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The Geithner-Summers Plan is Even Worse Than We Thought
Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1). In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.
Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.
Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.
Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.
The earlier criticisms of the Geithner-Summers plan showed that even outside bidders generally have the incentive to bid far too much for the toxic assets, since they too get a free ride from the government loans. But once we acknowledge the insider-bidding route, the potential to game the plan at the cost of the taxpayers becomes extraordinary. And the gaming of the system doesn't have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi's assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same.
Several news stories suggest some grounding for these fears. Both Business Week and the Financial Times report that the banks themselves might be invited to bid for the toxic assets, which would seem to set up just the scam outline above. What is incredible is that lack of the most minimal transparency so far about the rules, risks, and procedures of this trillion-dollar plan. Also incredible is the apparent lack of any oversight by Congress, reinforcing the sense that the fix is in or that at best we are all sitting ducks.
The sad part of all this is that there are now several much better ideas circulating among experts, but none of these seems to get the time of day from the Treasury. The best ideas are forms of corporate reorganization, in which a bank weighed down with toxic assets is divided into two banks -- a "good bank" and a "bad bank" -- with the bad bank left holding the toxic assets and the long-term debts, while owning the equity of the good bank. If the bad assets pay off better than is now feared, the bondholders get repaid and the current bank shares keep their value. If the bad assets in fact default heavily as is now expected, the bondholders and shareholders lose their investments. The key point of the good bank -- bad bank plans is an orderly process to restore healthy banking functions (in the good bank) while divvying up the losses in a fair way among the banks' existing claimants. The taxpayer is not needed for that, except to cover the insured part of the banks' existing liabilities, specifically the banks' deposits and perhaps other short-term liabilities that are key to financial market liquidity.
Cynics believe that the Geithner-Summers Plan is exactly what it seems: a naked grab of taxpayer money for Wall Street interests. Geithner and Summers argue that it's the least bad approach to a messy situation, in which we need to restore banking functions but don't have any perfect ways to do that. If they are serious about their justification, let them come forward to confront their critics and to explain to the American people why the other proposals are not being pursued.
Let them explain the hidden and not-so-hidden risks to the American taxpayer of the plan that they have put forward. Let them explain why they are so intent on saving the banks' bondholders, even the long-term unsecured creditors who clearly knew they were taking market risks in buying Citibank bonds. Let them work with their critics to fashion a less risky and less costly plan. So far Geithner and Summers tell us that their plan is the only option, but without a word of further explanation as to why.
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37 Comments so far
Show All"Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers."
Well, of course they can. The system was set up to enable them to do so. How else would the members of the Boys' Club get all of their money back?
To understand how the bailouts are working, folks need to look at things from the perspective of a Wall Street insider rather than that of an ordinary, honest, hard-working citizen.
q
nicely stated.
mr. sachs,
you write "potentially more disastrous..." this plan is so much more than just "potentially." and those who oppose the geithner-summers plan are "cynics?" how about realists? furthermore, it is a certified joke to even consider a "good bank-bad bank" concept. i'm not sure what your connection to banking is, nor do i care, but if even a remote connection does exists, then you very well know there is no such thing as a "good bank." oh wait, they've got safety deposit boxes. great concept.
additionally you write "also incredible is the apparent lack of any oversight by congress, reinforcing the sense that the fix is in or that at best we are all sitting ducks." after all this time you find it only incredible? what is incredible is the fact, not the "sense", that most all americans are enjoying being fat, lazy, and stupid sitting ducks, still waiting for the big blast that, although has not yet hit, is well on its way.
The banksters are robbing the taxpayer in daylight, broadcasting their intent in advance, and there is not a cop in sight. Total corruption!
Hey....if you keep the same people, you get the same results.
There are of course good banks in many, many towns. Local banks that kept to real banking standards and didn't participate in the "big boy's" schemes. Lets not confuse these honest folks with the likes of BOA or Citi which continue fleecing their customers.
