECREASE our liability by buying all of the junk?

[Beetwasher]

77. No It Doesn't Since FDIC Approves The Assets, As Opposed To The Gov't Being On The Hook For ALL OF

The liabilities should they nationalize. Again, you show a gross misunderstanding, misrepresentation of the plan which leads me to conclude you have a biased agenda to misrepresent what's in it.

FDIC, treasury and other primary regulators will have final say as to what assets will be auctioned.

From the plan:

"* Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets."

They may in fact end up w/ a sizeable portion of unsellable (bad) assets still on their books, and if it's large enough, we can nationalize them at that point and have a much clearer picture of what their innards look like before doing so. Meanwhile, we've stabilized the system, gotten rid of some sellable assets that still have a shot at being profitable (and we will now share in those potential profits through our equity stake AND get back the loans plus interest), and we've mitigated potential losses. We've also bought some time and perhaps staved off some of the potential nationalizations. In addition, this is a more orderly process that would have less shock to the system than jumping right into nationalizing and liquidating the worlds' largest financial institutions in one fell swoop.

[MercutioATC]

80. Dude, they're called "toxic" assets for a reason.

We'll be buying absolute garbage...probably well above fair value.

I would LOVE to be the used car salesman that sees you coming.


Just out of curiosity...how do you characterize our equity stake in AIG? Is that "nationalization" to you? Do you see a difference between and/or do you have a different words for 1) the government actually owning an equity stake in an operating company and/or the government taking a direct hand in running the operations of a company and 2) the government seizing the assets of an insolvent company and selling them off to other private entities?

[Beetwasher]

81. LOL! Ok, I Guess "Clear Skies Initiative" Really Cleared The Skies Too?

I guess you believe everything the media tells you? Talk about being a sucker. It's a moniker, not necessarily an accurate description. If I took it literally, I'd think they were contaminated with radioactive waste. Oh, is that what you think? I wouldn't be surprised actually.

Do you even know what assets we're talking about? MBS have real value, though currently depressed, they are worth something.

And as I said, the truly bad ones would more than likely NOT BE SOLD. In fact, no one would want to buy them, even WITH gov't funding. And with competent oversight, they would not be approved for sale.

Meanwhile, if we nationalized, they would be all ours and STILL no one would buy them.

[MercutioATC]

82. If they're not dogs, why don't institutions just sell them?

You're not making sense. Correct me if I'm wrong, but you actually think that we're going to leave the real trash on the institutions' books and only pay fair value for the slightly devalued assets? If that's the case, why do we even have to get involved? There is no shortage of healthy banks that would scoop up slightly depressed assets for fair value.

[Beetwasher]

83. Because No One Wants To Buy Anything Right Now, They Need Incentive

That's the point. The financial system is frozen up and depressed and no one is lending and no one trusts anyone elses evaluations. There's no confidence in the system. That's why FDIC is going in and conducting their independent analysis and giving their stamp of approval to the assets to be sold. Duh.

MBS have lost a lot of value recently, but they are still worth something. It's just no one is really sure what they're worth, if they've hit bottom or if their over or under valued. There's too much uncertainty.

But hey! Let's add to that uncertainty and just nationalize the largest financial institutions in the world and liquidate them! Buyers will be knocking themselves over to buy their assets at THAT point, right?

[MercutioATC]

84. Ok, I'l make you a deal.

We'll check back in six months and see what marvelous bargains the FDIC has found for us.

You may be the only person in the country who doesn't believe that we're going to be buying all of their garbage...

[Beetwasher]

85. Umm, Have You Checked The OP?

Roubini agrees.

[MercutioATC]

86. Actually, Roubini agrees with ME.

We differ on whether it's a good idea to bail out financial institutions in this manner, but we agree on two things:

1) We'll be buying the garbage.

"...the system needs to be cleansed of its poorly performing loans and so-called toxic securities backed by loans."

:...it creates a public-private partnership to buy the troubled assets of financial firms - in other words, to do the necessary cleansing."

"The private investors need the government because there are so many bad loans held in the financial sector that only the government's balance sheet can handle taking them over."

"the plan accomplishes mission No. 1, namely the removal of the bad assets from banks' balance sheets.

