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Why is Geithners plan better than the government buying the toxic assets outright? [View All]

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Oregone Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Mar-24-09 11:23 AM
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Why is Geithners plan better than the government buying the toxic assets outright?
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(even without setting a price of pennies on the dollar)

I don't like what I suggested, but I like what Geithner suggests far less. What is wrong with the government buying these assets and actually owning them (and hiring smart people to manage them)? With Geithner's plan, the government puts up 85% of the cash for financing, where in my idea, they put up 100%. But the difference here is that in Geithner's plan, the 85% financing minimizes investor risk and makes them more willing to pay a higher price for the assets (perhaps beyond what they are worth on average). Hence, 85% in the hands of a motivated investor with little at risk could be more than 100% in the hands of the government. Its possible that buying these all outright would be cheaper initially.

But you say, we are only financing these assets with the 85% and not really giving the money away like we would if we bought them. Well, that isn't true. 85% of the purchase of assets that may be worth nothing essentially leaves the government holding their dick if the investor bails. Essentially, in all such cases that the purchases turn out to be unwise investments, the government will have shuttled the money already into the banks, and there wont be anyone standing there to pay the government back on this loan. Its likely the shitty assets will be shuttled into some limited liability corporations that file bankruptcy and tell the government to fuck off. So in all such cases that the "investors" (another name for shareholders in the banks we are saving) will lose, they will just turn around and ensure its the government, who has actually put up the money, that loses on the assets.

Meanwhile, the assets that will be determined to be "good" (worth more than price paid for them) will not cost the government anything in the long run. But, for the government putting up the capital, where is the reward? Without owning the asset, the government will not bear the fruit of the profits made from them. Why does that make any sense whatsoever?

Geithner's plan has the government resuming the process of shuttling money to the banks. The government also almost takes full liability for all the bad assets. And further, despite the capital investment, the government stands no chance to profit. Is this lemon socialism (privatize the profits, socialize the risk)?

Why can't the government clear out the bank's assets (paying way too much in the first place). Then, once the government owns the assets, they could even resume Geithner's plan to finance a sell-off the private investors (the benefit of doing it in that they buy at X, and create an artificially high sell off price with financing to minimize risk, and hence, profit). Or the government could retain the assets, separate the good from the bad, absorb the loss of the failed assets by offsetting them with selling the good assets at a much higher rate than the purchased price.

Its difficult to actually figure out what the government would do once they possess all the toxic assets, and there is a chance they can lose by doing this. But there is a much bigger chance the government will lose with Geithner's plan. That is because the government will lose 85% of the cost on all assets purchased for more than they are worth, and gain 0% on the good assets they don't own.

Other than the smoke and mirror's of Geithner's plan, which makes it appear the government isn't benevolently bailing out the banks, could someone explain the value of it over the government taking full ownership and liability of the assets. Have they ever heard the term: Keep it Simple Stupid?
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