Why is Geithners plan better than the government buying the toxic assets outright?

[Oregone]

(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?

[Democrats_win]

1. Keeping it simple is not the way of men who "forgot" to pay their taxes.

America is one thing: the land of shenanigans. Shenanigans meant to separate us from our money so the elite can brow beat us for not working hard enough. So they can brow beat us for not allowing them to keep their undeserved and unmerited bonuses.

[tritsofme]

2. Isn't that basically the Paulson plan from October?

That he abandoned?

[Oregone]

4. I think so. Everyone hated it

People hate this less because they don't understand it. They don't understand its even worse than Paulson's plan. The government stand no chance to profit, and every chance to lose. All Geithner did was threw in a magic transaction to a private person to hide that the government is essentially putting up all the cash and all the risk, at less of a chance of a reward.

[dixiegrrrrl]

3. Why is Geithners plan better....for WHO?

That's the question.

[Oregone]

5. LOL...I didn't define "better"

I mean, for the nation, the people...why is this "better" than just buying these trash assets in the first place? Hell, we are going with it, so it must be "better". :)

Geithner's plan is good for the banks, great for the "investors" (bank shareholders and other elite rich men), and shoddy for the government.

Is Obama dropping the ball here?

[dixiegrrrrl]

8. You got it....

The plan is same as prevoius bailout. Covers asses of Big Banks, Goldman Sachs, etc.

If Government buys all the crap assests, the robbers don't make money.

[Redbear]

6. I guess our answer is that people who make their money on Wall Street

think they will make huge money on this plan which is why the Dow shot up more than 500 points.

[Oregone]

10. They will make big money on this plan

They have a massive guarantee to get rich off this on the tax payer dime.

From everything Ive seen, I highly believe the private market will trade the bad assets into quarantine corporations that go bankrupt and default on the loans to the government. Hence, there is no risk, zero, to the private investor who purchase enough assets to cover the 15% they lose on the bad purchases.

[sad sally]

25. And wasn't it sweet that they (wall street) got the advance notice

yesterday from Treasury - before the stoopid taxpayers did today. Inside knowledge sure helped fuel the Dow yesterday.

[Median Democrat]

7. Well, If The Gov Buys These Subprime Loans, Shouldn't The Gov Reduce The Principle On These Loans?

Indeed, wouldn't there be substantial political pressure to do so, and by doing so, doesn't this guarantee that taxpayers are eating the full costs without any hope of repayment.

[Cant trust em]

9. If we buy all of the bad assets...

won't we own 100% of them compared to owning 85% under the Geithner plan?

[Oregone]

11. Under Geithner's plan, we own 0% of them.

But under his plan, we have liability on 85% of it. Its an important distinction. We can't touch the profits because we are only financing the initial purchase. But the government is still liable in the case the assets are worth less than the purchase price and the financee bails.

[ww2player]

12. They don't want the US to own all of it..

The crooks just want the taxpayers to put up 96% of the money so they can lay claim to 50% of any miraculous profits that might surface from thier 4% ownership. Although if the assets don't make a dime (anyone want to place odds on that?) the taxpayers are gonna get kicked in the balls while the crooks sit back and laugh.


Where are all the investigations that should be going on? Start locking these bastards up and STOP giving them the money the future generations of this country are gonna need to make this country survive in what will surely be more troubling times.

[Beetwasher]

13. I'll Give It A Shot

Something needs to be done sooner rather than later. Right now the government doesn't have the resources to immediately take over and manage all of the assets. There's a lot of them. It would take time we don't have to create the bureauacracy and "hire the smart people" to do this. Time is of the essence.

Additionally, having the private sector involved mitigates the risk. Granted, the gov't is taking on most of it, but any mitigation is better than none.

Also there are some fundamental misunderstandings on this board about what exactly is happening under Geithner's plan. Read the plan. There is substantial FDIC oversight of the auction. FDIC is going to determine exactly WHICH securities will be auctioned and they are going to analyize and EVALUATE the securities that are going to be auctioned beforehand. After they have evaluated them, then they will determine how much they are willing to loan based upon that evaluation and a debt-equity ratio. With competent and honest oversight, this should prevent any hyper-inflated prices being paid for the securities. FDIC is running the show.

Now, there is much room for criticism of this plan. Valid criticisms include no confidence in oversight ability of FDIC, the amount the gov't is subsidizing via loans vs. private portion, and fears that the MBS will continue to deteroriate. But those are issues regardless of whether or not private entities are involved or if the gov't just takes over the whole thing.

Additionally what your not taking into account is the effect of confidence being injected into the system and the stabilization of the system that can stabilize the prices of the MBS. This in turn adds more confidence and attracts more buyers etc. It's a positive feedback loop.

Also, this plan is one piece of a bigger picture and is meant as one step, a first step (for Obama's admin at least) at stabilization. If you add this piece to the bigger picture that includes stimulus, job creation, mortgage assistance programs etc., the whole thing injects additional confidence into the whole economy and they all work together and feed on eachother to stabilize and turn this thing around. If it turns around, the gov't stands to actually make money on this deal by getting the loans back with interest.

Finally, before you fix the houses foundation, you have to make sure it doesn't collapse around you. This plan is meant to stop the collapse. I have no doubt once the system stabilizes we will then move on to fixing the fundamental, systemic problems in the system which absolutely need to be addressed.

[Oregone]

14. A couple comments:

"Something needs to be done sooner rather than later"

We could of bought 100% of the assets yesterday, and once that happens, that is, in itself, the "magic". Once you re-liquidize the banks, things should theoretically stabilize. Whatever happens thereafter on the toxic assets is not time-critical. The government can slowly approach the assets (and should because they would get more as the situation stabilizes) while the banks are re-liquid and lending resumes as normal (which makes the economy resume from the capital injection). The sky is falling line seems to be the biggest motivator behind treasury robbery ever.


"Additionally, having the private sector involved mitigates the risk."

That isn't true because 85% could be higher than 100% of the cost of the assets (allowing private investors to purchase with a low risk will drive prices artificially high and above face value worth). Further, risk from loss can not be mitigated by gains from profit. The government is merely financing the purchases and will not touch the profits. But, in the case there is no profits, you can be sure the government will be stuck with 85% of the cost of the purchase. Do you really believe that if an investor agrees to pay, as they later find out, 100% more than what an asset is worth, they will benevolently pay back the government financing on the loan? I "believe" they will bail and leave their 15% investment, because it offers no chance of a positive ROI. These assets will be shuttled to a corporation setup to file chapter 11 and shelter people, and the government will again end up with the assets (but just the bad ones this time around).


"Additionally what your not taking into account is the effect of confidence being injected into the system and the stabilization of the system that can stabilize the prices of the MBS."

A similar effect would of happen from the government clearing the banks balance sheet buy simply buying the assets outright.


"This plan is meant to stop the collapse."

But what I am saying is that it will do so at no greater ability than buying them outright, and it carries no potential for rewards. This will have an incredibly insane high price tag that the government will pay with no hopes of recompensation.


A few years from now, I bet the government will own almost all the bad assets (from investor defaults), and none of the good assets. And yes, even if we assume they got them at 85% of their cost (from investor defaulting and the price not being artificially high), they may all be worth far, far less than that. In the end, in a few years, the government will own all toxic assets and have to sell them at a substantial loss (and there will be no buyers). Whatever government loses, will probably be about what private people gained in this plan who retained the good assets. So not only did the government liquidize the banks, they injected money further into the investor class. When will it ever fucking end?

[Beetwasher]

15. You're Ignoring Some Of The Most Salient Points I Made

"We could of bought 100% of the assets yesterday,..."

No we could not have. We don't have the resources to manage them. If we had prepared months ago to do this and put the bureaucracy in place beforehand, maybe. Keep in mind we just took over Freddie and Fannie. Resources are already strained to the max.

"That isn't true because 85% could be higher than 100% of the cost of the assets..."