This Bill Moyer interview last week with William K. Black ( the past Staff leader for Federal Home Loan Bank Board Chairman Ed Gray’s Committee on reregulation of the S&L industry in the 1980s post S&L debacle) was the most revealing description in simple language that any blue collar worker or any individual thereof could understand of the deliberate "coverup" (his words not mine) being perpetrated by Geithner, the Banksters, Congress and Obama Administration.
Please Read and pass along this web link everywhere and expose the corruption of the highest sort.
It hard to put in words how revealing and shocking this "coverup" is.
www.pbs.org/moyers/journal/04032009/watch.html
Here is an excerpt:
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
I saw the Moyers interview with William Black. Even with my jaundiced eye, I am still flabbergasted at the sheer scope of the crimes and the subsequent cover-up. Then, tonight, I watched "Black Money" on Frontline (now tarnished), and I am starting to finally get it. What we have been taught - that honesty pays - is a lie. Not that dishonesty is right or moral, just the best (and maybe only) way to get rich.
No, I'm not changing my ways in order to get rich. I will remain a (relatively) honest slob and slum along with the vast majority of people. Perhaps my little corner of Hell won't be as bad.
Thanks clearcut-climate. I just listened to this stunning interview today - and immediately sent the link out to my family. Bill Moyers - great job!
It is 30 minutes, but you don't need the visuals. Can put it on while doing other things. It is worth the time.
Joe
Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks.
This is what it's supposed to do. It is not an unintended consequence. It is a conscious continuation of THE BIG SWINDLE.
Read more about how Summers, this arrogant, racist, sexist intellectual zero, treated one of his colleagues at Harvard who warned of the risky investments in Harvard's endowment. Of course those who are servile to the rich and powerful find it easy to dismiss the opinions of "subordinates" without even an honest hearing.
http://www.huffingtonpost.com/2009/04/01/iris-mack-harvard-derivat_n_182037.html
Obama: explain why our financial future has been placed in such hands!!! Helen Thomas - please ask. Of course he could blow you off the way he did when you asked about nuclear weapons in the MidEast.
Joe
Of course those who are servile to the rich and powerful find it easy to dismiss the opinions of "subordinates" without even an honest hearing.
The sophists and the number-crunching ciphers in the employ of the super predators are well compensated, in money and prestige, for selling their souls.
Good comment!
The link above was truncated. No edit option.
Here is the correct link:
http://www.huffingtonpost.com/2009/04/01/
iris-mack-harvard-derivat_n_182037.html
Joe
I already switched from my former bank account to that of a credit union and so far no regrets. It will be interesting to see what happens when more people switch to local banks and credit unions. No government can bailout big banks at that point.
That's right Jennifer, I am doing the same. The five largest banks, Bank of America, Morgan, Wells Fargo, Citi and Goldman, own 90% of the derivatives. Local banks are mostly solvent and Credit Unions are too. People should end their business dealings with these five largest banks and transfer their accounts to local banks and CU's. Also stop consuming until the big banks are properly dealt with. Geithner and Summers have to go. Openly ending consumption will send the right message to the White House, but mostly our work is local. I strongly encourage people to get connected with their local greens and change their lifestyle now. The NRDC just held a green meeting in your city last week and the architectural greens met and finished a green project there this week. Monsanto is also located in St. Louis County in Creve Coeur Missouri and there needs to be demonstrations there.
Great suggestions on going green. It's bad enough that traffic jams and poor quality yet very expensive public transportation are getting worse. As for Monsanto, I heard about that sneaky HR 875 which would be a wet dream for Monsanto. I wrote to my reps and sens about this and will be encouraging others to voice their concerns as well. I agree on the need for demonstrations in fron of that corporate creep. Hit them locally and they won't be able to fight for their wet dream.
Jennifer makes an excellent point about dealing with credit unions.
"Local banks are mostly solvent and Credit Unions are too. People should end their business dealings with these five largest banks and transfer their accounts to local banks and CU's."
And Stone added the local banks that are sound and not involved with the corruption at the big banks. We closed opr BA account which my wife used and we are both at our local bank now.
The free market way....stop doing business with crooks or the people they do business with. That will make a point.
Thanks to you both.
