So What Do We Think Of Geithner's Toxic Asset Plan?
I've spent some time in the past few days looking at Geithner's plan to stimulate the purchase of toxic assets from banks. I've also spent some time reading what my favorite finance bloggers think of it. My friend Roger Ehrenberg is mildly impressed but concerned that there is no forcing function to make the banks sell. I have not spent much time reading the opinion pages other than to note that Krugman hates it (surprise surprise – he wants us to take over the banks).
But I am most interested in what you all think of it. We've got plenty of sharp investors and smart people who can read, think, and analyze here at AVC and I'd really like to know what you all think. You can leave a comment with your thoughts and if you leave a link to a post of your own, I'll link to it here.
To get the conversation going, I've turned to no other than my "treasury secretary" Jeff Minch (who I disagree with on all things politcal, but agree with on most everything else). You all know him as JLM and he was our first guest blogger a month or so ago. Here's his thoughts on the Geithner plan. Please let us know yours.
Dr Tim’s Excellent Elixir
The circus is back in town and Dr Tim is peddling a new potion promised to cure the problem of “legacy loans and securities” or toxic assets. These bad boys have been creating gas and obstructing digestion at the banks and thereby have prevented the flow of loans as current values have caused painful deleveraging of balance sheets absorbing available capital and have exacerbated the natural unwillingness of these banks to extend credit to jump start the economy. Whew!
The call to action of this plan is to finally and bravely (well, a four martini kind of bravery) attempt to PRICE the toxic assets. There is a real timid, coy element at work here, not a bit unlike winking at the pretty girl across the bar.
To dispel the suspense, the plan — The Five Guys Toxic Assets Auction Plan — intends to do this by conducting a beauty contest to select five (5) Fund Managers to form, fund and manage Public-Private Investment Funds to competitively bid on packages of loans and securities offered for auction by banks which currently hold the toxic assets. That’s it. That’s all there is!
The rest of the plan is simply about how the government intends to co-invest on the equity side (match the equity raised), loan money to finance the transactions (up to 85%) and participate in the upside on the sale side (pari passu w/ the private equity).
As a plan, it is the recognizable journeyman-like work product of a competent investment banker complete with an executive summary, white paper, term sheet, FAQ and application to participate. It is not a prospectus, it is a deal sheet. You have to give them good marks for the general thoroughness of the communication. Take a look at the Treasury’s website and you will see all of this. The only thing missing is the Power Point presentation. Hell, they even have an e-mail address to ask questions.
There are things to like, a few to dislike and a few to question. In no particular order:
1. We are finally doing something about the 800 lbs gorilla sitting in the corner and frankly the plan is well laid out from a communication perspective. Any reasonably perceptive financier could understand and model the plan. I leave it to you, the markets, the economy and the banks to decide whether it is a good plan. It is an understandable plan.
2. The toxic assets initially are only assets which were once upon a time rated AAA. Huh? This is not a huge portion of the universe of toxic assets and this is likely the low hanging fruit. So I wonder how effective the process is really going to be.
3. The big job of the “private” participants is to price the toxic assets. This has always been the object floating in the punchbowl. I don’t like the idea that only five (5) bidders will attend the auction. My sense is that at a certain level of pricing there could be many more folks who would make a bid. My market sense is that more bidders means higher auction prices.
4. Here is a subtle point — as bidders exhaust their funds available, isn’t there the possibility that realized auction prices will go down dramatically? Simple liquidity trap. This argues for a wider set of bidders and a more expansive embrace of bidders who might bring their own financing. Should a deal be viewed differently if NO public money is involved?
5. In addition to the auction not being very broad, the sellers can withdraw the toxic assets from the auction if they do not like the prices. Hmmmm, this kind of feels like a cheap way for a bank to get an appraisal on their toxic assets. Maybe I am overly suspicious.
6. The government financial leverage is huge. The government will match the equity raised and will fund up to 85% of the deal. The private Fund Managers therefore only have to contribute about 7% of all the money in order to get half of the upside and some negotiable fees.
7. There even seems to be an argument that the private money could use NO public money on the equity side and thereby achieve a 6:1 leverage by providing up to 15% of the funding. A 15% equity investment earns 100% of the upside. That would be my personal favorite. In for 7% to get 50% or in for 15% to get 100%?
8. The expansiveness of the government’s funding also argues for a broader field of auction bidders because the government is “non-recourse” and secured solely by the assets.
9. The Fund Managers — picked by the swimsuit and talent portions of a Treasury run beauty contest — are sure to be large firms and I worry that they are not nimble enough to deal with the vagaries of litigation, foreclosure, renegotiation or obtaining payment on a huge, huge, huge number of individual mortgages. There is a skill set required to liquidate the underlying assets which is not the normal ken of big asset management firms. Isn’t that how we got into this problem in part?
10. OK, the line forms to the right for all folks who WANT to be partners with the government given the recent AIG/Wall Street demonization. What happens if you make too much money? Sure, the government gets their chunk but who wants to be successful and get demonized? Perhaps there is a derivative security that can be developed to hedge this risk? LOL
11. It is not clear how this plan will coordinate with HASP and other mortgage plans.
12. The Fund Managers can charge fees to run the deal with almost no restrictions on what they can charge the private money but the government — in a welcome display of savvy deal making — will only pay fixed fees from its share of the distributions or winnings. Bravo!