Only if there is not competent oversight and only if the MBS continue to deteriorate. It is in the best interest of ALL parties for this to NOT happen. The private entities stand to make a lot more money if the MBS stabilize and prices increase. The investors stand to lose 15%, which can be no small sum if the MBS fail. If the gov't owned 100% of a failed asset, they would lose more because the prices paid by this partnership should be no different than the price paid by the gov't alone if there is competent, honest oversight and evaluation.

"A similar effect would of happen from the government clearing the banks balance sheet buy simply buying the assets outright."

Nope. Profit motivates the market. Additional private investment and buyers will increase the prices more. It's a positive feedback loop that would not happen if it was just the gov't setting prices and solely buying the securities. Confidence and psychology are integral parts of the economy. Outright nationalization creates panic and that leads to a negative feedback loop. Also, what your suggesting is more expensive. Gov't would be giving the banks 100% for the assets and stand to lose 100% if they fail. If they don't fail, they would profit, but private partnership mitigates the risk. The price paid should be the same (or close to it) either way w/ FDIC oversight of the evaluation and auction process.

"But what I am saying is that it will do so at no greater ability than buying them outright, and it carries no potential for rewards. This will have an incredibly insane high price tag that the government will pay with no hopes of recompensation."

Incorrect. If MBS stabilize and prices increase, the government gets the loans back w/ interest and as I said, this is one part of a bigger picture. Several mechanisms working in concert to turn the WHOLE economy around. Again, a positive feedback loop. If you stabilize and turn the economy around EVERYONE PROFITS. And again, w/ proper FDIC oversight of the evaluation, there should be no incredibly insan high price tag. There should be reasonable prices paid for the assets.

[Oregone]

17. And you are ignoring mine

"We don't have the resources to manage them."

We don't need the resources to manage them immediately. Buying is time critical. Post operations is not. This plan will take longer to implement the private market buying regardless than if the government directly stepped in.


"It is in the best interest of ALL parties for this to NOT happen."

That isn't entirely true. It assumes the shareholders in the banks wont be the same private investors buying their (or each others) assets. :)

Do you get that?

If the assets were driven up to deliver more cash to the banks (which they like), and the investors also figured out a way to separate themselves from the loss of the toxic assets (which is easy enough), then its all profit for the investors and in everyone's interest to pay more than face value. As long as the potential of profit (plus some margin) is more than the potential of loss (15%), they will pay that price.


"Profit motivates the market."

Now I agree that this is true...the promise of profit (at the expense of the government) is making the market happy. But you must then ask, if we have to motivate the investor class to be happy and restart the economy, are we merely slaves? How much more should we promote this model of existence? Why play with these purchases at all? Why not just write the investor class a big fat check and say "Thank You for being kind to us", while buying the assets outright? Essentially, I think the government is going to get stuck with the bad assets and be shuttling an additional load to the investors for simply existing. Might as well give them a blowjob and a briefcase full of cash. That would of also made the market rally and everyone happy.

"the government gets the loans back w/ interest and as I said"

Which will be far less and negligible when considering the profits the investor makes. The government puts up 85% of the cost, assumes the massive share of the liability, and gets only the interest back on the financing.

Do you think that "profit" (interest) will mitigate the government's loss when the investors bail and default on the bad assets?

[Beetwasher]

18. I've Addressed Everything You've Said

"We don't need the resources to manage them immediately..."

Of course you do! How do you figure? They don't manage and administrate themselves. You can't just buy the assets and let them sit in a corner until you have your operations set up. Do you realize what would be involved in setting up such an operation??? It doesn't happen overnight. It's cumbersome and complex. Just because you say it's not relevant or necessary doesn't make that true.

"Do you get that?"

FDIC oversight is essential and integral to the plan. Do you get that? It can't be said enough. People gloss over this as if it's irrelevant.:shrug: Now, you may not have confidence in the oversight, and as I've said, that's valid criticism. Personally, I can't imagine after what's been going on that Obama would think he could allow FDIC to get away w/ incompetent oversight. Do you think the Repubs would allow him to get away w/ that?

"if we have to motivate the investor class to be happy and restart the economy, are we merely slaves?...."

Oh boy. This is a conversation that is not relevant. You're going into philosophical territory that is beyond the scope of the questions at hand. This is a philosophical tangent that is not worth getting into by Geithner (or me for that matter at this time) Geithner's plan rightfully is not addressing philosophical issues.

"Which will be far less and negligible when considering the profits the investor makes."

It always is. The whole point of the exercise is for gov't to profit, but to stabilize the system and prevent the collapse. The government makes loans ALL the time and only expects them back w/ interest. This is nothing new.

"Do you think that "profit" (interest) will mitigate the government's loss when the investors bail and default on the bad assets?"

Profit interest will make less likely that failure and default will happen in this first place and losses will be mitigated by the private investment portion. 85% loss is better than 100%.

[Oregone]

20. "85% loss is better than 100%"

1) Assuming 85% isn't more than 100%

2) Assuming there isn't a good asset worth 200% of the purchase price also bought that would balanced it out. Nothing will be worth 0% or 200% though probably. There will be a smaller range of loss and profit. The government is essentially opting out of their chance to benefit from the good assets, and accepting the 85% liability on the bad. Yeah, I guess they get some interest. Hurray.

[Beetwasher]

21. It Is

"1) Assuming 85% isn't more than 100%"

There's no reason to think it will be if there is competent oversight. FDIC is LIMITING THE AMOUNT OF THE LOAN BASED UPON ANALYSIS AND EVALUATION OF THE ASSET IN ADDITION TO A DEBT-EQUITY RATIO. That's the whole point of oversight. Again, the "gloss over".

") Assuming there isn't a good asset worth 200% of the purchase price also bought that would balanced it out. Nothing will be worth 0% or 200% though probably. There will be a smaller range of loss and profit. The government is essentially opting out of their chance to benefit from the good assets, and accepting the 85% liability on the bad. Yeah, I guess they get some interest. Hurray."

Hooray indeed! This is NOTHING NEW!! Government loans money ALL THE TIME and merely gets back the loan plus interest, while those who got the loan make MUCH MORE. BTW, I didn't get into it much to keep the conversation simpler, but the government ALSO HAS AN EQUITY STAKE. So it's not just interest, the government WOULD in fact share in some of the profits.

[Oregone]

22. The government should have an equity stake no less than their liability

Which is 85%. Just saying, eh?

[Beetwasher]

26. Why? The Government Loans Money ALL THE TIME W/ No Equity Stakes At All

The gov't is NOT a for profit enterprise. Frankly, the equity they've got in this deal is a nice bonus.

[Oregone]

28. Two points

They should have more of an equity stake because these are toxic assets and the government is taking an unreasonable amount of risk. The government is financing (grossly) ventures that could fail as likely as succeed. If the assets are less profitable than the buying price, the government financed portion will be completely shit on. Any profit the government may recoup from the good assets will not cover the 85% loss on the bad assets. They are loaning at a massive loss. That is why the government should have a larger stake. Who loans at a loss? Certainly no one on purpose, but in this scenario, the government knows a large portion of the assets will go bad. The government may loan money all the time, but certainly not at a loss this large.

Secondly, if you insist the government has the ability to loan money all the time, and to consider a philosophical tangent, perhaps it isn't so important to coddle the investor class and encourage people to reinvest in the economy and fix the credit market. Perhaps, as an aside, the experienced government could, along with Keynesian cash injections, take over for the investor class in terms of loaning until they feel more up to the task, eh? Im just saying, I certainly don't fear a nationalized banking sector getting the job done, and it may have a smaller price tag than continually providing an endless amount of incentives to the elite at the top, so that they may start trickling it down below again. Hell, the government "Loans Money ALL THE TIME". Let the continue, increase, and lets take out the middle men on the sidelines.

