TARP Oversight Panel: Treasury May Not Be Acknowledging ‘The Depth Of The Current Downturn’

[ProSense]

TARP Oversight Panel: Treasury May Not Be Acknowledging ‘The Depth Of The Current Downturn’

According to new forecasts set to be released by the International Monetary Fund (IMF) “toxic debts racked up by banks and insurers could spiral to $4 trillion“:

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy.

With that harrowing number hanging overhead, the TARP’s Congressional Oversight Panel released its six-month report yesterday. The panel, chaired by Harvard Law School professor Elizabeth Warren, questioned Treasury Secretary Timothy Geithner’s assumption that the toxic assets clogging the banks are merely economically depressed, noting that Treasury’s response “fails to acknowledge the depth of the current downturn“:

If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis. <…> On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.

The Warren panel also noted that Treasury “has not explained its assumption that the proper values for these assets are their book values.” These are very important observations, and it would behoove Treasury to provide some responses.

For its part, the panel suggested that liquidating troubled banks would be the strategy “least likely to sap the patience of taxpayers,” while also giving Treasury a definitive way out of its entanglement with the financial system. “Allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal,” the report said.

As estimates regarding the number of toxic assets climb higher and higher — with Nouriel Roubini claiming there are $3.6 trillion worth — its becoming clearer just how much depends on Treasury finding a workable plan for cleaning up the banks. As IMF managing director Dominique Strauss-Kahn said, “you never recover before the cleaning up of the banking sector has been done.” And right now, Geithner’s clean up is premised on an assumption that more and more people are taking issue with.

[Romulox]

1. So far, radio silence from Geithner...he is going to resist Warren's recommendations. nt

[truedelphi]

22. Warren also used her time last week, when open to questions from Senators and

Others, to complain about how Geithner et al ignore her calls and requests for information.

Geithner's economic plans exclude stringent and necesary regulation, transperency and sound economics.

Other than that, they are fabulous.

BTw the Senators present complained that Geithenr doesn't answer their calls either.

[PBS Poll-435]

2. It is all going to be alright.

nt

[biopowertoday]

3. ummmm....

when?
for who? etc.......



I know predictions are dangerous and i do not expect an answer.

[PBS Poll-435]

4. We have seen the bottom

While I worry about the LT debt, the current situation is about to get a whole lot better.

Q3 is a growth quarter.

[biopowertoday]

6. Perhaps but us real people out here have

yet to live thru the effects.

[PBS Poll-435]

7. I am right there with you. I am self-employed and my clients are still trying to see the light

Stocks, though, have seen the bottom. Banks (on a large scale) will not be nationalized. Maybe Citi, maybe CountrywideBankofLynch, but not every large bank.

[Better Believe It]

34. The old light at the end of the tunnel. I remember that being said during the Vietnam war.

[PBS Poll-435]

35. I guess the diference is real-time data

The market has confidence in the Geithner Plan.

Bank of America, US Bank, & Wells Fargo have recovered nicely since the bottom of March 5-6

[Better Believe It]

40. Nothing like a trillion dollar unconditional hand-out to make Wall Street crooks happy

[PBS Poll-435]

41. When will the crazy end?

You were wrong about TARP, you were wrong about Krugman/nationalization.

Give it a fucking rest already.

[anaxarchos]

9. ummm...

You do not exactly inspire confidence for two reasons:

1) The Fed announced today that it was revising its estimates to reflect that unemployment would continue to rise sharply into next year and Q3 would most assuredly NOT be a "growth" quarter.

2) The teddy bear looks much less confident than your words imply.

Could you explain with a little more detail why think otherwise.

(BTW, I am convinced that the teddy bear is a dead giveaway that you are Larry Summers).

[Kurt_and_Hunter]

12. You may both be right

It is distinctly possible that Q3 will see a good-sized GDP spike. (Probably not sustainable, IMO, but a growth quarter nonetheless)

It is pretty well accepted by all forecasters that unemployment will rise throughout Q3


(And it is 100% certain that people being laid off in Q3 will be confused to hear how good the economy is.)

[anaxarchos]

18. Sadly even your estimate is subject to "downward revision"...

If you look just below at the link for the FOMC minutes, you will see the reference that I was making in my post. The operative summary is this:

"Financial conditions overall were even less supportive of economic activity, with broad equity indexes down significantly amid continued concerns about the health of the financial sector, the dollar stronger, and long-term interest rates higher. The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end."