13. The banks find themselves in a very odd situation as it relates to their regulatory capital. Without boring you with the details most of these assets are going to be Class II or III assets for regulatory purposes and if the selling prices are very low could cause real regulatory capital problems. On one hand, the government flushes out the toxins and on the other hand the government must subsequently further shore up the bank’s capital. Proving that no good deed goes unpunished.
14. There is a 10-year mind set at work here while the real engagement phase of the RTC/S&L crisis was more like 5 years. Note that almost everything this Administration tackles has a 10-year time frame involved.
15. This needs to happen quickly to be effective and it clearly will not happen quickly. There is a chemotherapy element to the timeline which troubles me greatly. Right now, unfortunately, I would be long cancer. A ghoulish analogy for which I apologize.
Let me conclude by saying — this COULD work. This is the RTC but with a public-private wrinkle and with the financing pre-arranged. The paltry list of bidders seems a real flaw to me. It is difficult to imagine a rallying cry being: “Rally around the asset managers, boys! And give them hell!” But, hey, it COULD just work.
Let’s give credit where credit is due. While it has been easy to take cheap shots at the Secretary of the Treasury and he added a bit of fuel to the fire with his timing, this plan is the best piece of work that has been presented thus far indicating that he is teachable.
Who would have expected less from a guy who grew up in Zimbabwe, India and Thailand and has an Ivy League degree in Asian studies and government with a graduate degree in international economics and East Asian studies? BTW, did you know that his father while in the employ of the Ford Foundation worked with Ann Dunham-Soetoro on Indonesian microfinance programs? Who is AD-S, you ask? Barack Obama’s momma! Karma, kismet! We are saved!
Hi Jeff,Great piece on the TALF. I have a couple of questions – how can the “private” companies price the toxic assets? Aren’t they sliced and diced so much that it would be next to impossible to even price them at 50% accuracy?The stress tests that the banks are going to do will be performed by themselves and, in so doing, would be “influenced” to produce results that were most beneficial to them in regards to the toxic assets. This would then completely skew any projections on the pricing of the assets. This provides a perfect vehicle for the taxpayer to get – what is it now – triple or quadruple dipped.Finally, I don’t know if you saw this – http://bitly.com/3wYTl2 but Sheila Bair (FDIC) is open (meaning will happen) to allowing the banks to basically launder their toxic assets through off balance special purpose vehicles. Again put almost all the risk on the American Taxpayer and, IMHO, setting us up for another program from Timmy & Co.I don’t pretend to comprehend all the complexities of this but my radar goes off loud & clear -“DANGER WILL ROBINSON!!”Great post again. Fred – I was thinking this morning “I hope Fred asks Jeff to do a post on this”. I guess you get what you ask for. Thanks!
In the RTC solution some folks made huge amounts of money, so you have to resign yourself to the probability that success means some folks will make huge amounts of money. I am not absolutely sure that the Obama administration and the general public is willing to embrace that eventuality just now — think about the AIG bonus class warfare in which folks who “hit plan” were demonized as well.If you sell one Coke to every Chinaman, you make a lot of money. If you fix several trillion dollars of toxic assets, somebody is gonna make a ####### of money.The pricing is like watching a bunch of drunk soldiers playing mumblipeg with sharp bayonets. Before the game begins, you know that somebody is going to end up bleeding but the first couple flings of the bayonet fail to draw blood so you get lulled into sleep. The first couple of auctions will be such a novelty that nobody will really notice and the banks are likely to throw their real crap into the auctions. It’s like a first parachute jump, nobody knows enough to really be scared.Even having said all of that, there has to be a huge amount of info on each loan because the banks should have been working this stuff for a long, long time.I am extremely nervous about “regulators” getting into the deal business. It is a mismatch on the skill set but today in Washington everybody wants to be on the sexy side of the deal making dynamic. Not everybody is adept enough to play quarterback, some folks are linemen by nature and talent. The FDIC is not a deal shop.
Thanks for the response. I have no problem with people making money I want people to make a ton of money. The main issue I have is that the ones who screwed this up are not only getting the American Taxpayers to cover their losses, they are also being allowed to play in the game and make money off of their mistakes again at the expense of the taxpayer.Additionally doesn’t Timmy’s Elixir let the gov’t take this off balance sheet and thus fake deficit reduction numbers. I just don’t see how the taxpayers will be paid back on this. Just my 2 cents.
If the transactions actually transact and the government does not give up its equity stake — they are theoretically pari passu with the private equity and pay no fees until the pay window is open — then the government gets up to half of the winnings.Only fair as they have put up 93% of the $$$.One of the problems of looking at the government’s balance sheet is that we don’t have a set of books which includes the Fed, the GSEs, the Pentagon, the government backed regulators, the unfunded entitlement mandates, etc. etc. etc.I once tried to quantify how much just the liabilities were closing in on and quit when I approached $100T — trillion, mind you.