Deepa
TCS, RIL paid Obama aide: Report
India's top-most corporate entity Reliance Industries and Tata group firm TCS are among firms which paid thousands of dollars to US President Barack Obama's top economic adviser Lawrence Summers either for his association with the firm or for giving speeches, say reports.
According to the financial disclosure reports made public by the White House, Summers earned millions of dollars over the past year for being part of the advisory board and for giving speeches to various financial institutions, including some of those which were later rescued under the government's bailout programme.
Out of two Indian companies, Tata Consultancy Services paid the Director of Obama's National Economic Council $67,500 for an engagement in September 21, 2008, Internet newspaper Huffingtonpost reported.
Reliance Industries was listed under the section wherein compensation in excess of $5,000 was paid by the Indian corporate giant to Summers for being the member of the International Advisory Board, Huffingtonpost added.
Summers was paid a whopping $2.7 million as speaking fees for more than 40 appearances before different organisations and companies.
http://www.24dunia.com/english/shownews/3285771/TCS-RIL-paid-Obama-aide-Report.html
It wont be as bad as you think. The bankers will be playing Monopoly with all of their play money, and rest of the nation will start using community currency to deal with real economic and food production problems.
Sioux
CURTIS: This is what I was thinking about and hoping for. It seems plausible. So not only will other nations form separate trade blocks and use other currency than the dollar; but within the US "Homeland Security State" one by one communities will issue their own version of "Ithaca Dollars" and bypass all, as you put it, the funny money inflated so far beyond its intended value as to simulate the bankers' version of a hot air balloon not meant to get very far if for no other reason than fate interceding.
There was an article on Alternet that said that some local towns are already seriously considering the idea. It will be interesting to see how it works out. First thing though is the population has to even out across the land. Too much of rural America has been depopulated over the last 50 years while the cities and their surrounding suburbs have been sprawling and badly so. This will be interesting to see how it all works out.
v.purto
Seems to me oBAMa turned out to be worst than Bush, who did not pretend to be smart (C-student) and people loving (he called his base haves and have-mores).
Bush's idiocy was for everybody to see, whereas oBAMa's idiocy is a very long time-bomb. The failure of oBAMa will pave way for open dictatorship, mark my words. This is why dictatorship structure that was building from 1947 and reach its completion under Bill Clinton and George Bush is not even touched by oBAMa.
American fascism will have very charming multicultural and multiracial smile with much deeper penetration than the former Nazi one.
Go watch "The Crash of 1929," broadcast last night on PBS.
Although light on some of the facts, the overriding theme was this:
The fix was in.
And the similarities to the present super-sized Ponzi scheme some still refer to as "our economy" are truly shocking.
Not only was the fix in, it's pointed out that the majority of investors knew the fix was in and continued to "play" the stock market anyway, believing that the next time they could avoid the royal screwing.
Guess how that worked out...
The bail-out sure is working for the same people that caused all this misery. It's what we reap for allowing Money to be the equivalent to speech. That Wall st. owns DC shouldn't be any surprise. Now it's time to pay the piper and oh boy are they paying up, or is that are we paying up? The Pols aren't spending a dime of THEIR own money that's for sure. Is this the CHANGE we were promised if we voted for O and his party? We'll get change alright from this crowd...CHUMP change!!
Here is a possible short term solution to this problem:
Resign Geithner
Resign Summers
Replace these "advisers" with progressives who have experience in sustainable economics. We cannot have more of the same economic policy that we've experienced for decades now.
let them flutter around all they like. we are making other plans.
Most esteemed kloro: I am an old Hippie, most pleased that more of our ilk exists. And, I think I love you! There are many of us in sync. And, we HAVE initiated other plans.