2) We'll be paying more than fair value for them:

"The deal is structured so that firms will be responsible only for losses on their initial investment. The hope is that by giving this big "freebie," the government will induce investors to participate, and that competition among them will lead to higher offer prices for the loans and securities, thus encouraging banks to sell them."


Roubini may think the program is necessary, but he knows that we'll be buying the worst of the worst and that we'll be paying more for them.

[Beetwasher]

89. Where Does It Say Worst Of The Worst???

It says "poorly performing" and "troubled" but nowhere do I see "worst of of the worst".

Yes, right now they are bad instruments and they will be a loss for the bank selling them. But nowhere does the plan indicate we HAVE to buy the "worst of the worst" in fact, the plan allows the FDIC to tell they bank the CAN'T sell their worst assets and if they did allow them, even with gov't loans, there's little incentive to buy them if they're so bad. The private partners still have a stake they can lose, even if it's relatively little.

MBS are performing very poorly now due to the increase in bad loans, defaults and foreclosures and a depressed real estate market. But the vast majority of mortgages that make up these securities are still good (national foreclosure and default averages are still pretty low, under 3% I believe). MBS still have potential for profit (if purchased at a reasonable price now) if/when the economy stabilizes and the market improves. They really do have underlying value and are worth something, it's a question of how much.

[MercutioATC]

91. Right here:

"the plan accomplishes mission No. 1, namely the removal of the bad assets from banks' balance sheets"

That quote clearly states that removing bad assets is the #1 mission. How can that be the #1 priority if you leave the worst assets on the banks' books?

Not all MBS are "toxic". There's a good chance that the banks would keep the most attractive of them and just get rid of the junk. Again, this is exactly what Geithner's plan was designed to do...clean up the banks' balance sheets by allowing them to dump the worst of the garbage.

[Beetwasher]

92. So You Redefine "bad assets" To Mean "Worst of The Worst" To Make You're Point

So in IOW, you define things as you see fit. Got it.

Of course clearing the bad assets is the #1 mission. That doesn't mean they will clear ALL of them. Only the one's that are sellable and have potential for upside.

Most of them are only "bad" because they have lost money relative to what the current holder purchased them for. If they're bought at a reasonable price now, they have potential to be productive and may actually be quite a good deal (though that's debatable and dependant on numerous factors, it IS still a risk). It will be a loss for the original holder, but at least they get something for it.

[MercutioATC]

93. I think that's a fair assessment.

The primary goal of Geithner's plan is to remove bad assets from the banks' books.

Banks know this, and get to choose what assets they want to put into the program.

The plan actually WANTS the worst of the assets, because if it doesn't get them it's not fulfilling its primary function. Make no mistake, this isn't designed as an investment for the taxpayer, it's another bailout.

[Beetwasher]

95. Well Of Course YOU Think Your Assessment Is Fair

The goal is to sell what can be sold to try and help the institutions improve their position. Tha doesn't NEA. engaging in outright stupidity by buying stuff that has no obvious upside.

[MercutioATC]

96. I guess we'll see which one of us is right.

I have no idea how your version of the program would help banks enough to merit this kind of expenditure, but we'll see.

Can we agree that IndyMac's portfolio, at a average value of 30 cents on the dollar qualified as "garbage"? If we buy up a bunch of similarly-valued assets (not bid amounts, but REAL value) can we agree that we're buying garbage?

[Beetwasher]

97. One Man's Garbage Is Another Man's Bargain

n/t

[MercutioATC]

99. Correct, and private entities are free to take that gamble.

We shouldn't be doing it with taxpayer money, however.

...especially if the process allows the assets to be overvalued, as I believe it will.

[Beetwasher]

100. But You Think We SHOULD Take A BIGGER Gamble By Going Full On Into Nationalization

Who do you think is responsible for the liabilities 100% in that case?

[MercutioATC]

101. I believe we shouldn't be throwing money at insolvent inststutions.

Don't bail them out. Let them be forced into voluntary bankruptcies.

Since we've already done some money-throwing, refuse any further bailouts. If the institution can pay back the money as per the original agreement, great. If it can't, seize it, break it up, and sell off the assets to healthy institutions.

The shareholders and bondholders would most likely (almost definitely) be completely wiped out. Creditors not reimbursed by the proceeds of the sale of assets would take a loss. We'd take a 100% loss on the money we'd already unwisely put in, but that would be the extent of our losses.