“The FDIC is not a deal shop”I think that is destined for fredwilson.vc
I wrote two posts on it this week, asking if we have a political problem, which I believe we do:Part 1: http://snipurl.com/ehn0zPart 2: http://snipurl.com/emd00And there is a brilliant piece in The Atlantic that Umair Haque pointed to on his blog that goes deeply into the political question:http://www.theatlantic.com/…
This seems right to me. I think when we look back at this time, we will see the unwillingness of our leaders to deal with the problems in a serious manner as more damaging than the original crisis in the first place. The various plans just don’t make any sense unless your only goal is to preserve the status quo. I’ve posted on this here:http://realpropertyalpha.co…But I also think that there is a generational bias here, and I haven’t had the time to post on it. But basically these plans are there to try to get equity markets up so that baby boomers can retire. Ok, that’s obviously not the only reason, but you can’t dismiss it. But in order to effect this “rescue”, the Treasury is just kicking the can down the road.And they won’t address that the underlying value of the asset (housing) that all of the MBS and other vehicles are based on has decreased in value. And it’s not a seized up market. Housing is transacting. but at very reduced prices.
This is a great piece. Another former IMF economist, Raghuram Rajan, had a similar analysis in 2005. http://www.kc.frb.org/publi…Rajan went on to become a top financial advisor for the Indian government, which is a big reason you aren’t hearing anything about an Indian banking crisis.In the US, Rajan was attacked for being overly pessimistic. One of his strongest detractors: Larry Summers.The US is becoming more like the rest of the world. I was in Russia during its collapse, and Argentina during one of its many collapses. The current crisis in the US has a distinctly familiar feel. These two former IMF economists are great at pointing out the parallels.
I suspect the big difference between Argentina, Russia, India, et al, is that the whole world was not simultaneously on fire (maybe we should have seen the smoldering but there were no global flames) and therefore the medicine could be localized.This is one of the reasons I am very concerned about this global currency nonsense. We are the strongest economy in the world — not by as much as we once were but still the biggest set of shoes to fill — and we should get our house in order quickly in order to ensure that seize the opportunity. Witness the growing strength of the dollar.The most troubling recent developments were the inability of England to completely refinance its current borrowings at auction and the declining number of bidders and bids at our recent Treasury auction.If we cannot sell Treasuries, for whatever reason, we are in very, very, very hot water.
no doubt, this is argentina all over again. a debtor nation goes into a recession and responds with more government borrowing while its tax base diminishes. government borrowing fails to revive economy while tax base continues to diminish. there are only two options: cut government spending and accept deflation or keep spending and run the risk setting off a run on the currency.as the fed started printing money and the market responded by immediately dropping the value of the dollar, it seems as though we’re on the path to significant currency devaluation. can we turn around? if the geithner plan is what is proposed and accepted…..uh oh. it ain’t looking pretty.
I agree that we do have a political problem — idealogy gets in the way of undiluted financial decisionmaking based solely upon analytics.I do think that the essence of leadership is SOMETIMES to say — “burn the boats, boy”.Is this the time? MAYBE!
I think of everything to do with our current economy (and some other things too) in terms of a simple graph in which the horizontal axis is a timeline and the vertixal axis a value range, and on this graph there are two lines: one represents the “intrinsic/fundamental” value of an asset, and the other represents the “market” value of an asset. As long as the latter deviates above the former, then there is only one source of return for a current investor, which is a future investor providing a take-out or exit or refinance, because the intrinsic asset value itself does not support the amount of the investment. This is one way to illustrate what happens in a bubble, but also in a Ponzi scheme, and for that matter in an inflationary environment… all of which are sort of synonymous.In the context of this graph, the present Fed actions can be seen as a way of perpetuating the Ponzi, a system in which the Fed has become the source of take-out/exit/refinance, and so the “market value” line is protected and the bubble continues (eventhough we may not realize it). What needs to happen is for the two lines to merge, at which point there is no longer a bubble. For this to occur, the ideal solution is not for the bubble to burst, in which case the “market value” line moves down, but rather for the “intrinsic value” line to move up. In other words, fundamental value has to be created.I’m not sure I see this being emphasized these days, and I don’t see a plan addressing this objective, at least not directly.
But what if the intrinsic value of these toxic assets is, in fact, above their market values and the problem is that the market is simply to full of fear to take them off the bank’s handsThat was true during the RTC days (when JLM made a killing buying “toxic assets’)
Two things. First, RTC sold a lot of assets below replacement cost, but if you actually applied a reasonable pro forma to them, the assets were being sold at market value. The problem was that the RTC was not just cleaning up the mess of the S&L failures, but also of the Tax Reform Act of 1986, that put an end to speculative building for tax shelter purposes only. So you had office buildings and other assets that had been built just to supply a tax shelter, but weren’t needed. So a lot of the stuff that the RTC disposed of might have been 50% vacant (example only), so when you applied a reasonable pro forma it would be valued below replacement costs. So it wasn’t necessarily that the assets traded below “intrinsic value”, it was that the market could not support valuing the assets at replacement cost. For JLM or any opportunistic investor that got involved in these things, they were taking legitimate risks. They had to wait for a business cycle recovery in order to add value to the assets and then re-sell them years later.Second, based on what I am hearing, part of the issue on valuation of the assets right now is that the banks/investment banks that are holding the assets on their books are still not being transparent on valuation. They might have an MBS that has 30% of the mortgages in default, and the expected loss on the mortgages that go into default is 40% of book after costs of sale, and the holder of that MBS is only marking down to 90% of the original book value. Add to this the fact that the housing market is still directionally down, and buyers also have to underwrite further price declines. So part of the reason that the market is discounting these things is that the holders of these securities (and also any of the troubled assets included in the Geithner plan) are not being realistic about their losses. I work with banks ever day on their troubled loans, and I can tell you that this is the case. The bank says that they would like to sell the asset (construction loan, CRE, etc.) at appraised value. The buyer community agrees that the appraisal is worthless and the value is 70% of appraised value. Bank opts not to sell in order to avoid hit to capital/loss reserves.I don’t buy into this “too much fear” theory. I think investors are always looking for an opportunity. There have been buyers of stocks all of the way from peak in late 2007 to now. That is an extremely functional market and investors have shown that they will buy all the way to the bottom (fear or not). Find any market and I can almost guarantee you can find someone to buy all the way to the bottom. So I think this notion that the assets have been overly discounted by potential buyers just means that the bankers have won the war on language and they used this to game the government into bailing them out.Because a bailout just to save the banks would have been one thing. But a bailout to save the banks because of what has been sold as a temporary market problem is much more palatable for some people. But the market problem is not temporary. Housing is resetting to affordable levels.