[Beetwasher]

29. I've Always Maintained That Criticizing The Risk/Equity Ratio Is Valid

But it's really sort of a side point, and who knows, by the time the plan is implemented that may be corrected (to some degree). Yes, I too think a bigger equity stake would be more fair (sic), but that in and of itself does not necessarily undercut the validity of the workability of the plan, it's a question of fairness of dividing up the spoils when it's successful! So that's a debate that's worth having as it's underlying assumption is...SUCCESS of the plan! I'm all for that!

"Secondly, if you insist the government has the ability to loan money all the time..."

That's not what I'm insisting at all, I merely stating a fact. This is status quo for government loans. They loan money and only expect back the loan plus interest (and sometimes not even interest). Equity stakes are usually NEVER an issue in their other multitudes of loan agreements. In fact, not only does the government make loans, but they also *gasp* give away tons of funding in the form of grants and other instruments and *gasp* expect NO RETURN AT ALL on those appropriations.

[Oregone]

30. "Equity stakes are usually NEVER an issue in their other multitudes of loan agreements."

Yes, but the problem we are seeing here is the gross ability for the government to get burned on the financing of the bad assets, so its pretty well placed in this scenario. If you really take out all the fancy financial instruments, the bigger the ability there is for the government to get burned (and not recoup losses with an equity stake) coincides with the bigger ability for the investors to make more profits. If the government increased its stake to an amount that they foresee breaking even on the losses, it would diminish or even eliminate the potential for profits amongst the investors. Essentially, with this plan, the government is finding a balance between their ability to absorb the loss and encourage investors. As it stands, it seems this balance point is greatly in the favor of the investors who will profit greatly at the expense of the government (and Im insistent to predict there will be corruption involved as these investors trade the bad financed assets quarantine corporations setup for the sole sake of bankruptcy).

For the plan to be successful to any extent (on its own merits), it must present profit to investors, and therefore, must accept loss in their place. And while this may address the problem in the long term, I guarantee you will see another cycle of manufactured populism and feigned outrage when Congress finds out exactly how much they loss in the process of getting the private market in on the feeding frenzy. Such an amount of loss will be far greater than a move of buying the assets outright, because the incentive money to involve the private market is not included (in that scenario, you buy them all, lose on the bad assets, and sell the good at a profit to hopefully cover the rest). In Geithner's plan you essentially buy them all, lose 85% on the bad assets, and have little profit from the good ones to cover it. With his plan, you create another expense...that being, incentive, which goes to the investors on the tax-payers dime.

[Beetwasher]

31. I'm Not Disagreeing, As I Said It's A Valid Criticism

But it's beside the point as to the workability/viability of the plan in general. The plan is going to be workable/unworkable regardless of the risk/equity ratio.

"and Im insistent to predict there will be corruption involved as these investors trade the bad financed assets quarantine corporations setup for the sole sake of bankruptcy"

That's fine and it's your opinion. Again, don't gloss over the oversight provisions.

"I guarantee you will see another cycle of manufactured populism and feigned outrage when Congress finds out exactly how much they loss in the process of getting the private market in on the feeding frenzy."

I don't think so and it will be moot when the plan works and then get back the loans PLUS the equity! ;)

"Such an amount of loss will be far greater than a move of buying the assets outright..."

I've still not seen how this is true if the assets are reasonable priced, as they should be w/ proper oversight. :shrug:

[Oregone]

36. "I've still not seen how this is true"

I roughly (and crudely) tried to draw an illustration here:
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5320860&mesg_id=5323425

You say that there is oversight, and there are also financial/legal wizards involved here. Ive seen numerous economist suggest assets can be traded advantageously into quarentine companies that stick the government for the loss of the unprofitable assets using bankruptcy laws. This continues to siphon funds from the government to the investors who cannot lose profits in these transactions. My crude example was mild and with the unproven premise the assets will be sold at face value. If they are sold beyond that, the government could be getting really, really fucked on the losses.

[Beetwasher]

38. I Should Have Said Necessarily True

Of course the possibility exists, but as this is probably one of the BIGGEST potential problem areas of the plan I'm confident Obama is both aware and prepared to deal with it. His competence is after all a big reason why I voted for him. I guess I trust he will not allow this to happen. Others don't and that's their perogative.

[Oregone]

42. Yes, I am among the non-trusting

The anti-Keynesian nature of this plan (which operates on the premise we must bribe the upper class to treat our economy good) invokes a massive amount of cynicism in me. This is a top-down approach where they (if I can assume they are smart enough) recognize that the government is paying additional money for this operation to happen to investors to make them happy enough, in such a manner deficient demand magically dissolves. But anyway you cut it, an investor, happy or sad, is going to look down and see stormy flurry on the ground promising a negative ROI on any further investment in our economy. If the Obama administration doesn't spend more time addressing fixing the actual ground conditions and stimulating production, no amount of blow jobs, bribes and reach-arounds will make these benevolent investors start investing again in the real economy. Yes, theyll buy this shit up like candy because they can't lose, but that wont help anyone get a job. It will make investors happy that they are making a mint, but it wont make them happy enough to fund a store development in Detroit where you have 20%+ unemployment and no promise of profit.

Where should the emphasis be? Making investors happy, at tax-payer expense, or increasing production to make investors see profit in real world ventures?

"Belief is a greater enemy to truth than lies" - Nietzsche

[Beetwasher]

44. Well That's obvious!

LOL!
And your cynicism is arguably well earned in toto but not ad hominem. Honestly, I can tell you have larger philosophical issues, and that's cool, but there's a time for philosophical idealism and debate and a time for pragmatic actions and solutions. The current moment demands the latter.

About that Nietzsche quote: trust me, you don't want to go there with me, I was a philosophy major and I focused on N. ;)

That's why I really don't want to get bogged down and sidetracked with the larger philosophical issues, I could literally go on for days and if we have philosophical dfferences we can go on In circles forever.

[Cronopio]

48. What you mention as "larger philosophical issues" are actually make-or-break issues.

The Geithner plan is being touted as a way to get lending activity back up again. There is nothing in the plan that guarantees this. The *only* guarantee is that The Big Four get a massive infusion of capital in exchange for their riskiest assets.

The largest private banks will not lend as usual until their debts are dealt with, which will take years even with taxpayer support. Not nearly fast enough to support an economy that is losing almost 3/4 million jobs each month.

[Beetwasher]

49. So How does natonalization accomplish

It any better? It doesn't. In fact the fallout of nationalizing the largest institutions in the world can very likely send the world financial system into a death spiral. You want to talk job losses if that happens? The scale of the natonalizations we're talking about can not happen overnight without massive systemic shock. Natinalizations are NOT off the table, but they also can' t be rushed into rashly.

[Cronopio]

51. Nationalizing The Big Four wouldn't solve the problem of their "toxic" assets.

The main benefits of nationalization would be the old management would be replaced and the assets evaluated externally to the companies. Investors would have more reliable information on what to trade and who to trade with.

As you say, the process of nationalizing the banks would take more time than we have which is why I don't advocate it. Creating a new, large national bank to take up the slack of what the private banks are unwilling to do right now, and putting The Big Four into receivership, is the only effective solution.

Nationalization is a messy process but much more effective than keeping the current system, management, investor risks, and toxic incentives (on the part of the banks) in place - which is the essence of the Geithner's current plan. His plan addresses nothing but the bank's debts. Even if the debts could be wiped out overnight, rational investors would still have no confidence in the institutions themselves. Nationalization solves that problem, but not the problem of the risky assets.

On edit:

"Natinalizations are NOT off the table, but they also can' t be rushed into rashly."

As far as the Fed, the Treasury Dept., and the banks are concerned, any form of nationalization IS off the table. That's the only reason we have waited six months for the Fed/Treasury to come up with this convoluted "solution". The entire goal of the exercise is to buy time for The Big Four to generate the appearance of solvency so that they can say to the world "See, no need for nationalization - we solved the problem for ourselves." Right now, they are running the risk of a populist backlash that could result in some form/degree of nationalization which increases the longer the crisis goes on.

