Those are just a few of the adjectives analysts are using to describe the lastest iteration of Geithner's long-heralded "bad bank" plan:
Tim Geithner's banking fix is getting justifiably slammed by Paul Krugman, Calculated Risk, Yves Smith, et al. Why justifiably? Because
the only way it will work is if hedge funds and banks get another huge gift at taxpayer expense.
Remember the crux of the problem: Banks say their assets are worth 60 cents on the dollar. The market says they are worth 30 cents on the dollar.
Geithner continues to accept the banks' argument that this huge bid/ask spread is just a temporary condition: The market just doesn't understand that the assets are actually worth 60 cents on the dollar. When it realizes this, everything will be fine. The majority of smart economists (at least the ones we read) think this is a crock. The banks are hallucinating (or worse), and most of the assets are worth what the market says they are worth.
In any event, the only way banks can be induced to sell those assets is if someone agrees to pay 60 cents (or more) on the dollar, because otherwise the banks will have to take more writedowns and require more capital. The only way someone will pay 60 cents or more on the dollar is if someone gives them a boatload of free money to be reckless with. That's where Geithner and the taxpayer come in.
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/">From Krugman:
In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem. (The taxpayer's)...
This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.
http://www.calculatedriskblog.com/2009/03/geithners-toxic-asset-plan.html">Calculated Risk slams a different part of the plan:
The FDIC plan involves almost no money down. The FDIC will provide a low interest non-recourse loan up to 85% of the value of the assets.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.
Yves Smith
http://www.nakedcapitalism.com/2009/03/private-public-partnership-details.html">offers an excellent line by line takedown of the enormous gift to private investors, which will result in an enormous gift to banks--all at taxpayer expense. Again, the private investors will put up 3% of the money. They'll then use this gift to intentionally overpay for the assets and secretly recapitalize the banks:
If the banks sell the assets as a lower level , it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.
So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank's reserve, which would be the value on the bank's books now.
And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!
Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.
...
Bottom line, this is just another version of the same bad plan Tim Geithner has been trying to shove through from the beginning. Find some way, any way, to bail out banks by overpaying for crap assets with taxpayer money without taxpayers noticing and screaming bloody murder about it.
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Also from
http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html">Naked Capitalism comes this provocative tidbit:
With price discovery (or the equivalent via more realistic marking of their books), some banks would be toast and need to be put in a form of receivership. But pretending these banks are viable, keeping the incumbents in place (who have incentives to take risk with taxpayer money, if nothing else so they can try to show profits and slip the leash) is the worst of all worlds. Some of the big banks already have been nationalized from an economic perspective, yet we keep alive the dangerous and costly fiction that they are functioning, private concerns. The Japanese did a variant of this program via letting zombie banks grossly overvalue dead loans, and look how well it served them.
There may also be a Constitutional issue, as another reader alleged:
Geithner/Summers are willfully evading Congressional oversight. After the Tequila/Mexico financial crisis, the banks wanted 20 billion and Congress wouldn't give it, so Summers/Geithner under Clinton evaded that buy misusing the government's ESF, argually illegally. Now, given that Congress doesn't want to authorize more money, Summers/Geithner are trying to misuse Fed/ DIC authority to hand out cash. This is illegal because the FDIC and Fed are authorized to lend, but not to hand out gifts/grants. Lending non-recourse undercollateralized is a gift/grant.
Hopefully, we can unite our efforts and prevent this theft. We need to put an end to the pattern that seems to have taken hold whereby we rush through ill-advised policies and then ask questions later after they've blow up in our faces. A friend of mine joked at lunch today that like TARP, this is a plan so bad it's virtually guaranteed to pass. and a few months from now when the people wise up, the media and politicians will simply use the tried and tested "who could have known" defense.
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