There ain't no "spike" there, anymore. It would be hard to call the Open Market Committee "pessimistic"...

(I still think that was Larry Summers)

[PBS Poll-435]

26. Alcoa, while disappointing analysts was close enough in its earnings to inspire confidence

nt

[anaxarchos]

30. That's it?

I woulda been happier with, "the moon is in the seventh house and Jupiter is aligned with Mars..."

[PBS Poll-435]

31. Alcoa = Auto Industry & Reynolds Wrap.

I am ok with 3 cents off of consensus.

[girl gone mad]

10. Not according to the FOMC minutes.

What do you know that they don't?

http://www.calculatedriskblog.com/2009/04/march-fomc-minutes-outlook-revised-down.html

[mkultra]

29. from your link

The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end.

Things will turn. growth in 2010.

[anaxarchos]

32. Go back and look at how often the OMC has...

..."revised downward" in the past year. We may... MAY... see 1 to 2% GDP growth in 2010. Not exactly "V" shaped, is it?

[mkultra]

36. "revised downard" from their previous estimate

any growth is good. It signals the end of the slide. in truth, some areas decreased less in q4 while q3 looked brighter. That's a clear signal of growing support. the numbers for 2008 overall where slightly better in many areas than 2007.


I would suggest you take a look at the latest BEA news release. Its a factual report of the key economic areas.

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[anaxarchos]

39. I'm not sure what you are pointing to in the BEA release but...

... there is no good news there either. The original decline in GDP was projected to be -6%, the prelim was -6.2% and the actual turns out to be -6.3%. It would have been worse but imports deflated faster than expected. The only numbers better for 2008 than 2007 were the leading indicators of the decline. What do you mean by "growing support"? Are you trying to project stock market impacts, like the bear? That is an entirely different kettle of piranas... The "end of the slide" simply means that the unraveling is done (for the moment). The "growth" is due to "overshoot". What is significant, though, is this:

Unemployment will be higher and last longer than anyone projected six months ago.
As a result, the shortfall in "aggregate demand" will be deeper and last longer.
As a result, the assumptions for the "stimulus" are already underwater and will sink deeper (Krugman said this a few weeks ago).
As a result, the estimates for when a "recovery" will occur continue to be revised forward even as the projected magnitude of that "recovery" declines.

Sure, this thing may have bottomed out... and it may not have. It's dark and there may be more steps before face meets basement floor.

You can be "optimistic" if you want to, but its important not to turn this shit into a sales motivation exercise.

[mkultra]

42. the 4th quarter numbers are skewed by a reduction in auto production

IN fact, 6.18 of the 6.3% turns out to be a reduction in automotive output. If you isolate that industry by recognizing that it is being dealt with,(in some way) you can realize that they rest of the economic indicators for Q4 are below 1% decline just like Q3.


By growing support, what i mean is that some areas of GDP are showing positive signs such as services and medical. Exports and imports took a big hit but much like the BEA numbers say, it looks to me like this should be our last quarter of decline. Q3 and Q4 of 09 will flatten and 10 is growth.


If Krugman predicted economic decline, then he should be proud of himself. We all predicted it.

[anaxarchos]

43. Sorry, don't see what you report...

"IN fact, 6.18 of the 6.3% turns out to be a reduction in automotive output." If you look at table 2, in fact the decline in nondurable goods outstrips the decline in durable goods (including automotive). The narrative reports a -2.01 contribution for automotive. The export and import deltas were twice that. On the other side, I see an across the board decline in PCE. How is that at odds with what I wrote? Krugman didn't forecast "decline"... he forecast that the "stimulus" assumptions would be underwater before the porpoise ever got out of the gate. So they are...

But, we could do this all day... We'll find out soon enough. In the meantime, I'm waiting for the bear (turned bull) to tell me that we are "saved" based on one day's market performance.

[mkultra]

44. well, i counldt find it

but i didn't really look very hard. That final point you make is correct. We are essentially arguing about the weather.

The fed still and the treasury still two major acts to perform over the next five months which include the toxic debt buy up program which should help free some lending power and the 30 year bond buy up which could potentially open the flood gates on residential and commercial lending.


i guess all we can really do is wait and watch. you could always take up a short position if you really had doubts. :)

[w4rma]

14. It will *not* be all right if Geithner's rip-off is allowed to happen. (nt)

[PBS Poll-435]

33. Perhaps it will

I am not worried.

