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TechnoratiThe TARP Dog and Pony Show
Treasury Secretary Timothy Geithner's long-awaited plan for rescuing the banks left people even more confused about the Obama administration's agenda than they had been before the announcement. This is best demonstrated by the plunge in the market, including bank stocks, that immediately followed.
While it is generally foolish to assess the merits of a policy based on the market's response, it is a safe bet that if the plan were the unambiguous bonanza for the banks that many of us feared, bank stocks would rally based on their good fortune. At this point, we cannot be sure that it is not a giveaway, but apparently the banks do not seem to think that it is. This is one of those cases where everything will depend on the details, which we have not yet seen.
The one program that Geithner did outline with some clarity was a plan to buy up newly issued investment-grade securities backed up by car loans, credit-card debt, and student loans. This plan would expand a Federal Reserve Board initiative, which has not yet been started, from $100 billion to $1 trillion.
There is nothing obviously wrong with this proposal. It will help to extend credit in these markets, although people with questionable credit histories or who have recently lost their jobs will still have difficulty qualifying for loans. One issue that is not clear is whether there will be public disclosure of the assets purchased under this program. The Fed had not been in the practice of disclosing the details of its activities under its other programs. Either the Fed will have to change its practice, or Geithner's commitment to openness is not as great as claimed.
This brings us to the other program that Geithner only vaguely outlined. He said that he wanted to partner with private firms to arrange for purchases of the banks' bad assets. The Treasury would provide guarantees that would limit the losses that private firms would incur, as it has done with hundreds of billions of assets held by Citigroup, J.P. Morgan, and Bank of America.
In principle, government guarantees could make bad assets attractive to private investors. The problem is that the guarantees are in effect a subsidy to the banks, since they add an enormous amount of value to their assets. It may be difficult to know the full extent of the subsidy, since many of the prospective buyers of the banks' junk are likely to be private-equity funds and hedge funds, both of whom have very little by way of disclosure requirements.
Fortunately, we don't have to follow the individual trades to know whether the taxpayers are being ripped off. We just need to ask some more basic questions like "How much will this thing cost?" If the answer is anywhere much more than zero -- as Geithner suggested it will be -- and we still see that bank stocks carry significant value and bank executives continue to hold on to their high-paying jobs, then we will know that we have been had.
The basic point is extremely simple. We have a large number of bankrupt banks. We have a public interest in keeping the banks functioning, but we have zero public interest in giving taxpayer dollars to bank shareholders or to the executives that wrecked the banks they ran.
Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off.
Chalk it up to business as usual.
18 Comments so far
Show AllIf the banks are nationalized, the government will become the owner of the banks’ good and bad assets and it will have to assume the banks’ contractual obligations towards their creditors, investors, and account holders. In particular, any contractual guarantees given by the banks to the owners of now-worthless risky “innovative” financial vaporware will become de facto contractual obligations of the government towards these owners.
If we ignore small-fry investors, pension funds etc., these owners are greedy trillionaires who bought the financial vapor ware with full knowledge of its risks. If the “financial system” goes bankrupt the trillionaires of the country (and of the world) will lose humongous amounts of money and hence will lose much, if not most, of their economic and political power (but they won’t be reduced to misery, far from it; yes, smaller investors who chose "risk" will also go down in flames and they will deserve it, even if not as badly).
That’s why the trillionaires have mobilized bribed economists, journalists, and politicians and ordered them to call wolf about the horrors of letting the “financial system” fail. “Saving the financial system” is indeed the obfuscating phrase invented by these bribed economists, journalists, and politicians to try saving this neo-feudal class of trillionaires that is “essential“ to what “America stands for” and to “how things should be after we help them out”, as the “radical” Paul Krugman has put it in print repeatedly.
As you may remember, in the middle ages whenever the feudal class created a mess they “rescued themselves” for the “sake of the country” by taxing the hell out of the serfs and the bourgeois, but now with “the triumph of liberty” all of that has changed… yeah right!
Nationalizing the banks will open the gates to all kinds of pompous declarations by congress demoblicans about the government’s solemnial duty to honor the contractual commitments that came with the “act of nationalization” bla bla bla, so they can save their trillionaire friends amidst an apotheosis of self-righteous complacency and flag waving.
Let’s not give them that chance to demonstrate so much friendship. There is no need to save the trillionaires, regardless of how much money they have given to economists, journalists, and politicians and of whether the flow of bribes may stop if the trillionaires fail for good. The banks should be allowed to go through an orderly bankruptcy that preserve their real-economy presence and protect the savings of their non-reckless customers up to say 200k per account and up to say 1 million total net worth per person (IRS-declared), where a sliding scale could be used that reflect how "aggressive" the interest-gathering strategy chosen by each account holder was and the extent to which the account holder chose risky “lucrative’ financial-speculation products over investments in actual production. The necessary paper trail is available…
One should fire everybody in the *failed* banks' upper management (because they failed, duh!) except for whistle blowers and those essential to day-to-day operations, for those managing customer accounts, and for those having expertise in evaluating loans applications by companies that produce actual goods, be they trinkets, essential insurance products, etc.
Social criteria like protecting pensions could also be used by simply dividing the amount invested by each pension by the number of people the pension represents in order to determine what the pension can get in terms of protection and for which individual accounts (since pension-holders who chose especially reckless financial-speculation products should be protected less).
