Why Geithner's Banking Fix Won't Work
Nouriel Roubini, aka Dr. Doom, offers an excellent explanation of why Treasury Secretary Tim Geithner's latest brainstorm won't fix the banking system.
The bottom line is that someone has to take the losses on the $1+ trillion of depreciating assets that are still crushing bank balance sheets, and we taxpayers have woken up to the fact that we don't want it to be us. Geithner is therefore trying to find some way to stick us with the losses without our noticing, and this is easier said than done. Temporary receivership and restructuring is a much more effective way to go.
(Nouriel also makes his case without mentioning the most persuasive bit of evidence: The Geithner Plan is the same as The Hank Paulson Plan, just bigger, and The Hank Paulson Plan didn't work. Hard to be surprised that Geithner's sticking with it, though, inasmuch as he was likely the one who created it).
The very cumbersome U.S. Treasury proposal to dispose of toxic assets - that was presented by Treasury Secretary Tim Geithner... - can be best understood (subject to the large fog of uncertainty about its many details) as combining taking the toxic asset off the banks' balance sheet with providing government guarantees to those private investors that will purchase them (and/or public capital provision to fund a public-private bad bank that would purchase such assets).
But this plan is so non-transparent and complicated that it received a thumbs down by the markets as soon as it was announced today as all major US equity indices went sharply down.The main problem with the Treasury plan - that in some ways it may resemble the deal between Merrill Lynch (ML) and Lone Star (LS) - is the following:
Merrill sold its CDOs to Lone Star for 22 cents on the dollar; and even in that case ML remained on the hook in case the value of the assets were to fall below 22 as LS paid initially only 11 cents (i.e. ML guaranteed the LS downside risk). But today a bank like Citi has similar CDOs that, until recently, were still sitting on its books, at a deluded and fake value of 60 cents. So, since the government knows that no one in the private sector would buy those most toxic assets at 60 cents it may have to promise a guarantee (formally or informally by putting capital into a public-private bad bank that will receive extra lending from the private sector) to limit the downside risk to private investors from purchasing such assets. But that implicit or explicit guarantee would be hugely expensive if you need to induce private folks to buy at 60 what is worth only 20 or even 11. So the new Treasury plan may end up being again a royal rip-off of the taxpayer if the guarantee is excessive given the true value of the underlying assets.
And if instead the implicit or explicit guarantee is not excessive (if the public-private bank truly tries to discover the value of such assets as in the formal Treasury proposal) the banks need to sell the toxic assets at their true underlying value that implies massive writedowns that will uncover the insolvency of such banks. I.e. the emperor has no clothes and a true valuation of the bad assets - without a huge taxpayers' bailout of the shareholders and unsecured creditors of banks - implies that banks are bankrupt and should be taken over by the government.
Once you understand this, it's no mystery why it's taking Geithner so long to develop the details of this plan. Now that the country has figured out that the whole story about "temporarily depressed market prices vs. intrinsic value prices" is just a crock designed to stick taxpayers with bank losses, it's harder to do that.
But someone has to take the losses. Which is why most smart economists are clamoring for temporary nationalization.
See Also:
Roubini: Nationalization Is The Only Way To Go
Is Tim Geithner Actually Smarter Than He Looks?
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
NATIONALIZE THE FEDERAL RESERVE THEN DESTORY IT !!!!!!!!
Henry, unfortunately the powers that be are afraid to push away the gravy-train rich political contributing donors. TimmyG is just playing his rusty horn believing it is singing sweet jazz tunes. These folks around Obama are the Demoservatives who have not been told by Obama that it is time to go radical and make the radical economic changes necessary to begin to fix the economy and reduce the trade deficit, while bringing back long lasting manufacturing jobs to rebuild the nation from the bottom up and not from the top down.
http://eye-on-washington.blogspot.com
Check out the circular movement of money.
Investigate the banks/Wall St./insurance industry contributes to the politicians to have policy made that directs funds back to them. The money from the Treasury that belongs to the people.
Children and grand children are being saddled far into the future to pay for the unscrupulous activities of the past several years. How can this be right?
The money from the treasury does not belong to the people. The treasury issues bank notes, which have nothing to do with the loans that the Fed gives to banks. And I seriously doubt that you will end up anywhere else but jail if you drive to your local mint and demand they "hand over the money that belongs to the people".
The money the Fed loans to banks is always a loan. Period. Sometimes it comes at a lower, sometimes it comes at a higher interest rate. But it is always a loan. These loans have nothing to do with how much physical money the Treasury prints. Most of the Fed money stays accounting numbers in financial databases and never gets converted to physical currency.
The "bailout", including the TARP, on the other hand is money that is given to the banks and other stakeholders under a couple of conditions. Much of it are loans, some of it are equity deals. Now, since these loans are not secured (and can not be) and since the equity might not be worth much, these things simply fall under "the government deliberately makes a bad deal to monetize the system".
Whether this is right or not is really a moral judgment that everybody has to make for themselves. But it changes nothing about the underlying mechanisms of how money is created.
without a huge taxpayers' bailout of the shareholders and unsecured creditors of banks - implies that banks are bankrupt and should be taken over by the government.
In the end, if this statement holds water and is the best conclusion, then, nationalize the system and get on with fixing it .