The intellectual framework that allowed folks to take what were, in fact, huge risks was that the assets were being acquired at a huge discount to physical replacement cost. An office building that cost $120/SF could be bought for $25/SF.The then current return? 0% if not a negative number.One had to believe that the market would eventually recover to full replacement cost and replacement cost was going up at 2-5% per year in the intervening period.Housing is getting to the same measure and inflation will re-assert itself.Take a look at current selling prices in the Florida Panhandle at places like Seaside and Watercolor.
And how far away are we from bottom in housing if it is resetting to affordable levels? I know the answer varies by region but I wonder if you have a nationwide guess on that one?
my most trusted economist is former VC eric janszen, who has correctly called pretty much every major economic event in the US over the past decade. here is his analysis of the housing bubble correction which i thought you might find interesting:http://www.itulip.com/housi…he says the bottom is a decade away. that seems overly pessimistic to me, i’m more inclined to think there will be great buying opportunities by 2013. but he studies this stuff pretty religiously and has been spot on, so i gotta take him seriously and give him props.
Fred – Ritholtz has a post up today that looks at historical inflation adjusted prices. As Barry points out, the graph he shows isn’t the last word on the topic.http://www.ritholtz.com/blo…
I agree completely with your framework for evaluating the issue. There is a bit of context which can further refine the “systems” approach.First, I would urge you to think about “passive” v “active” investors.A failed mortgage is foreclosed and a passive investor says — what is it worth now? He lists the property w/ a broker and waits for offers.Similiarly an “active” investor says — what is it worth if I re-paint the interior/exterior, clean up the landscape, have the systems reviewed/repaired, offer a 10 HOW and am prepared to finance the sale on a reasonably underwritten basis?In the “value added” proposition of the active investor, the marginal returns on the new money are huge.Additionally, the skill set of the active investor may, in fact, be world class. When I renovated my 25th apartment complex during the RTC days, my guys had it down to a sharp edged cookie cutter which required about 5 minutes of my time and direction though it had taken a year to get the “formula” just right.There is no question that the new Fund Managers have a chance to be better than the banks in dealing with the real time consuming and perhaps expensive issues of litigation, foreclosure, rehab, repositioning and sales.This may devolve into a Dollar General/Walmart approach v a Neiman Marcus/Nordstrom approach. Huge difference in the marginal returns.
I am a huge fan of “active investing”It’s about the only thing I do with my money other than put it in tax freemunis
One question is how do you reconcile the plan as put forth with the suggested refinements laid out by Andy Kessler in his WSJ Article ‘Have We Seen the Last of the Bear Raids?’ (http://bit.ly/eMGL)?The other comment that I would add is that (once again) this system seems to favor the few anointed mega entities, which seems both at odds with creating a real diverse market of buyers (as you note) and a doubling down of the to-big-to fail (but failing anyway) model, something that I blogged about in Juxtapositions (http://bit.ly/gAAUq), ruminations on political will, consumer angst, wars and the economic, banking, and auto crisis.Check it out if interested.Mark
I will check it out and add the link to my post. I too find the emphasis on a few buyers to be deeply troubling. Maybe its because they want to “beta test” this process first before opening it up?
There is no known substitute to competition in the buying of good and services. Just taking competitive bids, opening them formally, providing all bidders with the results and making a prompt award to successful bidder will result in the harnessing of the powers of capitalism, the marketplace and competition.In another time, I was building a 32-story building and we bid it — against the advice of any and all contractors we were talking to. Every single contractor bid less than their “talking” numbers and the low price was a $22MM savings on a $42MM contract.A well ordered bid is a beautiful thing to watch. And benefit from.
Agreed, and remember the RTC times well (my first career was real estate asset management of shopping centers in CA), but I don’t fully understand the mechanics of the Bear Raid scenario that Kessler talks about. Can you or anyone explain that one and how Geithner’s plan addresses (or alternative paths address)?Thanks in advance.
I somehow had missed that there are only five funds. That’s good, I disagree with your point 3 in that regard… As a margin lender, the taxpayer would want the exposure to be pooled. However, your counterargument in #9 is valid, too…
Fred, Glad you put it up though Friday night is tough. I’m an unabashed Obama fan, but I’ve been very concerned and then I read this really amazing piece in the Atlantic which I hope the community reads. It can be found here: http://www.theatlantic.com/… . Written by Simon Johnson former Chief Economist at the IMF and it details how the IMF manages broken economies and how those lessons can apply to the United States.Johnson is not optimistic and I’m hoping Roger and JLM among others will respond to it.