[mkultra]

37. you mean his rip off of the rich?

since they are pouring billions into the banks and raising taxes on the rich to pay for it, you mean the rip off of the rich right?

[ProSense]

5. Video

Elizabeth Warren Introduces COP's April Report

[Kurt_and_Hunter]

8. Since reality has largely overtaken the stress-test "adverse" scenario, that seems likely

I have no idea just what Treasury expects.

I assume it's worse than they let on. Terrible projections would have bad effects for the budget, support for different programs, etc.

It may be that they don't want the nationalization question to get sharper.

???

[girl gone mad]

11. Are you finally starting to get it, ProSense?

Nice to see you quote a knowledgeable, respectable source that isn't connected to the banks receiving bailout funds or a right wing think tank. Big improvement over the usual stuff.

[ProSense]

13. Get what?

That the issue is complex and no one has a corner on the right answer?

That misrepresentation of the facts add nothing to the debate?

[girl gone mad]

15. Speaking of misrepresentation of facts..

how about your misrepresentation of Simon Johnson's opinions? You inaccurately claimed Johnson was writing that the only way Treasury could put banks into receivership is if Geithner was given the additional powers he sought last week. You also stated that Johnson's article somehow negated Black's claim that Geithner hadn't done his job.

In fact, Black's assertions were correct. Geithner's legal obligation from the beginning was to take prompt corrective action, something which Treasury did not do.

You've been vehemently opposed to nationalization, but here you are linking to a report that makes an overwhelming case for nationalization, based on many of the same arguments that you've been quick to attack in the past.

[ProSense]

16. No, that's you misrepresenting facts. Johnson's statements

are quite clear: here and here

[girl gone mad]

19. Or people can just read one of the many threads..

where you http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=5390234">pull the same http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8311293&mesg_id=8311293">nonsense out of http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5392819">your http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=132&topic_id=8327009">ass. http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=132&topic_id=8285198">Over and http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8257574&mesg_id=8257574">over.

Why the need to start so many threads saying the same thing? It appears that you simply stop replying to the posters who clean your clock on this subject in thread after thread, then start new threads as if the previous discussions had never taken place.

[ProSense]

20. Wow, you have a problem reading and dealing with facts don't you

There is very little opinion of mine in any of those threads. If you have a problem with the pieces as written. express your disagreement. To mischaracterize them "same nonsense out of your ass," means you're having trouble distinguishing my opinion from the authors of a given piece.

[girl gone mad]

21. Putting words into people's mouths,

as you did when you pretended that Simon Johnson only believed nationalization was possible if Geithner sought and received additional powers (a completely bogus view since Johnson supports receivership even if these powers aren't granted), is just you pushing your opinion.

When you twist people's words around to mean what you want to mean rather than what they actually mean, that's not stating facts, that's misrepresenting opinions.

[ProSense]

23. I did no such thing.

The Obama administration last week proposed draft legislation for a “resolution authority” that would effectively permit the government to liquidate or restructure large systemic financial institutions. If passed by Congress, these powers would allow the governments to treat nonbank financial institutions more like regulated deposit-taking banks. This authority offers a clear path to recapitalize institutions without using taxpayer money and therefore avoiding some dimensions of moral hazard but, if implemented poorly, the existence of this “nuclear option” can cause panic in financial markets and substantially delay recovery. This fear may be with us already — despite all of the material and moral support already on the table, the market is pricing in the highest ever risk of default for Citigroup senior debt, i.e., about a one in three chance over the next five years. (See the credit-default spreads for major banks.)

Imagine what happens when these powers are passed. The U.S. Treasury and FDIC would immediately have the tools need to walk into America’s largest financial institutions, such as Citibank or Bank of America, and liquidate them, or rewrite their contracts and capital structures. Such powers are clearly useful: if the banks are undercapitalized, and private money is not available, then the government could force creditors to swap claims into equity, thus instantly recapitalizing the banks while avoiding use of taxpayer funds. With such steps, the problem of moral hazard, where creditors to banks are bailed out by taxpayers, would at once be forgotten. Shareholders in banks would lose through dilution, some (unsecured?) creditors would lose with debt-equity swaps, while the nation would be better off having a well-capitalized banking system. The banks would remain private but now be controlled by (ex)creditors.