"Generating the appearance of solvency" will involve: changing accounting rules, inaccurate reporting of debt (helped by gov't overseers that see the "larger picture" of restoring the economy), increasing revenues (doesn't matter where it comes from - business operations or taxpayer handouts, just as good), and reducing expenses (reducing lending activity to the bare minimum).

[Oregone]

52. "Investors would have more reliable information on what to trade and who to trade with"

Thats actually contrary to the point. We need it to be blind somewhat so the bad is bought off, along with the good. Its not that risky for the investor because they are only putting up a fraction of the cost with Uncle Sam holding their hand.

[Cronopio]

53. "We need it to be blind somewhat so the bad is bought off ..."

The problem is that the investors know they're operating blind, so they're motivated to assume the worst - that most of the assets are junk. Of course, this is the rationale supporters of the Geithner plan float - to, in a sense, bribe the investors to the table.

The fact is, no one wants to own those assets and no one can be made to want to. This plan is basically a parody of a financial transaction with the players getting a payoff for their part in the farce and the FDIC getting stuck with the risk. Which, if the assets are as bad or worse than most investors expect, leaves three possible conclusions:

1. The FDIC will raise its premiums to offset the depletion of its funds.
2. Taxpayer money will be used to offset the depletion of the FDIC funds with the rationale that not to do so would endanger *all* banks.
3. A combination of 1. and 2..

On edit:

"... they are only putting up a fraction of the cost with Uncle Sam holding their hand."

Doing more than holding their hand - more like subsidizing the entire deal. Any deal that requires the effective elimination of risk to the buyer is not a legitimate deal - it's a parody of a deal. Real assets are being exchanged however, so someone is getting soaked. Geithner is pretending otherwise.

[Oregone]

55. "Geithner is pretending otherwise"

It seems like almost everyone is pretending otherwise, since they can't essentially be that stupid (so they probably understand why the likes of you and I do not favor this "solution"). Its almost like the smoke, mirrors, and actually subsidy Geithner applied to the original plan (of the Government taking all the risk and reward) has blinded everyone to exactly what is happening here. This is a fancy financial solution to solve the failed fancy financial instruments that tanked the banks. Nevermind the cost, principle, and details. As long the banks get their money, and private investors make some profit at the governments expense, I guess its a "success".

[Cronopio]

56. That's it.

When everyone seems to not see the elephant in the room, they really do see it. They're just choosing not to look at it.

Not a smart move in a crisis.

[Beetwasher]

66. No, It's A Success If The World Economy Doesn't Fall Off A Cliff

You see, the banks are prone to blackmailing and threatening to cut off ALL credit if they don't have their asses kissed and they want regulators off their backs and we can't trust a word they say. Additionally, if nationalization is pushed right off the bat as THE solution it would send the economy into a death spiral because the banks would go into temper tantric spasms. If you thought the liquidity crisis was bad now, just see what would happen if we decided to nationalize the worlds biggest financial instutions tomorrow. You have to have a clear picture before you can do that. Geithener's plan gets us in and gives the banks an opportunity to behave reasonably. If they don't behave, then we have still have the option to nationalize, and we've bought some time by auctioning off at leas some of the assets AND we've gone in and seen their innards through the evaluation of their assets, which is an INTEGRAL part of the plan.

[Cronopio]

98. I don't know where to start with this.

"You see, the banks are prone to blackmailing and threatening to cut off ALL credit ..."

Yes, and? We effectively have a credit embargo right now, and after giving 100s of billions of dollars to them in handouts. What makes you think another trillion would make them act any different?

"... because the banks would go into temper tantric spasms."

What does that mean? That they'll be pissed off? Sure. Just like an alcoholic gets when they are forced to go cold turkey. But you're not arguing that continually feeding the addiction is going to get us a better result, are you?

"If you thought the liquidity crisis was bad now ..."

There is no liquidity crisis. The flow of liquidity is low right now, but the world's economy is awash (excuse the pun) in liquid assets. The fundamental problem is a "confidence in assets" crisis, which is only made worse by Geithner's plan for the reasons I've described.

"If they don't behave ..."

They've had an opportunity to "behave" with the money given to them in TARP I. They are still denying that they are doing anything improper in using that money for more Gulfstreams, aircraft hangars, trips to the Caribbean, etc.. So what makes you think they're going to "behave" this time?

"... then we have still have the option to nationalize ..."

So you are for the "cold turkey" approach. You just want to give the addict just one more fix.

I've mentioned that nationalization doesn't solve the problem of the risky (and likely by now, mostly worthless) assets.

"... and we've bought some time ..."

This economy is bleeding almost 3/4 of a million jobs a *month*. That's 3/4 of the million fewer taxpayers. How much more time to you think we have?

"... by auctioning off at leas some of the assets ..."

What makes you think the banks will be willing to sell the assets for anything less then bubble valuations? Especially since they're trying to get financially well as quickly as possible to stave off the threat of nationalization?

"... seen their innards through the evaluation of their assets ..."

Why wait to do this? Receivership/bankruptcy will achieve the same result, we have the apparatus in the FDIC to do that, and investors don't have to worry that the old "gang that couldn't shoot straight" is still in charge.

[Beetwasher]

65. Wow, Now That's Just Downright Silly

"We need it to be blind somewhat..."

Errr, no. We need as much data as possible about the actual position of the banks involved and the actual values of their assets. Currently, we don't have that. Geithner's plan gets us in their to see the innards of these instruments.

[Oregone]

69. "We need as much data as possible"

Um, you realize some of these assets are bad, eh? If investors know that they wont profit from the purchase, they wont purchase and the assets stay with the bank. Thats sort of contrary to what is supposed to happen here. What we want is everything to be bought up and the assets to be cleared out. What Geithner has accepted, is the government will take a large portion of the hit on all the bad assets in order to encourage people to buy the good ones and help the banks become liquid. The more data available will sabotage this entire approach. The investor may know the average price and return potential of the assets, but not necessarily the ones they is buying.

At least this is how I understand the process to be setup.

[Beetwasher]

72. See, That's The Problem, That's How YOU Understand It

We want to know which one's are so bad they are unsellable. If there are too many of those, guess what? THEN we nationalize the suckers after selling off their sellable assets.

It's never a good idea to grope around in the dark.

[Beetwasher]

64. So You've Settled On Your Pet Theory Of Ulterior Motives And Drawn Conclusions Based Upon

that pet theory?

"Generating the appearance of solvency"... The entire goal of the exercise is to buy time for The Big Four to generate the appearance of solvency so that they can say to the world "See, no need for nationalization - we solved the problem for ourselves."

See, nice pet theory there. I can come up with one too that's not as cynical. Perhaps this is an intermediary step to nationalization. We go in, evaluate the assets so we know what we're dealing with, auction off the one's we can to alleviate as much of the problems as possible and hopefully stave off SOME of the imminent nationalizations AND get a MUCH clearer picture of the problems we're dealing with. THEN we asses what's left and what condition the banks are in, and nationalize where necessary (if still necessary). Meanwhile, we've made some progress in stabilization of the system, bought some time, and GATHERED ESSENTIAL DATA REGARDING THE NATURE OF THE PROBLEMATIC ASSETS. DATA WE DO NOT HAVE AT THE MOMENT.

"Creating a new, large national bank to take up the slack of what the private banks are unwilling to do right now, and putting The Big Four into receivership, is the only effective solution."

And we can do that in no time whatsoever! Why, just wave the magic wand and make it happen! VOILA! New bank that solves all our troubles! Why it's a piece of cake navigating the bureaucracy to make something like that happen!

[Oregone]

68. THE SKY IS FALLING!

Give me all your money now. Yes, and the keys to your Lexus

"And we can do that in no time whatsoever!"

I could of swore I heard this same line of thought about half a year ago.