A nice bookend to this is Rolling Stone’s ‘The Big Takeover’ ( http://bit.ly/x7JPw) on how AIG came to graft a hedge fund on top of a conservative insurance company, the duplicitous role of the Wall Street titans in metastasizing the AIG engine into the collapse we are now dealing with and why the end-game offers a feast for conspiracy theorists.Expands on the topic covered in the Atlantic piece you reference very provocatively and with lots of specifics.
Here is a question, will this solve the coming Alt-A and Aption ARM reset problem Whitney Tilson believes we will have…according to this article…http://www.cbsnews.com/stor…
One of the subtleties about the ARM reset issues is that the banks have to make a definitive decision as to when and how much to reset the interest rates. I suspect that many will ultimately elect to leave the rates where they are on the simple premise that a performing loan at a lower interest rate beats the hell out of a non-performing loan at a higher interest rate.Why?Because the non-performing loan requires the bank to block up capital to hold it.While I think many bankers are a bit thick headed, I am sure they will want to compartmentalize their problems and not create more non-performing loans at the slip of a pen.I hope not.
Clusterstock has a good item on how all of the “fixes” are the result of a fundamental misunderstanding of the problem.http://www.businessinsider….
mike shedlock has the best analysis of the geithner plan that i’ve seen. shedlock is a good writer so for those who are intimidated by this topic or are seeking an easy to understand and accurate analysis, i recommend shedlock’s analysis (save for his view that hyperinflation cannot happen, i think it is a safe bet we are on the path and not showing any signs of turning around)http://globaleconomicanalys…basically all these plans are theft, and are built on the remarkably false pretense that getting banks lending will jump start the economy (and so we need to clear the toxic assets so that lending can resume). bank lending won’t jump start the economy, and even if it did, these plans won’t do the trick because there are no credible borrowers left. the way to jump start the economy is to cut government spending at all levels and cut income tax as well, so that a new foundation of savings can be built, so that entrepreneurs can more easily create wealth, and on top of this foundation of savings a credit market can be built. it would be a painful path but it is somewhat unavoidable as we will soon see. any form of intervention should be on the other end, i.e. stopping foreclosures and increasing welfare payments, and doing this without a budget increase, but rather a budget transfer, from say, oh i don’t know, maybe the fraudulent wars that are completely unjustified and an enormous drain on the economy. i know stopping foreclosures and increasing handouts sounds disgusting to many and rest assured it sounds disgusting to me as well, i am simply saying that type of intervention is better for the economy than all these criminal attempts at restarting the fraudulent finance industry, as that will boost consumer spending, help rebuild savings, and help prevent crime from getting completely out of hand.though the real way to intervene is in fixing the political system. as others have noted in this thread this is largely a political problem, government is broken and totally captive to a certain clique within wall street. fixing the federal reserve system, which is the true cause of this mess and an enormous burden on society, as well as exposing the truth about 9/11 and bringing about justice to its perpetrators, are the way to solve the political problem. americans by and large are still under the remarkably naive belief that they are better off not talking about such issues and they are desperately hoping such faulty strategies like the geithner plan can work.they can’t, and they won’t.
Besides the fraudulent wars part and the so-called 9/11 truth seeking, I agree with you.I think the problem is less a political problem and more an entitlement problem. Americans have drawn this sense of entitlement over the course of recent history. We were once a country of self-reliance, but now we rely on the government for providing solutions to all life’s problems.Just the other day during at the Obama townhall meeting it wasn’t Obama’s answers that were the most disappointing, it was the questions from the crowd. To sum up their questions: “Gimme, Gimme, Gimme”When will you fund this program? When will you fund that program? You should spend more money on XYZ. Gimme Gimme Gimme. People do the same thing in Saudi Arabia to the royal family.I think people’s attitude must change…plain and simple.
thanks for your reply. if 9/11 is an inside job, i trust that we can see how it has destroyed the economy (through misallocation of resources via war) as well as created a culture where corruption prevails, and thus gives us the problems we have, economically and otherwise.so let’s take a look at some facts to see if 9/11 was an inside job:1. FBI admits no hard evidence linking bin laden to 9/11: http://www.google.com/searc…2. 7 of the alleged hijackers have been reported alive: http://www.google.com/searc…3. even if you think the hijackers did it, they were trained at US air force bases: http://tinyurl.com/9lwv54. military was running war games of planes crashing into buildings on 9/11. war games are a way to get funding for an operation and get honest people to participate without knowing about the full agenda — it simply gets turned on at the last moment. there was also confusion amongst air defense personnel as to whether the attacks were real attacks or part of war games: http://www.google.com/searc…5. 9/11 first responders say there was a countdown to a controlled demolition of building 7, the building that collapsed at near free fall speed without being hit by a plane: http://www.google.com/searc…6. FBI agent sibel edmonds, who has been gagged for reasons of national security, says she has all the evidence of a coverup: http://www.google.com/searc…7. max cleland, a member of the 9/11 commission, says there is a coverup: http://www.democracynow.org…8. over 170 military, intelligence, law enforcement, and government officials have questions about 9/11, many of them flat out saying it is an inside job: http://patriotsquestion911….that’s just scratching the surface. i could literally spend the an entire week doing nothing but listing all the evidence. and i still wouldnt be able to get it all.meanwhile, there is no evidence that bin laden and his cave dwellers did it.once we do the research and come to find that 9/11 was an inside job, the case for war, which was weak to begin with, loses all its credibility. the war machine can thus be ended, and the war/national security budget can be redirected either to internal stimuli or simply to reduce government and lower taxes.as the economic crisis is the result of political and economic malpractice, and as 9/11 is the economic justification for war and is evidence of political corruption of the highest magnitude, it is very relevant to solving the economic crisis.