So it’s not time to nationalize the losses of this self-anointed neo-feudal class of trillionaires masters of the universe. Rather, it’s time to shut down their failed banks, to let the greediest investors bite the dust, to claw back any bailout money given so far to them and the banks, and to use this money to jump start the flow of credit into the economy after “nationalizing” (hiring back!) the banks’ existing experts in locating, evaluating, financing, and following-through worthy entrepreneurial ventures in real production and giving them a new institutional backing and responsibilities.
This crisis must teach harsh lessons to the most reckless of investors and bankers, and spare those investors and bankers who tried the hardest to stay away from the greedy madness of the last 30 years, even if only for moral reasons.
"We have a public interest in keeping the banks functioning"
No. We have a public interest in allowing the banks to fail. The author apparently thinks we're in the "Oceania" of "1984" where war means peace, etc.
"In principle, government guarantees could make bad assets attractive to private investors"
And whos' principle might that one be? The people's or the elite's? Is that statement an affirmation of class war aggression? Is it time yet for the Second Tea Party?
Maybe if we had a national referendum resulting in congressional salaries, administration people, cabinet people,and lobbyist people pay the interest on the national debt.
"This brings us to the other program that Geithner only vaguely outlined. He said that he wanted to partner with private firms to arrange for purchases of the banks' bad assets. The Treasury would provide guarantees that would limit the losses that private firms would incur, as it has done with hundreds of billions of assets held by Citigroup, J.P. Morgan, and Bank of America."
Well, isn't Geithner generous to partner with "private(equity?)firms" to arrange for purchases of bad assets and use taxpayer "protection" guarantees so they'll purchase this sh!t and take it off the balance sheets of the insolvent bankster institutions; and at top price, no doubt, as long as "WE THE TAXPAYERS" will be shielding these wealthy "private" shareholders from loss.
More of the same trickle-up economics: The profits go to the wealthy and the rest of us get stuck with their losses.
Life is beautiful!
We need family wage jobs and debt RELIEF, not more credit. The government could set up a "facility" that could refinance/consolidate citizen credit card, auto, etc. debt at, say, 8% SIMPLE interest directly to the people. The gov would get their $$ and the burden of paying 29.99% COMPOUND interest would be lifted from citizens. Most people are being crushed by COMPOUND interest, whether it be rapacious mortgage amortization or insane credit interest rates. This would immediately put a lot of money in peoples' pockets.
Clearly, I'm a f**king moron, too, cause I still cannot wrap my mind around this equation:
We The Taxpayers give the banks trillions, which they then lend back to We The Taxpayers - and if We The Taxpayers are unable to repay the money We The Taxpayers gave the banks to lend, We The Taxpayers will cover the losses, too.
Sure, it's simplified, but that's the gist. So the banks are, what - just the middleman skimming the interest/profit whether We The Taxpayers repay or not, yes?
Where's the upside for We The Taxpayers again?
The upside for taxpayers: If you pay your taxes, you won't go to jail. Remember the Wall Street banksters are too big to jail.
"Where's the upside for We The Taxpayers again?"
We keep paying taxes :-)
Grab your ankles and hold on tight, taxpayers.
Once again, you mere mortals fail to appreciate the sublime genius of Barrack Obama: He only refused to nationalize banks because he knows it will create a groundswell of overwhelming demand to do just that. One of two (or possibly both) mechanisms will trigger the groundswell: Option A is that his blatant refusal will trigger a knee-jerk oppositional reaction in Congressional Republicans who will begin screaming for us to nationalize banks simply because Obama said we shouldn’t. Option B is that, by engaging in another round or two of gratuitously enriching heinously greedy bankers with public funds will bring Joe Sixpacks everywhere out into the street in near riots to demand nationalization of the banks. (snark)
The $350 billion that this article addresses is the only bailout component requiring ANY accountability and it is just the tip of the bailout iceberg.
The Federal Reserve has already handed $2.5 trillion to banks carte blanche and is probably handing more to them as I write this. The US taxpayers are on the hook for every last penny of this money.
Obama wants to make sure that the banks have enough free cash to tide them over before the banks get nationalized.
Geithner is a complete moron, period. Obama's worst decision yet.
What bank execs do with their own money, that's their business. What they do with MY MONEY is MY BUSINESS!
What bank execs do with their own money, that's their business.
I am not so sure when they use so much of their own money to buy congresspersons and influence.
"...Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off..."
- With an air of resignation, Baker plainly expects that when all the facts are in, it will turn out that indeed, we've been ripped off. But he's perplexed that the bank stocks didn't rise on Tuesday, when Geithner outlined the plan.
The MSM "explanation" of the stock market rout Tuesday was that Geithner's plan "was too vague." But this is just code language. Wall St doesn't generally mind "vagueness" per se. What they were objecting to is that the plan, though entirely favorable for the banks, didn't make rock-solid guarantees.
Since the market realizes full well that what's being contemplated here is an unprecedented rip-off of the taxpaying public, they want rock-solid guarantees. Once those guarantees are made, bank stocks will rally. And as Baker says, "...then we will know that we have been had."
i think you are right. a select and very tiny class of investors can jolt the market up or down. "the market" can effectively sabotage any package they don't like. pleasing wall st. is akin to pleasing your rapist.
I must be getting old because the term "trillion" just wasn't used so much back in the day. Too many zeros and most everyone hated math. Now it is like Old McDonald's Farm with one trillion here, two trillion there, more trillions everywhere. And somehow we are supposed to ignore the $10.7 trillion national debt gorilla in the room no one wants to talk about.