When the house is on fire, do you put it out, or ask who lit the fire? :)

[Beetwasher]

71. Must Be Nice Up In Your Ivory Tower

Philosophizing while millions are unemployed and becoming homeless.

But let's run the risk of crashing the world economy because I hate giant corporations and want them to fail! WHAAAAAA!

[Oregone]

32. BTW, to break it down in dollars and cents.

Imagine your whimsical little brother takes $300 bucks and throws it into 4 piggy-banks. One piggy has $50 bucks in it, two piggies have $100 in it, and one piggy has $150 in it (he forgot which one has what amount). He decides to sell it because he can't open the piggies and he need dough for an X-Box. Being a good brother, you have a few options:

1) Take him at his word about the amount and buy all the piggy banks for $400 dollars (despite his back being against a wall). Yes, you lose on the one with $50 bucks in it, but you win on the one with $150 bucks. You can balance out what you paid for him when you get your piggy bank cracking crew to open up the banks and extract the money. Thats going to take some work, and will probably cost $10 bucks over the course of the years until they are cracked, but its worth it for the little shit. If you are lucky, he might of put an extra $10 dollars in one of the banks and you win. But any way you cut it, at a small profit or loss, you make sure your brother gets the assets liquidated and he can stimulate the economy by buying an X-Box. You can hold it over his head and make him do your dishes for a few weeks straight.

2) You can ask your friends, Walter and Harry, to buy each piggy bank at $100 a piece. Yes, you will put up $85 dollars and they will put up 15$, and pay you back the $85 plus another $5 dollars in interest plus 5% of profits made on each bank. Lets say Walter buys 3 of the piggies and Harry buys 1. Anyway, Walter comes back to you after day 1, and says, "I got $150 out of the first bank!". So, he hands you $90 dollars, and another $3 on the $60 dollars of profit. So on the first financing of $85 dollars, you made $8 dollars! Now, the next day, he comes back and says, I found a measly $100 dollars in the second piggy. You get your $5 dollars for interest, and your $85 bucks back. So now, you've made $13 dollars financing the sale of the piggys. Well, the third day you little shit friend comes back and says, "I didn't like what was in my last Piggy, so I traded with Harry". Walter hands you a quick $90 dollars for the financing on his last piggy (which had $100). In the end, Walter profited $32 dollars ($350-$100-$15-$3), and in all such purchases, he only put up $45 dollars of his own money. Walter almost doubled his money with your help!!!

You didn't see Harry for a few days so you went to find him. Harry says, "Well, you know, about that bank....I sort of declared Chapter 11 bankruptcy you know". Harry hands you the last piggy with $50 dollars in it, and crys about the $15 dollars he lost. It seems like an unfortunate case.

When you do your math, you realize that you financed $340 dollars of piggy buying, and you got back $270 from the financing, plus $3 dollars in profit, plus a lousy $50 dollar piggy that you have to hire someone to crack. You shake your head and realize that in this venture you lost $17 dollars! In fact, the amount you loss, plus the amount that Harry loss, is equal to the amount that Walter gained! But its worth it to you, because after all, you realize that your brother gets his X-Box and Walter and Harry love you much more. So, in the end, you may of lost $17 dollars, but you gained two friends and your brother, who now idolizes Walter and Harry, gets his X-Box.

So where you were looking to at least make $20 in financing plus your equity stake, you ended up paying $17 bucks (subsidization) just to have your new friends involved (who lovingly refer to you as the "Double D-Bag".

Weeks later you learned Walter gave Harry $15 bucks to trade boxes, and then split the remaining $17 dollars in his profits with Harry to absorb the loss. You thought that it wasn't too cool that they stole $17 bucks from you, so you confront them about it. They kick you in the left testicle. When you get home, angry, your brother kicks you in the right testicle for making his idols upset. You still have to go back and beg Walter and pay him $5 bucks to crack the $50 dollar piggy bank for you that you got back from Harry. How humiliating.

3) Tell him tough shit, he doesn't need an X-Box. When his friends come over, you can charge them to play on your superior Playstation you just bought with your own dough. He will figure out cracking the piggies eventually and in the meantime, you can make a mint lending money to him and his buddies with your own load of dough.

4) Just go buy some good BC Bud and say fuck it. Who cares about your brother, his friends, your rich divorced mom with her augmented breasts, and the homeless guy on the corner

[Beetwasher]

46. Oy! Thanks But I Already Understood The Underlying Principles

My point is that thiis is not necessarily going to happen, and IMO it's unlikely given the intense oversight and scrutiny that will be focused on it from every corner of the known (and unknown) universe.

Look, at this point it boils down to an irreconcilable difference of opinion. You obviously believe their will be unmanageable ad rampant fraud and corruption in the process. I think there will be intense competent oversight that will prevent it. What else is there to say except if you don't trust Obama to competently handle this plan with more limited gov't involvement, how can you trust him with signficantly more complex task of massive nationalizations?

[Oregone]

54. "if you don't trust Obama to competently handle"

I think the proof is in the pudding...

They would of shown their competence by not coming up with such a shitty plan. :) Hell, if I rather heard him say, "Tomorrow, what we will do is purchase ownership in Citi and BoA..." then it would be much easier for me to trust his competence.

You realize we could retain ownership in these banks buy buying up common stock at market rates until we have a majority share, and then vote to sell off the company at a killer price to, well, us (pretty cheaply too)? Then we would outright own the toxic assets without even directly buying them, and all the good assets on the balance sheet. We could probably then turn around, consolidate the assets elsewhere, sell the good ones back to the private market, and then sell the ownership of the cleaned (solvent) banks and make a double killing? Yes...shareholders take it in the ass in that scenario. Big. Fucking. Deal.

[Beetwasher]

57. LOL! Such A Shitty Plan? OK Nostradamus!

You already know, huh? We're in uncharted waters but you already know the future!

[Oregone]

60. I know the merits of the plan

It will unload the toxic bank assets, cause profit for investors with minimal risk, all at a cost to the government. Then we turn around and cross our fingers and hope, against all reason, that the investors and banks are happy enough to put their money down in the middle of the shittiest business environment this country has seen in years.

Id rather see the government perform a cheap, but legitimate hostile take-over of the banks (which the banks have done before to others), and a sell off of the assets to clean them out for public consumption. Once done, the government could take the profits from overall operation and ENSURE it is applied to fostering a more positive business environment in America, from the bottom up. Thereafter, the salivating investors will jump in the circle with open arms.

The merit of Geithner/Obama's plan essentially relies on Friedmanism and coddles the investor class to restart our economy. They assume if they shovel enough out to the upper classes, they will trickle it down. Will it work? Who knows. It may make entities more willing to lend (because they are solvent and can) ONLY IF it is profitable to do so. But this plan, in itself, doesn't ensure it will be profitable to invest in America, nor is it the only way to clean out the banks assets. In fact, it is a more expensive way to do it, and that expense is justified as a bribe to make investors do their free-market, trickle down magic.

The entire philosophy needed to merely come up with Obama's plan is so off track from where we should be, its beyond disappointing. Thats why its shitty. Yes, it will succeed 100% in getting the banks solvent. But beyond that, there is no guarantee it will do much else but cost the government some amount of money.

[Beetwasher]

61. You Have An Opinion And You've Already Made Up Your Mind That It Will Fail

And you don't realize that all you have is an opinion. The difference between you and I is that I allow for both possibilities. Can the plan fail? Of course that's possible, but I think if it's handled properly it is workable. You allow no room for that possibility because all you want is failure because it will feed your ego that you were right.

[Oregone]

62. "You've Already Made Up Your Mind That It Will Fail" - Not true

No, I think it will succeed in helping the banks become liquid at a heavy cost. There are ways to do it at a much lower cost, and a way to do it all at a gross profit. The plan, in no way, guarantees anything further beyond that point (such as if the banks & investors will then put up cash in a shitty business environment and see a positive ROI in these conditions).