[Beetwasher]

102. "...but that would be the extent of our losses."

As the financial world comes crashing down. Uh huh. No biggie. No losses for anyone else in that scenario.

People will be rushing to buy their assets in that scenario.

[MercutioATC]

103. So it's necessary to allow them to unload the bad onto us while keeping the good?

Are you positing that we should use ANY means necessary to keep failed institutions afloat?

[Beetwasher]

104. Who Said It's NECESSARY, It's Just A Better Idea

For now. They may not be kept afloat. But allowing their failure is something that should be avoided if possible, for now, until we know more about what we're dealing with and the whole picture.

The orderly liquidation of these companies may be necessary. But ORDERLY is the operative word. That won't happen w/ out government involvement and should not be rushed into (or allowed to happen)rashly. If the largest financial instutions in the world all went belly up simultaneously (or relatively so), the losses for EVERYONE (not just their bondholder and stockholders) would be incalculable, staggering and catastrophic.

I guess that's okedokey for you though!

[MercutioATC]

105. I never advocated anything other than an orderly process.

What I DO have a problem with is dicking around to the tune of a few trillion dollars trying to keep these failed institutions afloat.

You admit that liquidating these companies may be necessary, yet you feel that spending trillions of dollars on alternatives should be our first focus?

We've been doing everything BUT looking at liquidation for over 6 months now...when do you feel it would be appropriate to start thinking about pulling the plug on the giveaways?

[Beetwasher]

106. Obama's Been President For 6 Months???

This plan is HIS first go at the problem.

Loans are not giveaways unless the MBS totally fail. That's pretty much not possible as they are based on REAL VALUE. You do know what an MBS is don't you? If the institutions fail WHO WILL BUY THESE ASSETS AT THAT POINT???? What exactly would be the incentive to buy them THEN??

Your idea of orderly is doing NOTHING and letting the largest instutions fail willy nilly. Who's responsible for all of the insured accounts that will have to be covered? Where do YOU think THAT money will come from? I mean gee, there won't be any run on the banks if that happens, right?

21 banks have ALREADY failed this year alone and their deposits have to be covered. Let's pile some of the biggest financial institutions in the world ON TOP THAT all at the same time. Great idea.

[MercutioATC]

107. Obama can't learn from others' mistakes?

I've never actually jumped off of a building in an attempt to fly...for two reasons:

1) It's irrational to think it would be successful, and

2) others have tried it with less-than-successful results.

Obama is supposedly "smarter than we are", so why is it unreasonable to expect him to use the same process when problem-solving?


I don't advocate "doing nothing". I believe the government should be actively involved in getting these assets properly valued and sold to companies that want to buy them...at a fair price. What I DON'T believe we should be doing is throwing trillions of dollars at these failed companies (in ways most advantageous for them) and expecting them to behave responsibly...and that's both what Bush did and what Obama is doing.

[Beetwasher]

108. How Is The Process The Same???? It's Not

It's not the same, not at all.

Just becaus YOU say it is, doesn't mean it is.

"I believe the government should be actively involved in getting these assets properly valued and sold to companies that want to buy them...at a fair price."

LOL! That's what the government's doing.

What you don't seem to get is (actually I think you do get it, but you're just pretending you don't for obvious reasons), if these companies fail, no one will buy the assets, at any price and we will be stuck with all the liabilities and fallout. That's WAY more expensive than LOANING money that will more than likely be paid back when the assets and economy stabilize and are productive again.

I know why your doing what you're doing, and for the record I'm not really talking to you anymore, just exposing your bullshit so anyone reading along knows how full of shit you are.

[MercutioATC]

109. There was a discussion on another thread about what an Obama "sheep" was.

It was posited that those who both blindly "trusted" Obama's decisions despite countering facts and accused people who disagreed with Obama's decisions of having an agenda are the true "sheep".

You do realize that it's possible to think Obama's dead wrong on his economic "fix" without having an agenda, don't you?


Either way, we've pretty much talked this to death anyway. I say we're going to be buying trash assets at inflated prices...because this program is fundamentally flawed. You say we're going to be selective in buying assets and that the worst of them will stay on the companies' books.

Only time will tell who's read on this was accurate.