By the way, "shareholders and unsecured creditors of banks", to bad, you knew the risk, due diligence is your responsibility. If you got burned, use the court system to sue those that defrauded you.
This is all about class action. The larger the class, the less accountable the liable will be. Compare the two scenarios, one involving "The Taxpayer" and one involving "several thousand angry investors." If you were "The Industry" which one of these would you prefer to face in the end?
Well if by taxpayer you mean - present governemnt - I'd take my chances with the government, I would seem to own them anyways.
As a taxpayer, i don't really give 2 shts about an investor losing their shirts. I trust they are adult enough to seek avenues to satisfy their losses. I also trust they would understand why i would not be too keen in having them extort money from me to save their hides
Ok, let me see if I understand this. . .
Banks create risky investment vehicles with no clear objective value, then assign bloated values to them to drive up the assets on their balance sheet and artificially drive their stock value up.
Now the theoretical basis of those investment products is collapsing. So the government has to step in to make up for the "loss" of value of something that was assigned a fictional value to begin with, just so the bank's fictional stock price doesnt drop down to its actual value.
If that's what's going on here, then we have truly entered bizarro circus territory.
Geithner is the wrong person for this job. Do yourself a favor and write your Congressonal rep at Congress.org to tell them we need someone outside the Buckway who will take the tough action needed to allow bad banks to fail. Geithner, like Paulson, is NOT this person.
One small problem with your article. This isn't the Geithner plan, this is the Obama plan. And it stinks.
Let me see... you gave Bush four more years to mess up, now you want to blame the mess on Obama's first four weeks?
That lead duck ain't fly.
Let's be clear here - it isn't just the rich who want to stick the taxpayer with this huge bill, it is our President. We need to make it clear to him that we are on to his game and expected a helluva lot more from him than this. This is the worst thing I have ever seen a Democrat do, and that includes Clinton's support of NAFTA and welfare reform.
Exactly. This is the OBAMA Plan. He is the one who wants taxpayers to bail out the bankers.
There is speculation that this is a backdoor to nationalization. Looks much more like a backdoor to sticking it to taxpayers to me.
The existing banks are dead. We need an orderly process of burying them so the economy can begin to recover.
Yes, you are right on!
Simple really: the rich are again trying to push their crippling debts & gambling habits onto the "wealthy" taxpayer. Well, they must think we are wealthy? and stupid.
The U.S. Government should take over all Real Property Loans. ALL OF THEM !!!!!!
Then from that day forward the U.S. Government thru FANNIE and FREDDIE make loans to sell land to Americans for businesses and homes.
No one else would be allowed to fiance property.
Banking would have to rely on Businesses, individual loans and trade to make money .
American Real Estate would never again be used to create Chaos in the Economy !
The bottom line is that someone has to take the losses on the $1+ trillion of depreciating assets that are still crushing bank balance sheets, and we taxpayers have woken up to the fact that we don't want it to be us.
WELL GET OVER IT !!!!!!!!!
IT IS YOU !!!!!
THE BANKS CREATED THIS MESS THEY MUST SOLVE IT !!!!!!1
Henry Blodgett. Well done. Thank you. Obama claimed he was the products of stupid, untutored slobs like me. Actually, he was owned by the financial interests form before the beginning. He wrote me three year ago that free trade was the greates achievement of the human race since the invention of the contrl of fire or something like that. Evidently, he is not FDR. He is a beholden politican to the special interests that have subverted the democratic experiment.
To me one fear of letting maybe many of major banks involved with the toxic credit market go bust is that maybe 50% or more of all individual and business deposits would be put at risk. That could trigger a run on banks like that of 1933 that FDR had to haltwith emergency actions. What if someone or a company had $1 million in an account in that bank with the current insurance at $250K? They could lose all of the balance, and talk about triggering a recession!
Perhaps the government could give troubled banks emergency status so could get out of leases and various contracts with no penalities. They could get out of all kinds of employment contracts with top executives, shut down 1000's of unnessary branches, office space leases, sports venue and other sponsorships, marketing and advertising, as could be done in a bankruptcy and save many billions. Of course, most important would be to make it so people can get affordable mortgage payments to bide time for a long term 5-10 years until the housing prices hit bottom and recover.
Leon,
What is the difference between recognizing an obvious loss and pretending that it doesn't exist?
I think doing the former allows us to move on with new banks. Doing the latter just makes matters worse.
We need an orderly process of forcing the bankers to eat their losses, but we need to make sure they are the ones who eat them, not the public. Sadly, shareholders are many people with 401k plans, not necessarily evil, greedy people. Perhaps their losses will have the salutory effect of making people hate bankers for a few centuries.
Here is the reason that the status quo is being protected. It's just the same old bought and paid for politics. The money rules. I hate to break it to you folks but BO is just another politician (and a Chigago one at that)
Total to these candidates: $44,558,132 (Dems 56.2% and Repubs 43.7%)
Securities & Investment
Barack Obama (D) $14,039,592
John McCain (R) $8,262,427
Hillary Clinton (D) $6,254,106
Rudolph W. Giuliani (R) $5,087,295
Mitt Romney (R) $4,932,837
Christopher J. Dodd (D) $2,706,632
Bill Richardson (D) $794,300
http://www.opensecrets.org/pres08/select.php?ind=F07
You must be logged in to comment. Log in or connect with
