The Bank Bail Outs are Taxpayer Theft

[TheBigotBasher]

....In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.

The earlier criticisms of the Geithner-Summers plan showed that even outside bidders generally have the incentive to bid far too much for the toxic assets, since they too get a free ride from the government loans. But once we acknowledge the insider-bidding route, the potential to game the plan at the cost of the taxpayers becomes extraordinary. And the gaming of the system doesn't have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi's assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same.

Several news stories suggest some grounding for these fears. Both Business Week and the Financial Times report that the banks themselves might be invited to bid for the toxic assets, which would seem to set up just the scam outline above. What is incredible is that lack of the most minimal transparency so far about the rules, risks, and procedures of this trillion-dollar plan. Also incredible is the apparent lack of any oversight by Congress, reinforcing the sense that the fix is in or that at best we are all sitting ducks.

The sad part of all this is that there are now several much better ideas circulating among experts, but none of these seems to get the time of day from the Treasury. The best ideas are forms of corporate reorganization, in which a bank weighed down with toxic assets is divided into two banks -- a "good bank" and a "bad bank" -- with the bad bank left holding the toxic assets and the long-term debts, while owning the equity of the good bank. If the bad assets pay off better than is now feared, the bondholders get repaid and the current bank shares keep their value. If the bad assets in fact default heavily as is now expected, the bondholders and shareholders lose their investments. The key point of the good bank -- bad bank plans is an orderly process to restore healthy banking functions (in the good bank) while divvying up the losses in a fair way among the banks' existing claimants. The taxpayer is not needed for that, except to cover the insured part of the banks' existing liabilities, specifically the banks' deposits and perhaps other short-term liabilities that are key to financial market liquidity.

Cynics believe that the Geithner-Summers Plan is exactly what it seems: a naked grab of taxpayer money for Wall Street interests. Geithner and Summers argue that it's the least bad approach to a messy situation, in which we need to restore banking functions but don't have any perfect ways to do that. If they are serious about their justification, let them come forward to confront their critics and to explain to the American people why the other proposals are not being pursued.

http://www.huffingtonpost.com/jeffrey-sachs/the-geithner-summers-plan_b_183499.html

I hate this corporate socialism, which has robbed the World of money to help properly stave off this recession.

[gristy]

1. The scariest part of this is not the money lost by the taxpayers

It's the money gained by the financial corporations and the individuals tied to them. With money there is power. And there is so much money in these organizations now, and there will be so much more in the near future, that their power will be absolute. That will be that.

[TheBigotBasher]

2. The UK

has given / guaranteed more in the bank bail outs than the US. The UK has doubled its national dent to do so. So the taxpayer gets a higher debt t o allow the banks to continue to recover the already inflated debts off the consumers. What is worse the cost of clearing everyones mortgage would have been lower and what boost would that have given?

[MarjorieG]

4. Think the admin is enticing some of that money to reinvest, so we get something for the assets. Not

fair, but we get to slowly take that trigger off the bomb Obama was describing, serious debt, so he can have an agenda and solve some problems, get jobs through the budget/stimulus. This disastrous global economy will be with for a long while, regardless of how he deals with the superbanks.

[FrenchieCat]

3. Is Jeffrey Sachs really all that he's cracked up to be?

Sachs has also been criticized by leftists for having an overly neoliberal perspective on the economy. Nancy Holmstrom and Richard Smith pointed out that, in advising implementation of his shock therapy on the collapsing Soviet Union, Sachs "supposed the transition to capitalism would be a natural, virtually automatic economic process: start by abandoning state planning, free up prices, promote private competition with state-owned industry, and sell off state industry as fast as possible…". They go on to cite the drastic decreases in industrial output over the ensuing years, a nearly halving of the country's GDP and of personal incomes, a doubling of the suicide rate, and a skyrocketing unemployment rate.<13> The Lancet has recently reported that rapid privatization of the Soviet Union caused a 12.8% death rate increase among males in just two years<14>, a claim that The Economist disputes.<15> Canadian activist Naomi Klein argues in her 2007 book The Shock Doctrine: The Rise of Disaster Capitalism that Sachs' Bolivian "success" is clearly not true. In her analysis, the radical reforms pushed by Sachs were neither democratically agreed upon nor achieved without violent state repression, and in her opinion, left the majority of Bolivians in far worse circumstances.<16>
http://en.wikipedia.org/wiki/Jeffrey_Sachs

[girl gone mad]

5. Sachs is just saying the same thing..

Galbraith, Krugman, Stiglitz, Reich, Simon Johnson, Dean Baker, Barry Ritholtz, Yves Smith, James Kwak, Ray Dalio and dozens upon dozens of other very smart economists and financial experts are saying.

You've got your work cut out if you plan to trash them all.

[SanchoPanza]

8. Point?

One could make the same argument about Summers or Geithner. In fact, people are making that argument. They're a bunch of Wall Street swindlers, I tells ya! You know they all worked for Goldman Sachs at one point, right?! RABBLE RABBLE RABBLE!!

But people who are interested in this dilemma in anything more than a drive-by manner should probably confine themselves to the arguments being put forward and not the personalities involved. What Sachs describes in his article is the same thing many analysts have been worrying about since Geithner introduced the PPIP plan, and there's little in the way of enforceable legal mechanisms that the government could implement to curb it.

[earth mom]

6. Is it pitchfork time yet?

Oh yeah, I forgot, Obama is standing between these bastards and the pitchforks. :grr:

[LooseWilly]

7. I'm with you on hating corporate socialism...

... and I think Geithner ought to come out and say why his plan is better than this good cop/bad cop (sorry, bank) strategy.

Unfortunately, I think betting on the stock market is liable to be safer than betting on me staying awake through said explanation.

That said, all the alternates to Geithner's plan are gaining traction in my mind. So, the next question would be: how does the administration (presuming they might also be thinking now that their first approach isn't, in fact, as good and public-happy-making as some of these later theoretical approaches) actually make the change, without having to sacrifice their political ground too much? In other words, what's the strategy for politically managing the changing of plans, should a change of plans become a good idea?

Maybe develop a plan, pass it off to some congressional leaders who can be trusted to play ball, and have them then present the plan as a "counter proposal", which... in the interests of seriously considering other points of views... the administration "takes under consideration" (and subsequently adopts all that has been put in for future adoption)?
Are there any other suggestions for handling the political side of the issue of a change of plan? Should even the administration decide that the current plan has too many loopholes that the bankers are liable to try to exploit?