Has anyone yet made a stink about who will, and who will NOT, be allowed to bid on all the repackaged toxic asset bundles that will soon be auctioned off, probably at fire-sale prices, to the same bankster/graftster class that caused the meltdown in the first place? Since the federal government is going to guarantee 94% -- if I remember the figure correctly -- of the buyer's risk on these latest "securitized" products, and the buyer is thus only in for 6%, there are obviously going to be huge profits to the buyers, almost irrespective of how much they have to bid on these bundles to win them. Why is it then, that in this fine democracy of ours, only a very few of the wealthiest "heavy-hitter" banks and hedge-fund banditos will be allowed to bid? Since we all are all supposed to believe so strongly in those "free markets," where "everybody's dollar is equal to everybody else's," how come the general public is not going to be allowed to bid on these latest rigged products? And WHO, exactly will decide who can bid and who cannot? Do you have to be close golfing buddies with the dynamic duo of Geithner and Bernacke, [aka Grift and Graft] in order to get in on the deal? Do you have to promise to donate a cool million to Obama's re-election campaign committee? But alas, I almost forgot the Golden Rule of the new and improved Banking/Brokerage/CDO/Derivative Industry; namely, "what happens in banking, stays in banking," so I guess all of us little fish, we non-banking-tycoon investors, are just plain S.O.L.! In fact, we should probably be satisfied even to have learned as little as we know about how this latest "double-or-nothing" scam is going to be pulled off. After all, they kept the first thousand scams well covered up and "off the books." Still ... I can help but think it would be wonderful if a few HUNDRED of us non-bankers wrote to the Treasury Department to inquire as to what we need to do to bid in the auction. I wonder if they would even deign to reply?? I wouldn't hold my breath.
Sioux Rose
There is an old axiom at play in giving the bankers all this money without oversight or the demand for genuine accountability: it's called "Honor among thieves."
short time on CD today, but simple question:
WHAT THE HELL DO WE NEED BANKERS FOR AGAIN?
the US gov't exists to do one thing (on the domestic front): maintain the fiction of DEBT.
I find ironic that one of the most fervent believers in the Chicago School, Mr. Sachs, who was personally responsible for the destabilisation of the Polish and Russian governments, now criticizes Obama and friends.
For your information, Mr Sachs is now running an equally bogus development project in northern Kenya.
Columbia University should be ashamed....
Mr. Sachs, you have no credibility amongst academics and true believers in the concept of humanity. You should be ashamed of yourself after writing an article that actually considers the public interest over the private interests that you have spent a generation defending. Go back to your corporate masters and slide back underneath that rock you came from!
The progressives blew it. They smeared Hillary in the mistaken belkief she was the corporate candidate. I tried to warn them, but they just spewed nasty names...
If you factor in this massive Democratic screw-up with Republican election fraud, it becomes a virtual certainty that the Repubs will be back in the White House in 2012. I'm guessing Jeb Bush.
Xe:
http://www.youtube.com/watch?v=9KaKyNDOopY
"Both Business Week and the Financial Times report that the banks themselves might be invited to bid for the toxic assets, which would seem to set up just the scam outline above."
Murray Rothbard (Ludwig von Mises Institute) provided evidence that "loose credit" during the 1920s played a key role in creating the great depression. Alan Greenspan even admitted that excess credit policies during the 1920s "nearly destroyed the economies of the world."
Knowing this, one would have to ask why Greenspan encouraged the continuation of credit expansion along with the roll-back of banking/finance regulation. Was he really "in shock" over the self-interest and greed on Wall Street or did he play a sinister roll in this perversion where the sheeple would be "sheared" again as they were in the 1920s and 1930s?
Let's not forget, back then, banks called in loans. It was wealthy bankers and their friends who made vast fortunes during the depression by buying stocks and property at sharply discounted prices....pennies on the dollar.
"To the greedy eye, everything can be possessed……It destroys the natural innocence of desire, dismantles its horizons, and replaces them with a driven and atrophied possessiveness……This greed is now poisoning the earth and impoverishing its people….. HAVING has become the sinister enemy of BEING." - John O'Donohue
The banks will buy each others toxic assets, pocket the government sweetners, and still own the toxic assets. Bailout 101.
Jeffrey Sachs says, "The Geithner-Summers Plan is Even Worse Than We Thought," All I can say to that is, no it isn't worse than we thought. It's just a little more transparent than they thought.
Seems to me that the dirtbag duo Geithner-Summers has now sufficiently demonstrated its utter corruption to be pitchfork ready.