However, today these powers don’t exist, and none of us know exactly how this authority would be used if it ever lands on Mr. Geithner’s desk. We’ll now have a healthy debate in Congress and then see revised versions passed and signed into law. But as this debate proceeds, creditors and shareholders in all such institutions will be nervous. We’ll be giving the Treasury a “nuclear option” and no one can be sure who is safe. A natural reaction by clients and investors of these banks will be to edge towards the exit immediately and to stay away until the dust has settled. It won’t matter whether institutions are solvent: Due to the uncertainty and risk of losses, investors and clients may run. We’ve seen repeated waves of such panics over the last year, and we can live through them, but each successive one hurts the institutions we are trying to save and delays recovery.

It doesn't take a genius to understand his point, and I had nothing to do with him making it.

[girl gone mad]

24. Nothing Johnson wrote negates Black's arguments.

Nothing.

Now, here's what you repeatedly refuse to answer: If Johnson is saying that Geithner needs these powers in order to nationalize the banks, which you claim, then why did Johnson support nationalization from the beginning of this crisis? Johnson supported receivership long before there was talk of additional powers for Treasury. Johnson will still be for receivership if these powers are not granted. Therefore, Johnson must not consider these powers are not absolutely necessary. Logic 101.

[ProSense]

25. Nationalization happens now. In addition to "However, today these powers don’t exist" you've missed

Imagine what happens when these powers are passed. The U.S. Treasury and FDIC would immediately have the tools need to walk into America’s largest financial institutions, such as Citibank or Bank of America, and liquidate them, or rewrite their contracts and capital structures. Such powers are clearly useful: if the banks are undercapitalized, and private money is not available, then the government could force creditors to swap claims into equity, thus instantly recapitalizing the banks while avoiding use of taxpayer funds. With such steps, the problem of moral hazard, where creditors to banks are bailed out by taxpayers, would at once be forgotten. Shareholders in banks would lose through dilution, some (unsecured?) creditors would lose with debt-equity swaps, while the nation would be better off having a well-capitalized banking system. The banks would remain private but now be controlled by (ex)creditors.

However, today these powers don’t exist, and none of us know exactly how this authority would be used if it ever lands on Mr. Geithner’s desk. We’ll now have a healthy debate in Congress and then see revised versions passed and signed into law. But as this debate proceeds, creditors and shareholders in all such institutions will be nervous. We’ll be giving the Treasury a “nuclear option” and no one can be sure who is safe. A natural reaction by clients and investors of these banks will be to edge towards the exit immediately and to stay away until the dust has settled. It won’t matter whether institutions are solvent: Due to the uncertainty and risk of losses, investors and clients may run. We’ve seen repeated waves of such panics over the last year, and we can live through them, but each successive one hurts the institutions we are trying to save and delays recovery.

"Such powers are clearly useful" does not mean unnecessary.

[girl gone mad]

27. Duh.. the powers Geithner is seeking don't exist today..

or else he wouldn't be seeking them.

They are not absolutely necessary. In fact, to me they look a bit like overreaching.

You still haven't answered the question. If Johnson thinks they are absolutely necessary in order to put the banks into receivership, why was he for nationalization before Treasury ever started talking about wanting more authority, and why has he stated on his blog that nationalization is still the best option regardless of whether or not the powers are granted?

[ProSense]

28. You said: "Therefore, Johnson must not consider these powers are not absolutely necessary." Also,

why do keep going on about banks when the authority as Johnson point out is about:

The Obama administration last week proposed draft legislation for a “resolution authority” that would effectively permit the government to liquidate or restructure large systemic financial institutions. If passed by Congress, these powers would allow the governments to treat nonbank financial institutions more like regulated deposit-taking banks.

There clearly is a difference.

[jeanpalmer]

17. We need someone who can level with the people

We can handle it. We're adults. Don't treat us like children.

[dgibby]

38. My money's (if I had any) is on Elizabeth Warren.

She is, IMO, the brightest bulb on the Christmas Tree. I just wish she was setting policy.

[biermeister]

45. Bloomberg reported this

Financial Rescue Nears GDP as Pledges Top $12.8 Trillion (Update1)

By Mark Pittman and Bob Ivry

March 31 (Bloomberg) -- The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

here is the link-
www.bloomberg.com/apps/news?pid=newsarchive&sid=armOzfkwtCA4

We are very much fucked big time. They have spent, lent or committed almost the 2008 GMP!