The Geithner Plan: What Is It?

Brad DeLong:

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Read the whole story: Brad DeLong

Comments

[clarryr]

Wow, a plan that might actually work. It was worth the wait.
Totally brilliant - risky - but a plan that might work.
Now, please follow up with re-regulation of the financial institutions.

[spinns17]

wow i feel better now.its a win win for the crooks that put us in this mess.i can sleep better tonight knowing the crooks are ok now.

[dsws]

Where's the downside? I see two possibilities, bank by bank. Some banks will fail anyway, in which case the hedge-fund investor walks away and we've put in a bunch of money into a bank we still have to nationalize. So we've given the money from ourselves as taxpayers to ourselves as the owners of a worse-than-worthless bank -- as long as we don't let them give it away as dividends or bonuses first.

Some frozen banks may be successfully thawed out. Then the hedge-fund investor pays back the loan, and we break even on the deal. So we've gotten the bank unfrozen at approximately no cost.

There's one possibility I glossed over: maybe as owners of an insolvent bank, we were planning to dump the entire loss on the bank's depositors and bondholders. That way they could fail, fire their employees, liquidate their assets at fire-sale prices, and dump even bigger losses on the next link in the chain. Under that policy, we could rename the 1930s as "the Little Depression". This plan would commit us to taking the loss on the insolvent banks instead of doing that.

[clarryr]

After the hedge fund (85% gvmt funded) buys the toxic assets from the bank - the hedge fund keeps them until maturity or resells them for a profit. This isn't direct bailout funds - we get the assets in return. Sure, the banks may still go broke but it's less likely because they won't own the toxic debt anymore. The problem is how to value the toxic assets - the plan sets up a bidding process so multiple hedge funds are bidding on them.
What's very important is to not let the banks directly or indirectly bid on their own toxic assets. Doing so they could jack up the price and bilk the taxpayers to overpay for them.

[dsws]

I'm not sure which point in my comment that responds to. I understand that the plan doesn't bail out banks directly (or even indirectly if the assets turn out to be worth what the hedge-fund investors pay for them). I hadn't considered the possibility of letting banks bid indirectly on their own assets, but the plan doesn't do that, does it?

[PhilipTaylor]

Bernanke-Bush-Paulson-Obama-Geithner policy pursued by US, amounts to a $10 trillion (Fed/Treasury) bail out of world derivatives bubble on the backs of taxpayers, can make Economy worse and must therefore be rejected. Krugman is right: "Zombie Ideas" rule Geithner.

The $1.15 quadrillion financial engineering derivatives bubble is comparable to black holes with gravity sucking in all matter. Derivatives can consume all wealth/money in the world, and still be bankrupt. They can only be dealt with by a quick freeze followed by their extinction and permanent illegality.

Derivatives are fictitious capital, instruments created that destroy production. In 1931-2, fictitious capital appeared as $Tens Billions of reparations imposed on Germany, plus war debts owed by Britain/France to US. These debts strangled world production and world trade. Bankers/statesmen tried desperately to maintain these debt structures. President Hoover’s Moratorium of 1931-1932 temporary froze all payments. The Lausanne Conference of June 1932 was the last chance to wipe out the debt permanently, failed to act, and passed the buck. By the end of 1932, there was near-universal default on reparations/war debts, and by January 1933, Hitler seized power.

We urge the London G-20 to defend world civilization against derivatives. It is time to lift the crushing weight of derivatives from the backs of humanity before the world economy and major nations collapse into irreversible chaos/war, as seen during the 1930s and 1940s.

http://www.rense.com/general85/g20.htm

[iverallie]

The writer does an excellent job of describing how bipartisan this trainwreck is:

www.rollingstone.com/politics/story/26793903/the_big_takeover

Ya gotta love the answers to congress about "show me the money"

[TJCole]

This plan is a way to send more money to the banks and bypass helping the American people and all those millions facing foreclosure...

The banks are treating the America people terribly while at the same time getting their money from both ends thanks to our sold out government...

[dolphy]

Geithner's plan is to steal more money from us.

[jojony]

No, Obama is. He is in charge. Geithners doesnt do anything without his boss's approval.