I am a credible borrower Kid. And I know of many others. I’ve borrowed a lot of money and paid it all back every time.
i’m sure you and many of your peers are credible borrowers, but i imagine many of you don’t need or want debt — or at least not as much as others need or want it. also, because you are a credible borrower, you could probably easily get a loan with or without the geithner plan. banks make money of loans, so of course they would be interested in lending to credible borrowers.but let’s say the geithner plan works, the taxpayers foot the bill, and the banks are lending again. who are they going to lend to? credible borrowers. so really, credible borrowers like yourself get the wealth advantage of this plan, while taxpayers, the majority of whom are not credible borrowers because they are already tapped out, foot the bill. so this amounts to a transfer of wealth from those who can’t afford it (average taxpayer) to those who were credible to begin with. we have already seen a bit of this; after previous bailouts, verizon secured a 16 billion dollar loan this past december, which they are using to make investments. this does nothing to solve the problem of insolvent households who can’t pay back their debts, which is what caused the whole subprime crisis and the ensuing crisis in the finance industry built on securitized mortgage loans.the real problem, and the reason why they are so fixated on getting banks lending, is because of the federal reserve system, in which banks lend money into existence. if all money comes out of debt, it is not surprising that there will be difficulties in paying debt off. even if there was a nationwide effort to pay off all debts, it would result in a severe depression, as paying off debts reduces the money supply, and thus would create capital shortages. basically, we are always beholden to debt under this system. and it is primarily because of this system that americans have gone from being a one income household with positive savings to a two income household with a negative savings rate, while wealth continues to be increasingly concentrated amongst fewer people.
Good points. We need to increase the savings rate in this country. I’d like to see a sales tax replace an income tax but I think that’s a regressive tax policy
I agree with everything you say completely and without reservation (well, except for the 9-11 conspiracy stuff). It is very gratifying to see how many independent voices have framed the plan and issue similiarly and how the rub points are almost identical when viewed from any of a number of different perspectives.I harken back to something you wrote earlier that is so simple and coherent as to be unable to overlooked — “personal savings beget the basis for banks supplying credit.” This fundamental principle is so utterly simple that we are unable to embrace it as a Nation. We long for a more complex solution.The banks are not going to expand credit but hopefully they will retreat back to the 5 Cs — capacity, credit, collateral, cash, character — pick a few of your own favorite Cs.
Under the Geithner plan, banks have a huge incentive to buy up their own assets at full mark-to-imaginary price, letting the government take over 93% of their losses. The plan forbids this directly, but it’s near impossible to prevent in practice. In fact, Sheila Bair this week indicated that she was in favor of allowing banks with “legacy assets” to take equity positions in the five funds. This would destroy the whole idea of setting a market price, since the banks have such an incentive to pay the full mark (or even higher).Paulson originally asked for a blank check so the government could buy this stuff up at above-market rates. The first plan wouldn’t fly politically, because it was just too obvious. Each iteration since then has been an attempt to give better political cover to the same basic idea. The current plan has a fig leaf of “market” pricing, and has gotten much better response. But the market aspect relies entirely on trusting investment bankers not to game a system that could easily be rigged in their favor. That just doesn’t strike me as a bet I’d like to take with a trillion dollars of taxpayer money.
It seems to me that if the banks were allowed to participate, we would indeed have the conflict of interest you mention. The banks could use the government loan guarantee to inject cash to themselves by overbidding on the assets.But in this plan, don’t the investors have an incentive to not overbid? They make money by turning a profit on the assets, not by forcing the government to cover for them if they pay too much. Sure, they have a nice protection against loss, but no one makes money that way.
I think the big hurdle for the banks is to get “annointed” as one of the Fab Five. There are only going to be five “playas” in the Treasury’s plan.On the other hand, once prices begin to be set, the whole deal is just a big “financing” and with interest rates so low, a bank should be able to figure out to do its own deal on a private basis even if it means some kind of a one of a kind spinout to the shareholders.
JLM – do you think the “fab five” are just beta testers of this approach and if it seems to be working, will the administration allow others to get in on the action? It seems like limiting it to five limits the amount of private capital that can be applied to the problem
I don’t see the risk of ‘running out of money’ in the sense of pure capacity, because the Pimcos and Blackrocks will accept outside money, and to the extent it looks like a good deal they can always raise more money. If capacity is a problem it will be extraordinarily successful and of course it can be expanded, so no call for worry on that score.I also don’t see that much risk of shenanigans, except to the extent that it’s a feature, not a bug – a way to to give the prices a boost in orderly way at reasonable expense. In fact the risk may be the other way, right now Bill Gross and Larry Fink have pretty good brands, they may not want to risk getting hauled in front of Congress by getting creative enough, aggressive enough and making money while costing the taxpayer, which is the whole point of the exercise.For these reasons it’s a tradeoff between ease of policing and finding enough people who know what they are doing and are willing to take the political risk. 5 is a small number, the risk is they will collude to keep prices low and the whole thing will fail.but this is offset by the guarantee and subsidy which makes it pay to overbid – see Sachs article in FT – suppose you have 5 securities that pay off $1 with 20% probability – they are worth 20 cents. Suppose the Feds guarantee 90% of your investment in each one. You bid 40 and get 36 back four times and 100 back once, clearing 244 on your 200 investment. The Feds are giving you a cheap option, so given enough uncertainty and volatility prices are bound to get raised too high (a feature, not a bug – raising prices insufficiently and then having to nationalize everything would I think be far worse outcome).