Its ensures credit CAN flow again, not that credit WILL flow again.

[Beetwasher]

63. Really? There Are Ways To Do It Much Lower Cost? And How Will You Determine The Value Of Their

Assets? I thought you were for nationalization? Now you have this "third" way?

"Id rather see the government perform a cheap, but legitimate hostile take-over of the banks (which the banks have done before to others), and a sell off of the assets to clean them out for public consumption."

Oh brother. Why would anyone buy their assets under THOSE conditions and not through the FDIC's auction???? What nutbag would buy those assets???

[Oregone]

67. Yes...here is a quick way to do it much cheaper.

You buy low and sell high.

Citibank now has shares at 3 bucks a pop. The government can buy em up until it has 51% ownership in the company. Then the government can make a bid for the company, offering a price equal to 1 cent a share. It just so happens, at least 51% of the ownership is going to agree to that price (so thats a loss on the previously bought shares--big deal, you'll get it back later).

You now own Citi bank for very, very little (and its assets). Congratulations! Now, you can do Geithner's magic plan and sell off the assets (its all profit now, since you own them and the cash gets injected into our company). At this point, what the hell, subsidize the investor if thats what it takes for infusion. There may be some loss absorbed because these assets probably, in all, have a net negative value (afterall, the banks are not solvent), so who wants them all?

Now that Citi no longer has these damn assets, its solvent again and clean. Its magic. A clean solvent bank. Wait a minute! What would the stock price be of a large profit making bank with no toxic assets?!? Much, much higher than 3 bucks a pop. Thats called profit.

Hell, you can even takeover, move assets to a separate holding firm, then re-privatize the bank immediately to ensure no normal operations are impeded upon. Then, the holding firm can try Geithner's private/public partnership mumbo jumbo. With clean banks and credit flowing, some of these assets may gain value sitting in that holding company (does this approach ring any bells?--lets not reinvent the wheel here).

Here is the thing...for every penny that the government burns on Geithner's plan, it ensures the current shareholders of the bank don't get burned. My approach does the opposite. The shareholders of these shitty banks get burned for owning shitty banks, and the government profits for fixing them.

Now thats the elephant in the room. Thats why we can't consider my approach. We think its anti-American to burn owners of shitty companies. But isn't the US and capitalism founded on a notion of meritocracy? Isn't it rather anti-American to essentially provide a welfare system for these shareholders?

Thats what this fancy financial instrument of Geithner's does. It hides us ensuring no private people lose money, and instead the government does (the people do). But by doing so, it is expensive and in no way ensures credit flows again from the benevolent rich who wouldn't plant a penny in the ground in Detroit, expecting a money tree later. If you can provide liquidity cheaper, sell off the assets and directly profit/loss from it, and turn around to tell the owners to bend over, is that so horrible? Instead, we are being asked to bend over...further, again.

The idea of buying, cleaning, and selling the banks wont ensure credit will flow again anymore, but at least the government makes money by ensuring credit CAN flow again. Then they can ensure the profits are reinvested into improving the economy (making it more profitably for investors to invest) with a Keynesian type stimulus

BTW...don't use your critical time excuse. It wouldn't take much time to perform the acquisition. The next step, for all I care past that, could be Geithner's approach. And yes, people would re-invest back into CITI. Why. Because now its solvent! Of course people should realize that when a bank fails through shitty practices, its owners also suffer. If you take away banks ability to do this shitty practices, people gain as much confidence as they had before they knew they existed.

[Beetwasher]

73. Ok Gordon Gekko! Obama Should Open Up An Etrade Account And Get To Work!

Seriously, do you really think the gov't should be in the business of corporate hostile take overs? Seriously???

Now I know I'm wasting my time w/ you. You were never interested in a serious discussion.

[Oregone]

75. There is nothing wrong with using legitimate business mechanism to retain ownership

Other countries respect and interact in markets to obtain ownership shares. It may cause less of a private investor confidence drop than to just outright seize their assets at some arbitrary price we determine and force them into receivership. What this does is essentially has the government act like a business itself, rather than a big brother entity with no rules. This method allows the market to still determine the price of the acquisition.

You sound awfully grouchy today.

[Beetwasher]

76. Nothing Wrong? You Mean Aside From The Legal And Ethical Issues??

:shrug:

Yes, imagine Dick Cheney with the ability to use government resources to instigate hostile corporate takeovers. :eyes:

Not grouchy, just realizing that you're not really interested in meaningful discussion. You've decided the plan sucks and definitely won't work and that your hairbrained schemes are better.

[Oregone]

78. And the better alternative is to just seize them?

Id rather see the government buy the company legitimately. If they make a low bid for complete ownership, it isn't as if it isn't something these banks have done many times in their history. The companies are pretty much insolvent--it isn't like they are worth anything, on paper, anyway (the low price is justified). Giving the government the ability to act like a business (with regulations and limited power), is not quite as scary as you may think contrasted to the current method of operation.

Regardless, my overall thought is buy the company cheap, move and/or sell assets, and resale privately at a profit. That is a much better model than this smoke and mirrors. The only difference is the stockholders lose instead of the government. They lose for owning a bad business.

[Beetwasher]

80. "Id rather see the government buy the company legitimately."

Too bad it's illegal and unethical.

You can start your education by reading US Code, Code of Federal Regulations, OMB Circulars and then when you're done with that move onto the Federal Acquisition Regulations and Cost Principles.

[Oregone]

82. Its humorous how it is only legal to steal money...

from taxpayers, but not from businesses when playing their games. :)

You don't seem to have a problem with the former, based on your support of this shell game.

[Beetwasher]

85. You Still Have Not Shown Money Is Being "Stolen" In This Situation

What's humorous is your enormous lack of understanding of the issues at hand. Your lack is so enormous that you think it's perfectly acceptable for the gov't to be involved in hostile corporate takeovers. No one, not a single expert has put forth this ridiculous idea. Why do you think that is?

I gave you the benefit of the doubt at first and tried to have a reasonable discussion, but you've crossed a threshhold and really only deserve mocking at this point. You have made up your mind. "Geithner plan bad! My hairbrained schemes good! Hulk smash!"

[Oregone]

87. You keep talking about those who have made up their mind....

And I see nothing but definite support of the Geithner plan here from you. Your line seems to be "Everyone else bad, Obama goooooood."

I do hope we have an opportunity to revisit this issue in 6 to 12 months. What may be humorous, is re-reading this thread.

[Beetwasher]

88. Please Show My "Definite" (Whatever That Is) Support

I've said over and over and over again that I think it's WORKABLE, but leave open the possibility that it may not work. Please show where I've said anything different.

"Your line seems to be "Everyone else bad, Obama goooooood."'

Should be easy to find examples. Let's see them.

From my original post on the topic:

"Now, there is much room for criticism of this plan. Valid criticisms include no confidence in oversight ability of FDIC, the amount the gov't is subsidizing via loans vs. private portion, and fears that the MBS will continue to deteroriate. But those are issues regardless of whether or not private entities are involved or if the gov't just takes over the whole thing."

Do I support the plan? Yes, because I think it's workable, but that doesn't mean I think it will DEFINIITELY work. There are too many unknowns. But that will be true of ANY plan under the given circumstances. I've never said anything different.

[Oregone]

90. You support is shown in how you are adamantly dismissive of the other side.

[Beetwasher]

91. So Go Ahead And Put Up My Adamant Dismissiveness

Examples please.

Am I adamantly dismissive of your hostile corporate takeover scheme? Yes, because that's just plain idiotic and you are the only one suggesting it.

[Oregone]

94. Should I copy and paste pages? Just about every post here

And yes, I may be the only one to suggests that a government acts like a business to perform a business acquisition, but I may have different insights than the average American from watching other governments successfully act like businesses. Governments can use a business model to buy, own, operate and sell corporations, in a successful manner.

