In his review of the Geithner-Summers Plan to remove toxic assets from the banks, NY Times columnist Joe Nocera writes (March 28, p. B8), "As for the complaint that it will make rich guys richer, well, you can't win 'em all." If Nocera had looked at alternatives that many of us have been suggesting and if he still concluded that helping rich guys get richer was the only conceivable strategy, his attitude might be acceptable. But he does no such thing. He did not explore alternatives. Nor did he explain to his readers that the taxpayer transfers to make "rich guys richer" could amount to tens, or hundreds, of billions of dollars of the public's money, massive transfers that are avoidable.
Geithner and Summers are proposing to use government loans to finance investors to buy toxic assets. This is fine. The question is the terms. If the loans were going to large and well-capitalized investment funds, whose overall capital base would back the repayment of the government loans, the plan would have merit of providing liquidity to the market for toxic assets. Instead, the government loans by design will go to poorly capitalized special investment funds set up specially to buy toxic assets. The approach is tailor-made to leave the FDIC and Fed with massive losses. Since the taxpayer losses will be hidden on the balance sheets of the FDIC and Fed, the tens or hundreds of billions of dollars of taxpayer losses will not be recognized until the program is long forgotten by the public.
The cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer. The Fed and other bank regulators would insist that bad loans be written down on the books. Bondholders would take haircuts, but these losses are already priced into deeply discounted bond prices. The government could provide new loans to blue-chip investors to buy up the toxic assets at a deep discount, but the government's loans would have to be repaid by the investors whether or not the toxic assets pay off. In the current plan, the investors are allowed to default on the government loans if the toxic assets perform badly.
Investors would of course bid less for these assets than under the Geithner-Summers plan, so that the banks and bondholders would get less, but the taxpayer would also be left much less exposed. If the write-downs of the bad assets force the bank into insolvency, the FDIC would pump in public capital to keep the bank operating without interruption. Even in that case, however, the solution would be cheaper than under the current plan, since the taxpayers rather than the existing shareholders would be the claimants on the bank's assets.
We all know the end of the story as it's now being written with an overpriced rescue of the banks. When it comes time for health care reform, education funding, infrastructure rebuilding, and (heaven forbid) help for the world's poor and dying people, there will be no fiscal space. Budgets will be tight. Spending that helps make rich guys richer while leaving the poor to die of hunger and disease seems to be par for the course in our Wall-Street-besotted public policy.
Last week I stood in a village in Africa where the mines had closed and people had nothing to eat. Pleading eyes looked into mine. Those are the eyes that I still see when I read Nocera's flippant acceptance of shoveling taxpayer funds to the undeserving rich.
There are plenty of resources for all and with further automation and technology we should be able to deliver more than the basic necessities of life in a cost effective way to all the world.
It takes the WILL, EMPATHY, INNOVATION, EFFICIENCY, and of course, MONEY!
1. SELLER FINANCING: Finance sale of own troubled loans, lending money to public-private partnerships that buy the assets. Since bank's loan gets FDIC guarantee they essentially Unload junkiest mortgages with an FDIC-guaranteed loan.
2. PUMP AND DUMP: A private investor, also big stockholdings in bank, overbids for bank's bad loans to drive up its shares and makes a tidy profit. Since government shoulders most of any big losses his stock market gains will exceed his loss due to overbidding.
3. PASSING OFF LOSSES: FDIC/Treasury absorb 93% of losses, while keeping half of any profits. With investor"s downside so limited, private partners are likely buy riskiest deals with the highest potential payoffs, and Government"s biggest potential losses.
4. PORTFOLIO SWAPPING: Using Government funds Bank swap its existing portfolio of junky loans for another similar one, only this time limiting downside with government loans/guarantees. Switching high risk for low risk at government expense but Administration may block maneuver.
5. LAYERS OF LEVERAGE: Most intricate maneuvers is "layering" government's many programs over last six months. Bank invests past government money in private partnership buying toxic assets using loan guaranteed by FDIC. Chop up/repackage those assets and sell as securities to other investors, who put together the financing using low-risk loans from FED. Thus bank's capital is almost nil, like the practices that created the CRISIS using government LEVERAGING on steroids.
Mr. Sachs, would you invest in such a risky proposition. That is like saying, buy this 500,000 dollar house at a discount for 300,000. Well that sounds nice and tidy, but if the value keeps going down, the investors would do just what many homeowners are doing. Walk away and default on the loan rather than be underwater. I think that the general premise of your plan is interesting, but you have got to put some sweeteners in there or else no one will touch this stuff.
There was once an economy where economic conditions suggested that poorer people would inevitably see jobs eventually opening up for them (i.e., good judgment for a banker to invest in them through mortgage loans), instead of jobs being exported to other countries. That change in the economic landscape should become the poorer person's problem, and cause him to be regarded as a bad risk.
a. do all banks have problems with toxic assets.
b. are all the banks without toxic assets under capitalized.
c If they are not all under capitalized why are they not leaping at the possibility of making high yield "good loans"
d. Is it possible that banks are not lending because in the uncertain times they don't know what is a "good knowledge"
e. how does the having or not having a toxic asset on your books provide more or less insight into what is a good loan.
f. Rather than trying to clean up the mess would it have made more sense to put capital input clean banks so they could pick up the slack- including setting up new banks
g. given the foregoing is it not possible that the toxic asset bailout is government rewarding those who own it - under the guise of helping out the average guy.
no government would never play bait and switch now would they?
I am astounded that Obama fails to realize that the agenda he initially ran on, healthcare reform, education investment and energy re-prioritization, is endangered by his Treasury and economic team. Additionally, it could be argued that the Obama's November mandate is a product of the economic meltdown. Trust, Obama's agenda, and our money and future economic prosperity are all being squandered.
Somebody better start making sense here before we are all lost.