Twofish's Blog

March 27, 2009

Notes on the Geither plan

Filed under: Uncategorized — twofish @ 4:11 pm

I haven’t been blogging much here, but I’ve been very busy elsewhere on Brad Sester’s blog talking about Chinese finance and on Brad Delong’s blog talking about Geither’s Plan

kharris: Putting assets into private hands, financed with non-recourse loans, means that the FDIC will end up with the losers, but not the winners. Isn’t that the case?

FDIC has the mandate to get the best price possible for its assets, and one reason FDIC is the lead agency for dealing with loans is that it already has the experience to deal with liquidating bad loans. Losers and winners are relative. If you have a winner, charge more for it. If you have a loser, charge less for it. If you have something that is unsellable at any price, then FDIC would have to handle this anyway.

I’m trying to understand how Geithner’s proposal will leave things worse off than if you have FDIC pay everything.

kharris: Putting aside suspicion, at best what we are looking at is a situation on a knife edge, in which we hope there is some magic in involving private funds on advantageous terms.

There is. The private funds have a whole lot of money that is sitting on the sidelines. The more private money you get in, the less public money you need. Again politics comes into play. If the banks fail then FDIC has to dispose of the assets anyway, and you’ll need enough more Congressional money.

kharris: Why is straining to see never-before-experienced financial magic such a good idea? There are alternatives with which we are a good bit more familiar.

I’d like to see them. The alternatives I’ve seen are:

1) nationalization – which is likely to require far more cash than what Geithner is proposing. There are good reasons for doing nationalization, and if things are really bad then there isn’t any other choice. However, don’t kid yourself into thinking that it is going to end up being cheaper.

2) walking away – just let the banks go bad. This does appear to save money, but what happens when you wipe out investors is that they stop wanting to invest, which creates the situation we have right now.

3) pretend there is no problem – This is by far the thing that requires the least upfront case. You just pretend that the loans are good and roll them over. The trouble with this is that this causes the economy to freeze like Japan.

1) is what happened to AIG, Freddie, and Fannie. 2) is what happened to Lehmann. 3) is what Japan did.

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