[Beetwasher]

110. Baaah Thy Name Is You

I contend its workable. I'm open to the possibility that the plan may not work, you on the otherhand because of your irrational bias are absoltely certain it will fail. You have your talkingpoints and marching orders and you're staying the course! Bahhhh!

[Undercurrent]

20. ?

The Treasury Department is trying to get Congress to pass legislation to allow the Department to have the same authority the FDIC has over banks. They do not have that authority now.



“The United States government does not have the legal means today to manage the orderly restructuring of a large, complex nonbank financial institution that poses a threat to the stability of our financial system,”

Geithner Wants New Authority for Treasury
March 24, 2009, 9:19 am

When he goes before a Congressional panel Tuesday morning, Timothy F. Geithner, the Treasury secretary, is expected to call for the Treasury Department to be granted greater powers to seize troubled financial institutions that aren’t banks.

“The United States government does not have the legal means today to manage the orderly restructuring of a large, complex nonbank financial institution that poses a threat to the stability of our financial system,” Mr. Geithner said in text of his opening statement, which was made available Tuesday morning on the Web site of the House Financial Services Committee.

This expanded authority would have given the government more options, and potentially more control, when it stepped in to save American International Group from collapse last fall, Robert Gibbs, a spokesman for the White House, said Tuesday morning before the hearing.
http://dealbook.blogs.nytimes.com/2009/03/24/geithner-e...


Feds push for power to seize any failing financial company

By EDMUND L. ANDREWS
and ERIC DASH

Published: Wednesday, March 25, 2009 at 3:48 a.m.

...The federal government can take over and close banks and other deposit-taking institutions whose deposits are insured by the government and subject to detailed regulation.

But Obama and the Fed want to extend that authority to insurance companies, such as AIG, investment banks, hedge funds, private equity firms and any kind of financial institution considered "systemically" important.
http://www.pressdemocrat.com/article/20090325/WIRE/9032...

[truedelphi]

61. Thank you for your sanity.

Do wish your sound thinking on this was contagious.

[MercutioATC]

63. Thanks. I think most people see the huge problems with this plan.

There will always be those who see things differently, but in this case I think they're a small minority.

[Beetwasher]

79. LOL!! I Got News Bub, You're The Minority

Obama is trusted to handle the problem by a significant majority. People like you who are biased against him and don't trust him are quite the minority these days. But keep up your delusions!

[MercutioATC]

88. You keep trying to make this an "Obama" issue. Its not.

I'm not biased against him. I support the majority of his decisions.

I just believe he's been dead wrong on almost all of his economic decisions so far.

[Beetwasher]

98. "I support the majority of his decisions." ROFL!!!

Sure you do.

[Better Believe It]

11. Nouriel Roubini: "My take is generally positive, with a couple of caveats"

- It wasn't all positive as one might conclude by reading the excerpt in the opening post. Read the complete article. -


"But let's not have any illusions. The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks.

Also, while this plan is designed by the Treasury, many of the big guarantees are being made by the Federal Deposit Insurance Corp. and the Fed. Why not use only Treasury funds? Well, then the administration would have to deal with Congress. While the populist hysteria of last week suggests this end run might make sense, there is something a little worrying about circumventing the legislative process on such a huge investment."

http://www.nydailynews.com/opinions/2009/03/25/2009-03-...

--------------------------

Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan
by Cyrus Sanati
New York Times
March 25, 2009

“My take is generally positive, with a couple of caveats,” Mr. Roubini told DealBook about the new plan. He said he liked that the government was finally stepping up to clear the toxic assets off the bank’s balance sheet and that private capital would come in to make a market for it.

“Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay,” Mr. Roubini said in a telephone interview. “People say, ‘the government is putting in 95 cents on the dollar, so why not put 100,’ to do it all by itself. It’s because private-sector participants have the incentive to get the best price.”

It wasn’t all positive: Mr. Roubini said he did not like that banks have the option not to sell an asset after the auction concludes, as this would create confusion and frustration on the part of the buyers. He also believes the government should use its leverage over the banks to force them to participate, whether they want to or not.
In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.

Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.

Please read the complete article at:

http://dealbook.blogs.nytimes.com/2009/03/24/dr-doom-fi... /

[FrenchieCat]

17. BREAKING NEWS: Taxpayers take a risk.....

Like that is really news?

Everyone understands this.
Nothing can be fixed without risk to taxpayer due to what we have been handed....no matter which plan one would have chosen.