Here is a post on it that is relatively coherent.http://www.blindreason.org/…
If you did not see the Stephanopolous interview w/ Geithner — you should see it. I was modestly concerned about Geithner and his ability to LEAD this effort.I am now in an outright PANIC. This guy is a dud.He said: “Only the government can solve this problem. The market cannot.”The stark assurance of his comments was very unsettling.
I agree with Simon Johnson and this article:http://www.theatlantic.com/…>>If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.And we need to put these banks into receivership (and do the stress test as originally planned). These banks are insolvent, and until we face that fact, we’re in trouble.And why all the Krugman bashing, between this post and the last? It’s fine to make an argument, but every time you mention Krugman, it seems personal.
I don’t krugman so its not personal but I don’t agree with him
Great post. My main question is related to point #13. IF this plan does work and the private/public partnership is able to take a substantial portion of toxic assets off of bank balance sheets, what is the next step if these banks are in need of a major recapitalization? Or is this even problem we will face, since as point #5 mentions, the sellers would probably just deny the prices that they do not like? If the sellers deny the funds, and the shroud that surrounds the values of these toxic assets is lifted, but these assets remain on their balance sheets, what happens then?
Get rid of Mark to Market, change the up tick rule and allow US car companies to sell cars in the US manufactured in other countries. The new Ford plant in Brazil is a business and engineering wonder and we should be making plans for a plant better than that one here in the US. THEN HAVE PATIENCE AND ALLOW THE MARKETS TO WORK. Doubt, Diversion, Discouragement, Defeat, Delay are the seeds of evil.
Jeff Sachs has a must-read on the perils of price discovery – http://www.ft.com/cms/s/0/b…Possible outcomes:Scenario 1 – there is no market clearing price as banks don’t like the bids, because they would be insolvent. Then there is no longer any dispute about their insolvency and we can proceed to plan B, nationalization. All we lost is time (would have been better if we had done this a long time ago)Scenario 2 – the prices are high enough for the banks to deal, and they unload a boatload of assets and clean up their balance sheets enough that many are at least solvent, and able to raise equity to get properly capitalized.- In this scenario 2a) the assets may have been properly priced, and the investors make a profit and the government doesn’t lose money, everybody wins- or 2b) the assets are significantly overpriced due to the nature of the assets and the structure of the auction (see Sachs) and some degree of fraud / collusion (I disagree that it will be rampant because people would go to jail, but there will be some degree of ‘you scratch my back and I’ll scratch yours’). Then the government will lose money, the investors won’t. But it may be a small price to pay for recapitalizing the banks in a reasonably orderly way.These are the ‘corner solutions’ but the worst-case – Scenario 3) – is banks cherry-pick a modest amount of their toughest-to-value assets, dump them at high prices, and say they’re fine now. Then it’s another giveaway of taxpayer dollars that doesn’t solve the fundamental problem.I suspect that some or all of the big banks maybe insolvent under any reasonable assumptions. Look at the haircut to the S&P over the last year. Now assume only say a 25% haircut in the value of the collateral underlying mortgage, commercial, leveraged loans etc. If the banks had 5% of assets equity capital (they didn’t) and 80% loan to value (they didn’t), they’re underwater. Therefore the outcome seems likely to be somewhere closer to scenario 2b or 3. Even if the plan works for the stronger banks, we will still have a problem deciding what to do with some of the world’s largest financial institutions being insolvent.
One thing I haven’t mentioned in my other posts is that despite my criticism of the various bailouts, I actually think that this plan has good timing going for it. Krugman et al have criticized the fact that the government is going to be on the hook for a lot of the losses (if any) because of the high leverage they are offering. However, because of the timing of this plan, the government is likely offering the debt at a time when the downside risks are at least starting to dissipate. Housing is nearing bottom. Does it decline another 10%? 20%? Who knows. But the 45% price declines seen in places like Florida and California won’t be seen in the future. So even if the government offers leverage on these deals, the equity contribution from buyers should be sufficient to provide the cushion for the losses. Will that be the case in every deal? Maybe not. But the equity contributions from the Buyers aren’t being done to be thrown away. They are expecting to make money. So between the successful investments that the government participates in, and the interest income on all of the debt they offer, and then the fact that the downside risks are starting to dissipate, I expect that the government’s exposure in this plan is limited. That’s just my gut. Not based on a model.So, is this plan going to goose prices up higher than if the government wasn’t offering all of this non-recourse debt? Yes. Have all of these bailouts been an embarrassment to the people who have planned them? Yes. But… is the government at least going to benefit from good timing on these deals? Probably.
Great comment and you partially answered my previous question
I’ll defend Krugman here. I think there area two camps here: those who think that we can affect a relatively quick turnaround and restore the markets and confidence; and then there are those who think, or in my opinion “realize”, that this can’t be bounced. This group realizes that this is a much more serious situation, and that any denial of that fact will just lose people’s confidence more.You get one shot at sounding the all-clear after a bombing run. If you do, people come out, and more bombs fall — the all-clear loses all value. You’ve lost the trust, the confidence. So when it’s really all clear and you desperately need for people to come out, they won’t. That’s a huge risk that Geithner and Obama seem to have no problem taking, but I’m with Krugman.
