Geithner's plan is actually worse than Paulson's

[HamdenRice]

It's pretty disappointing. I haven't analyzed the whole thing yet, but overall, it's worse on principle than Paulson's.

<On edit: I should call it Barney Frank's plan, not Paulson's. It was Frank who completely revised the one page plan that Paulson presented to Congress, and turned it into a much better, if flawed, 100 page legislative plan. That said, Paulson worked on it, and it is generally called "Paulson's plan."-HR>

At least in Paulson's TARP 1, the Treasury took an equity position in the banks. That was in the form of preferred shares and warrants to buy common stock. Although a lot of the liberal blogosphere seems to believe that there were "no strings attached," in fact, the preferred had a face value, paid mandatory dividends, and had to be redeemed at face value. Paulson's plan was a partial stealth nationalization. Hence, if the banks were saved, most homeowners stayed in their homes and paid their mortgages, and the bad assets regained value, then the taxpayers would regain almost everything they put into the banks in preferred redemption, dividends and the warrants ability to deliver the rise in price of the banks' common stock. In other words, to paraphrase the phrase of the day, Paulson's plan socialized the risk, but also socialized the profits.

Geithner's plan entirely socializes the risk and privatizes the profits -- the risk being socialized through guarantees, while as far as I can tell (and I stand to be corrected), all the profits will go to hedge funds and other large institutional investors. He's trying to lure hedge funds and institutional investors into a win-win situation in which if the assets recover value, they make trillions, and if the assets lose value, these hedge fund investors lose nothing because the taxpayers pony up on the guarantees. In other words, Geithner's plan will completely socialize the risk and privatize the profits.

One thing we all have to keep in mind -- something that's hard to keep in mind because of the rhetoric of the media -- is that the underlying assets, the mortgage backed securities, are still extremely valuable. Many of them are not in default, but because the market has died, can't be sold. Many of them are performing normally, but their credit ratings have been downgraded, so many, many financial institutions, that are only allowed to buy "investment grade securities" are legally not allowed to buy them. That means that there are billions (if not trillions) of dollors worth of $10,000 face value mortgage backed securities that are paying interest and principal normally, that are by any measure actually worth $10,000, but are worth almost nothing on the bond market.

<On edit: The $10,000 face value is an example, and is not exclusive.-HR>

Of course, there's also a lot of really, truly worthless stuff out there -- especially collateralized debt obligations -- but that stuff is making everyone afraid of the still good stuff.

Because the media, including the liberal blogosphere, has latched onto calling all of them "toxic," "worthless," "troubled" and so on, most of the public doesn't realize that they still have inherent value and that a lot of actors are planning a massive giveaway of "garbage" that will magically be transformed into gold.

Who gets these securities -- and who is holding them when and if they return to their face value -- is the big question. In Paulson's plan, it's basically the banks, with us taxpayers as owners, through preferred shares and warrants. In Geithner's plan, it's hedge funds.

[notesdev]

1. The big question

is not who gets the securities, but who gets paid off with the money being poured into the money pits, oops, I mean banks.

[Joanne98]

2. Great.

[chill_wind]

3. Good luck trying to decipher an as yet puposely vague Rorsach blot...

An old joke from my younger days: What do you get when you cross a Godfather with a deconstructionist? Someone who makes you an offer you can’t understand.

I found myself remembering that joke when trying to make sense of the Geithner financial rescue plan. It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.

The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect.

What is in it, in reverse order:

1. Super-TALF: a big expansion of the Fed’s quantitative easing, with Treasury backing. I’m OK with that.

2. Private-public purchases of questionable assets; as I understand it, private investors would be the junior partners, so this is probably not a big giveaway (unless there’s huge public financing, in which case it amounts to ring-fencing after all). I also suspect it wouldn’t accomplish much, but no harm, no foul.

3. Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.

So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.

http://krugman.blogs.nytimes.com/

Details Scarce on New Bailout Plan
by Paul Kiel, ProPublica - February 10, 2009 12:46 pm EST



It looks like we'll just have to keep waiting to hear the details of the Financial Stability Plan, the Obama administration's chosen sobriquet for the bailout. Treasury Secretary Tim Geithner's remarks this morning <1> followed the general outlines we'd expected <2>, but details were hard to come by.

(...)

We do, however, know the url for a new Web site <3> Treasury is launching to serve as a clearinghouse on bailout info. For now, details are scarce on that, too. Geithner promises that on the new Web site.

more:
http://www.propublica.org/article/details-scarce-on-new-bailout-plan-090210


Geithner: This Is a ‘Broad Architecture’
by Paul Kiel, ProPublica - February 10, 2009 5:05 pm EST

One of the first questions Tim Geithner faced this afternoon during a Senate banking committee hearing was about the same thing we've been focusing on <1>: the lack of details <2> in his new plan. This seemed like déjà vu all over again, said Sen. Richard Shelby (R-AL), pointing out that about four months ago, the previous Treasury secretary had made his way to Capitol Hill to tout a plan that was short on details and long on zeros.

Geithner admitted as much, calling the plan the "broad architecture" of an approach, but promised those details would be forthcoming.

more: http://www.propublica.org/article/geithner-this-is-a-broad-architecture-090210