Wish the President would take a magic wand and make it all go away,
but the realists at the table understand that this will not be the case.

There is no perfect panacea and if that's news to you, then consider yourself informed as of now!

[LittleBlue]

26. No, that's a gross oversimplification. Taxpayers take the risk, but get far less reward

The "private sector" (aka hedge funds) will put up 7%, yet they will not get 7% of the profit (as with normal partnerships). They get 50%, or 700% (50/7) what they are entitled to. The public gets around 50% of what they are entitled to (50/93) as a payoff to hedge funds. For losses we eat 93% of them, while they take 7%.

This is the most parasitic partnership agreement I've ever witnessed.

[leftstreet]

18. "it could get very ugly, very quickly"

And he does a good job of explaining why

[girl gone mad]

31. He's not nearly so positive in the actual piece.

Moreover, there's the issue of transparency - or lack thereof. No one knows what the loans or securities are worth. Competing investors will help solve this by promoting price discovery. But be careful what you wish for. We might not like the answers.

Finally, we have to anticipate the likelihood that some banks will resist selling their loans and securities. Why? Currently, the government has been giving them the option to keep holding them with the hope that market conditions will improve.

Going forward, the government must insist on the banks' involvement in the new program. The reason that financial institutions must be pressured is that they are the cause of the financial crisis. They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place.

What happens if removing toxic assets from a bank's balance sheet at near-market prices shows it is effectively insolvent? Then we will have to face the elephant in the room. We may then have to start asking, "Why keep insolvent banks afloat?" And having asked that, we will have to search for ways to manage the ensuing systemic risk.

Either way, once the plan is fully implemented, we will be entering a new phase of the financial crisis. The water is choppy. Let's hope we are strong swimmers.

[Undercurrent]

38. .

The authors said it was a serious step in the right direction, but there were many hazards along the way. Pretty obvious, and straight forward. The title was from HuffPro, but I see no real spin.

"Secretary Timothy Geithner's new toxic asset plan is a serious step in the right direction in that it creates a public-private partnership to buy the troubled assets of financial firms - in other words, to do the necessary cleansing. Up until now, with all the government bailouts, the financial system has been barely treading water. With this plan, it will still be a hard swim, but, at least, there is a path to shore."

[girl gone mad]

53. You're reading a little too much into it.

This is typical of Roubini's style. To counteract his "Dr. Doom" rep, Rounibini often couches his criticisms in positive language. A thorough reading of the article reveals that he is concerned about the risk to the taxpayer, thinks there is a good chance the banks will hold out and also thinks the plan could ultimately fail, leaving us to drown. He's not really saying anything different than Krugman, Galbraith or Stiglitz have said. He just puts it a little nicer.

[truedelphi]

62. We taxpayers will have to be strong swimmers.

Inflation ahead.

WHile the firms being assisted so generously will be securely in the life boats we have provided them with.

[brentspeak]

48. "But let's not have any illusions..."

"...But let's not have any illusions. The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks."

[MarjorieG]

59. Now if we could get any angry NYT devotees of Krugman to give this a chance.

Reading the LTEs I feel he does rev up the masses dangerously. Not helpful. Just a populist screed in economist credibility.

[genna]

94. if he predicted this credit bubble we are currently facing

and served in the Clinton administration as Geithner's adviser, should we be listening to him now? If he knows his stuff, he is probably more trustworthy than those who didn't. I can't believe they called him Dr. Doom.


I think the hardest thing about sorting through all this financial/economic information is my background does not help me to sift through what is true and false. I took some econ classes but I didn't have a minor or major in it.


I don't think it makes sense to judge who is most knowledgeable by where they have served. I think his background on wikipedia gives me a little confidence, but who is right on this?


I have a little more confidence in him since he has previous experience with these meltdowns:
"Roubini returned to the IMF in 2001 as a visiting scholar while it battled a financial meltdown in Argentina. He co-wrote a book on saving bankrupt economies entitled Bailouts or Bail-ins? and opened his own global consulting firm, which now employs two dozen economists and publishes a popular Web site and blog. "Nouriel has a rare combination of economics and the real world, and so has great insight because of that," said economist Robert Shiller. "He looks into the details and rolls up his sleeves."<5>"

Wikipedia.