The problem I have with kurgman”s take on all this is he is speculating just like all of us. As you point, he’s speculating that there’s a lot more downside hereBut he’s not being clear about that in his opinion pieces. He’s acting as if he knows best. And he is just guessing like everyone else
Geithner’s right, and this is the best plan he can come up with that will fly. Krugman is right, and you’re still going to have to nationalize banks, and it would be better sooner rather than later. That won’t fly politically right now, but better to have people saying that, I think.
Will we have to nationalize as many banks after the PPIP plan runs its course as we would have had we not done it druce?
I hope not. Depends on how well Geithner does ~3 things. 1) restores confidence that the team knows what it’s doing 2) funnels capital and cleans up bank balance sheets 3) reforms to eliminate opacity and systemic risk . Unfortunately I’m skeptical – balance sheet hole may be too big, imponderables of Geithner plan too great, too much focus on propping up status quo. A good, quick nationalization may be the least undesirable outcome. It offends free market sensibilities, and politics may make it messy and hence even worse. The Krugmans are less offended and more optimistic about the Feds’ ability to pull it off. And properly, I think, more realistic about the perils of a more gradual course. But I think Geithner plan is a good start, just a bit late, and barring a miracle, nationalization is plan B.
What about plan A1?
Sure, it’s all speculation. Krugman and Geithner are both acting as if they know best when no one knows. I’m not judging either case based on the confidence of the players. Krugman deserves our attention. He saw this coming and he’s making a strong case that we’re burning the last of the Winter wood trying to fool ourselves that the Summer temperatures haven’t left.You’ve probably seen this, but just in case:http://www.huffingtonpost.c…
As someone who has spent his most of my career working in technology start-ups, one of the most important traits to build into a company is the ability to face reality and deal with it. Companies that can’t figure this out don’t get to critical mass. I’ll bet Fred counsels his portfolio companies about some aspect of dealing with reality every day.My problem with this plan and the others we’ve seen over the past 6 months is that none of them deal with the reality that we have a broken system that needs to be put to death before we can rebuild something sustainable. We, as a society, have leveraged ourselves to the hilt to buy boatloads of crap from factories in China. Our financial services industry has grown “too big to fail” as it’s reeled in massive fees financing our binge. Yes, this is a mortgage crisis, but most people I know, including myself, have used the equity in their homes as collateral to buy more crap.Worse, these plans are set-up to perpetuate the status quo, as soon as the “toxic assets” are flushed through the system. As has been said many times in this community, we need to unleash the power of entrepreneurship and innovation to change our system. We need to get back to being a society that is creating sustainable value for the entire world, not just growing through our own unsustainable consumption. That clearly requires that we shift our spending and incentives to spend to activities that invest in our capacity to deliver what the world needs.Given this framework, let’s get creative about how to deal with the real issue of “toxic assets”. I have little confidence that a very small group of large private equity and hedge funds can effectively unwind this mess. I have even less confidence that a government agency can do it, but I believe that only government can mandate a system for dealing with it.How about forcing the issue down to the local communities where the toxic assets are actually physically located? Investors and real estate developers in my community have a much better chance of placing a proper value on the local properties that are at risk than a few quants sitting on Wall Street. How about the Treasury Department forcing the holders of these toxic assets to report on where they are located. The banks will whine that because of securitization, they can’t figure this out, but shoot, if Google can index the entire web daily, then someone can certainly figure out where several million mortgages originated. Based on this information, let’s create regional auctions for the properties.The real problem here is that the reality is more bleak than anyone wants to admit. Just like a start-up staring at a down round, someone is going to get crammed down. It’s going to take time to deal with these assets in a real way. In the meantime, as we are seeing, bad loans aren’t getting made anymore, individual savings is surging, and marginal companies are laying off or shutting their doors. To me that sounds like a recipe for an exceptional entrepreneurial environment.Obama needs to step up and speak the truth about what we are really looking at and make sure that we the taxpayers aren’t the ones getting the cram down.
I remember when I first heard about securitizing mortgages back in the 80sand I wondered “what is going to happen when there is a default?”I know there’s a good answer to that, or there is supposed to be one, but Ido like the idea of going back to simpler timesUnfortunately I don’t think we can do that
We at least need to simplify to the point where the people underwritingthese investments can make sense of what they are dealing with, whichclearly hasn’t been the case for a while.Or maybe they did, and took the fees anyway knowing that the governmentwould backstop it.
Someone knows where the assets are, because a statement is being mailed to said assets every month. And, if no one knows where to find a given asset, said asset isn’t an asset, but the memory of buying a house for someone, somewhere.
One point that Tony Crescenzi has mentioned a few times and makes sense to me is that with all of the venom surrounding compensation for those who have received tax dollars, Tony thinks that the rules of the TALF and PPIP programs need to be explicit so there are no ex-post fiascos or at least an attempt to limit them. He thinks that the Fed should enunciate rules for compensation, disclosure and other items in an effort to keep the public sector off the backs of investors so as not to “demonize” them. The second round TALF opened on Tuesday and was under what was expected. How much of this was due to investor fear of Congress is difficult to quantify.