But thats really irrelevant to the overall action (you are nit-picking for the sake of nit-picking). The entire point is you buy low, clean, sell high. You shift the loss from the government to the stockholders to realize profit that may be used for stimulus (which is a philosophically different approach that the Ayn Rand inspired Geithner move).

[Beetwasher]

95. So It Should Be Easy, Put Up Examples IN CONTEXT Please

"And yes, I may be the only one to suggests that a government acts like a business to perform a business acquisition,"

You are the only one saying this and for good reason. Because everyone else knows it is idiotic. Yes, I'm adamantly dismissive of this illegal, unethical hairbrained nonsense that the gov't should be engaging in hostile corporate takeovers and wholesale purchase of stocks in private corporations.

[Oregone]

96. Here is an example:

Read this thread ad you'll see snark abundant directly under every mention of Beetwasher:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5320860

[Beetwasher]

97. Thought So, You Got Nuthin'

Pathetic.

[Oregone]

70. Here is some good analysis on the sucess potential of the plan itself:

http://roomfordebate.blogs.nytimes.com/2009/03/24/will-the-geithner-plan-work/

If you take what Krugman is saying about the two options, and look at the test Thoma applied them:

"Unfortunately, however, the loan terms make it unlikely that we’ll have timely information on the percentage of bad loans. But there is something else we can watch to assess the health of the loans: the price of the toxic assets purchased with the loans. If the price of these assets is increasing sufficiently fast, then the loans will be safe. But if the prices do not respond to the program, then the loans will be in trouble."

I guess, in order for you to believe this will work, you have to believe panic is causing an abnormally low price, which will rice. But if the assets are just shit, and just toxic, and no one remains wanting them, and the banks are really insolvent Zombie banks in every sense, these things wont go up in price and they may not be cleared out at all. Thoma goes one to remark:

"In that case, we will need to end the program as quickly as possible and minimize losses. The next step will have to be bank nationalization, though the political climate will likely be difficult. Sticking with the plan until it completely crashes and burns on the hope that a little more time is all that is needed will make nationalization much more difficult."

I couldn't imagine what the political climate will be if we have yet another failed supply-side inspired approach to this. It would be bad, bad, bad for the markets. I was more positive about the chances of success (of clearing the assets) before reading much of this opinion.

[Beetwasher]

74. It's Obvious You've Made Up Your Mind

And are unwilling to even consider that the plan is workable. Is there risk that it won't work? Of course, given the situation that can be said of any plan. In fact, there may be NO single workable plan.

You are not interested in serious discussion, you are only interested in saying "The plan sucks and wont' work, but MY hairbrained schemes will! So there!"

[Oregone]

24. "You're going into philosophical territory that is beyond the scope of the questions at hand"

Its a relevant tangent worth exploring at these times. Geithner's approach is definitely a supply-side approach, in which he emphasizes that private capital is essential for labor, and the product it creates. Geithner is begging the private investor to re-participate in this flourishing capitalistic system (and bribing them to do so), such that the lowly workers have a place to work. Now, yes, this is the current state of the economy, as it has evolved the last few decades, but it is a far cry from the Keynesian approach the liberals used to address the Great Depression. Geithner is taking a top-down approach, assuming that if he can get the investors lending and spending again, all the money will re-trickle down and production will resume at lower levels.

Some say, morality aside, you must do what it takes to save the system (to paraphrase Soros). What is interesting, is many people suffer from and essentially hate this system in the first place. Despite our hatred, we are going hat-in-hand to the same master-minds who created this mess, hoping they will be benevolent enough to help us fix it if we make it profitable enough for them to do so.

Its like a battered woman whose husband cheated on and abused her, but she will do anything and make any concessions to get him to stay (because she irrationally sees no other way to exist). What we have here is a classic case of Stockholm Syndrome in the economic sense. It reminds me of a parable I heard in Church (Ill do my best):

"Stalin was old and retiring, and looking for a successor. So he took his two brightest pupils before him, and asks each to explain why they were best suited to carry on his Communistic regime. Although they both did a fine job explaining the merits of socialism, they were both young and had little management experience. Stalin had an idea. He asks the first one to go over to a cage, and bring him a bird. The first one did, and as he approached Stalin to show him the bird, it flew away from his open palm. The second pupil tried the same task, but as he approached Stalin, he noticed the bird clenched in his hand was lifeless. In response, Stalin walked to the cage, and grabbed the last bird in a tender embrace. He worked to pull out each feather. He turned and showed the pupils, in his open hand, the shivering bird clinging to him for a shred of warmth"

Are we but caged birds, clinging to our abusive masters for what they stripped us of the ability to do (profit from our own labor)? Is there no other way t exist but to continue this structure? Is the government not capable of solving this with a bottom-up approach, by injecting money at the bottom to combat employment and restart the economy, until the investor class sees the economy as a safe-bet again? Is the Keynesian approach dead and useless because we have shifted so far to the other way, or is there anyway to use it to revive the economy and empower the American worker? Are the lessons learned from the Great Depression old and esoteric antiques, or just forgotten?

[Beetwasher]

27. Oy! Perhaps It Is, But I Don't Feel Like Getting Into It Now

Maybe some other time.

And don't take that to mean I disagree w/ you on it, we probably agree on the philosophy more than you think. Right now I'm focusing on practicalities and immediacies.

Suffice it to say I think many of these longer term issues (and by extension philosophical underpinnings/implications) can (and will) be dealt w/ after we get past the crisis stage.

[acmavm]

100. Give it up. Apparently we're supposed to buy up these assets and

let the thieves retain ownership.

[Mike 03]

34. I couldn't have said it better. I wish you'd start a new thread on this: Why Geithner's Plan Make

s Sense and how it differs from Paulson's.

Kick and Rec!

[FrenchieCat]

16. Because part of the problem we are having is being able to attract investors

to invest in America's financial institutions.... which needs to happen to help get us out of this mess.....

We need investors to capitalize these institutions so that we, the taxpayers, don't have to. No capital; no loans can be made.

Although America backing financial institutions strenghtens them,
America owning bad assets is not going to help their value.

The whole reason that financial institutions went down, were because of losses that they incurred, so no matter what, we are now stuck with that mess. There is no perfect answer, but some ideas are better than others.

Nationalization would deter investors, not attract them. Investors are in the business of making money, but government is not. Folks don't want to understand that nationalization of financial institutions might solve one problem, but create another; attracting capital to the United States.

Geithner's plan from what I can see, addresses three issues: It attracts investors who are interested in making money. It prices the toxic assets, and gets rid of them. And it provides for taxpayers not losing 100% on their investments. Investors, in particular Foreign investors are hesitant (pissed at us because the US financial scheme set up ended up affecting them too), need an incentive in doing this......because otherwise, why would they do it? They can just go and invest in China instead.

The government holds their own dicks no matter what because of what occurred over the last 8 years cannot be fixed at no loss.

[Oregone]

19. "America owning bad assets is not going to help their value."

And with this plan, its my crystal ball prediction that America will own ALL the bad assets in a few years and none of the good ones. America will have to assume all (or 85%) of the loss on the bad assets and have no profits from the good ones to compensate for this. It will be a disaster.

Something is really sad when the government has to engineer a system like this that will shuttle so much additional money, at the tax-payers expense, to the investors just to "attract" them. Is Geithner's plan better than Paulson because he is pragmatic enough to see we are all slaves of the rich and we must ensure they have a shot at massive profits to make the economy go `round? Is his plan so much better because he accepts the fact the government will lose their ass, with no chance of gain, but he thinks its a price worth paying if it makes our elitist masters happy enough to invest in America?

I understand that there must be a loss at 8 years. Geithner's plan magnifies that for the government and eliminates it for the private market. Im bewildered.

[dixiegrrrrl]

23. Here is the plan I am for

which ever plan meets this criteria:

Any plan that doesNOT allow risk-taking where the person taking the risk
is divorced from the person who bears the consequence when the bet goes bad.