When does Obama become responsible?

[gopSTEALSyourTAXmoney]

O has always been responsible.
He's only been President since Jan. 20,
Go ask Georgie b why he's NEVER
been 'RESPONSIBLE'!

[sherifffruitfly]

I don't know who's right (Krugman/Atrios) or (Obama/Delong), but it's nice to see that a more congenial description of the plan exists.

Time will tell, I suppose.

[OVERSITE]

put paulson under oath for sending tarp money to goldman

[Okieborn]

This Democratic Baby Boomer Chooses Krugman over Giethner !!!!!

[HumeSkeptic]

How much would nationalization/receivership "cost", since we would own all the toxic assets? And how would Krugman finance it?
I'm all ears.

[truthynesslover]

It doesnt matter at this point.Throwing good money after bad is a loosing game.

[Ergon]

Why are some contracts sacred (bonuses for AIG) and some are not (Social Security, American workers?)
Why has Goldman Sachs, Citigroup and Bank of America, major shareholders of the Fed., received the major portion of bailout funds from the Fed? (AIG was just a conduit for those funds)

[dolphy]

Simple. Because they are all cronies and buddies of the people in charge of the money.

[Ergon]

Maybe Possibly Perhaps saddling future generations with a trillion dollars more debt will turn out to be a stroke of genius, and maybe it's our grandkids who'll be paying the price.

[clarryr]

You are correct, it is a gamble. How much pain are you feeling from paying off New Deal spending?
If this doesn't work along with the other parts of the recovery plan (like if the New Deal hadn't worked) then we're in for a long ride downhill.

[PhilipTaylor]

Is it TIME TO SHIFT GEARS?

Yes it is WRONG that $1,000 goes to Banks for every $1 that goes to Main Street.

Why NOT an Internet Government Bank that lends directly to consumers and businesses at low rates and low fees, with NO BRANCH OFFICES to increase OVERHEAD!

Automate the Industry so Main Street gets served regardless of the corruption or FAILURE of the BIG Zombie Banks! Create A MAIN STREET ECONOMY independent of WALL STREET!

No more waiting in lines to see a loan officer or deposit a check.

An Internet Central Bank removes the corrupt middle man and can do everything Main Street Needs through the Internet, ATMs, and Debit/Credit Cards at much lower Rates and Fees!
_________________________________________________________________

"Goldman Sachs Group rejected overtures from American International Group to settle trades with the troubled insurer at a discount, instead holding the company to the letter of its contracts, the investment bank's chief financial officer said Friday."

So Goldman wants ALL THEIR CASINO BETS PAID by AIG!

Stop feeding AIG to FEED GOLDMAN and let the BETS BE CANCELLED!

http://www.marketwatch.com/news/story/Goldman-rejected-offers-settle-AIG/story.aspx?guid=%7BD7078A9C%2D86CD%2D482E%2DA977%2DD5FCB0A0F827%7D

[Carolab]

It's time to END THE FED and RESTORE CREDIT AS A PUBLIC UTILITY!

[Minotaurus]

I totally agree with Philip Taylor !

[dsws]

The problem is on Wall Street, and it's hurting Main Street. To help Main Street, we need to fix the problem where the problem is.

[Asean4Obama]

I believe the only way to solve the toxic assets, would be to auction them off with a starting price of 30++ cents ot the dollar.

[Erdgeist]

I love Prof. Brad Delong (I am a member of Huffington's Brad Delong League of Almost Confused Amateur Economists) . He has a gift few in academe have who is able to simplify the complex without changing its substructure. In his Q&A, one important matter that the public doesn't seem to get is that assets are not fixed in concrete. Today's toxic asset can easily become tomorrow's healthy asset. At the risk of oversimplifying Geithner's plan, he is banking on the fact that as the economy gets better (called *reflation*), toxic will become healthy. And the government will make a nice profit so we can have nice jobs.

As for Krugman he has bee wrong before. Read Prof. Reuven Brenner book review who points out glaring errors in Krugman's analysis of the Mexican and Japanese financial crisis (vide: Depressing economist, National Post [Canada], July 03, 1999 Saturday National Editions).