So far, I don't see this criteria in Geithner's plan.
Or Paulson, same plan.
or the bailouts.
or any of the financial shenanigans of the past 20 years.

Then again, my few measly retirement bucks are not in the sandbox where these bullies play.

[MadHound]

33. How about neither plan

Rather let the corporations who kited these assets eat them instead, and if that leads to people like Goldman Sachs and others collapsing, so much the better.

Instead, it looks like one way or the other, the taxpayer is going to be on the hook, again, and massive infusions of our cash are going to go into cleaning up after these assholes so that in a couple of decades they can rinse and repeat, thus making more millions for a new generation of the elite.

Fuck 'em, let them eat their own toxic assets.

[Oregone]

37. But the problem in this scenario...

Is that credit dissolves because there is no one left to loan or encouraged to invest.

Because, of course, after all, the government is complex enough to come up with this financial plan of smoke and mirrors, but lacks the insight to loan and stimulate the economy with their own hands free from the bottom up. Normally their hands are too busy giving reach-arounds to the banks.

Yeah, the plan I mentioned sucks. There was a reason it was hated. But this one is hated less because no one understands it. Its even worse and a bigger handout to not only the banks, but also to any additional investors.

[MadHound]

39. Credit is already gone, and frankly no matter how much money you pump into the system

Credit is not being given out, except by the smaller local and regional players who didn't go hogwild.

We've seen how much the first half of the TARP thawed out the credit market, very little. Having the government scoop up these toxic assets isn't going to thaw it out any more. Instead, it's simply going to put the same idiots who got us into this mess in charge of whether or not more billions of taxpayers' monies are spent(under Geithner's plan). Either way, we the people will be throwing more money than we can't afford at this problem.

Let the financial institutions who dabbled in this shit have to eat it. If they go under, then gee, we've got dozens and dozens of clean, healthy regional and local institutions who are ready to step into the breach, much like what happened during past recessions and depressions. Credit will flow and we won't be on the hook for a bunch of toxic crap. Problem solved.

[Oregone]

43. You know, I understand that

I think we should let them wither and set up national consumer lending branches to get the job done.

But here I am just comparing two bad plans and trying to see which one is the worst. And the one the Obama admin picked seems worse than the abortion the Bush admin came up with. Geithner plan requires additional capital to be directed at the investors (aside with the capital rolling to the banks) to coddle them into lending. Its a bit absurd that its real.

[Cronopio]

45. "... national consumer lending branches to get the job done ..."

Glad to see that someone else on this forum understands the need to _create_ new lending activity through public institutions rather than limiting ourselves solely to restoring lending activity in broken, discredited private institutions.

I'm surprised that even Galbraith, Stiglitz, and Krugman aren't mentioning this. It doesn't require 60 votes in the Senate to create a "good" taxpayer-money-funded bank - it can be done by executive order and be lending to individuals and small businesses within a month. The benefits are clear, obvious, and are far cheaper to implement than throwing unknown amounts of money into the Big Four's bottomless debt holes.

This is a far more effective way to "buy us time" (as proponents of the Geithner plan say to justify it) in resolving the debt problems of the largest banks.

I suspect you know why this option will probably never happen, and why it's not being even mentioned in media discourse.

[robinlynne]

35. or lowering the prices of these homes so we can buy them?

[girl gone mad]

40. Banks will refuse to sell..

unless they can get full price.

This will probably hamper Geithner's plan, too, to be honest.

This is why we should have nationalized them from the outset.

[Beetwasher]

41. Ahhh, But We Will Have Thoroughly Analyzed Their Assets

Much easier to come in and natinalize them then after they fail. And they can't whine that they weren't give an opportunity.

[high density]

47. I think they're going to want to sell

It seems like a good deal for them... The banks can take a charge now to get out from under these securities which have given them such problems. And the price will be much better than they'd get today thanks to the guarantees provided by the FDIC.

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.

http://www.treasury.gov/press/releases/tg65.htm

[girl gone mad]

58. It depends on whether or not they think..

This is the best deal they can get. If they think they can get a full bailout by holding out, they will.

[sendero]

50. This is all a shell game..

.. you, me, your kids and their kids are going to pay for these banker's folly.

They are trying to fool us with the "private investor" bullshit. The "private investors" are paying a pittance, and they are totally or almost totally backstopped by the government.

More of the same heads I win tails you lose bullshit, because this economic team is about saving the investment banks, not about doing what is best for the average American.

[debbierlus]

59. It isn't any better. And, Keep It Simple Stupid only works when you are trying to be honest

The goal here is to make the whole thing SOOOO confusing, the majority of Americans will have no idea that they are being screwed up the arse, hard.

[Marie26]

77. Because it's privatized, not nationalized.

IMO this plan is just a massive Rube Goldberg device to avoid bank nationalization, or even the hint of direct government ownership of assets. This way, the "free market" can take care of the toxic assets w/o government control. Of course, this also means that the US gov. assumes the risk while Wall St. makes the profits, but they're just fine with that. So now the US has to pay the losses w/o having any equity stake or ownership of the actual private property. $1 trillion dollars of public funds will be used to insure Wall St.'s toxic corporate debts & given to private investors when these assets shown their real (worthless) value. The US becomes AIG. It's a crazy kind of reverse socialism, in which the public goods are seized & funneled over to the private sector. Otherwise known as disaster capitalism. It's practically textbook.

[Oregone]

79. Risk is still nationalized here, and the profit is privatized

Lose, lose.

[Gin]

81. are these swaps still allowed? if so, is it possible the deal could be bet against

to get a bigger bang for their buck? I have not heard of any new regulations.

[Oregone]

83. LOL. I couldn't imagine anyone thinking that was relatively a good idea.

But who knows.

[Marie26]

86. Exactly.

That's what I'm saying. The risk is "socialized" to the public, while the profit remains "privatized". If the US bought these assets directly, the US would also recieve the profits. The Treasury Dept. would also be able to set guidelines, regulations, etc. This way, the US just acts as an insurer & shovels billions to the private investors w/o getting any portion of the profits. The end result is that the public wealth (Treasury) is transfered to private investors (Wall St.)

AIG got into trouble because they were insuring toxic mortgages w/credit default swaps w/o having any equity to back it up. This is the same damn thing. It's basically a credit default swap scheme - insured by the U.S. Treasury! OMG, I can't even say how upset this plan makes me. Or more like despairing. Under "Disaster capitalism," corporations will use an economic crisis to transfer massive amounts of public wealth to private hands. That's exactly what's happening here, IMO.

[Doremus]

84. Because there isn't enough money in the world to buy them.

Smoke & mirrors are necessary to conceal that fact.

[Oregone]

89. But something that I don't understand...

This assumes these assets have positive net value and its suppressed by fear. It assumes fear is the reason banks are insolvent, not because their books have worthless toxic crap on them. There may in fact be a real finite and small amount of money that can buy them all (its just not what is needed for the assets).

[Doremus]

92. There isn't enough money in the world ..... literally.

Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

*
U.S. annual gross domestic product is about $15 trillion
*
U.S. money supply is also about $15 trillion
*
Current proposed U.S. federal budget is $3 trillion
*
U.S. government's maximum legal debt is $9 trillion
*
U.S. mutual fund companies manage about $12 trillion
*
World's GDPs for all nations is approximately $50 trillion
*
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
*
Total value of the world's real estate is estimated at about $75 trillion
*
Total value of world's stock and bond markets is more than $100 trillion
*
BIS valuation of world's derivatives back in 2002 was about $100 trillion
*
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7D

Take your pick: smoke & mirrors or crash & burn.

[Beetwasher]

93. You Are Confusing MBS With CDS

n/t

[Irish Girl]

99. Bookmarked this thread

Too bad the thread is too old to rec but great discussion from everyone in this one so kicking it back to the top.

:kick: