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

http://delong.typepad.com/sdj/2009/03/geithner-plan-self-referential-comment-blogging.html

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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1 Comment »

  1. I posted this in response to your and Raven’s conversation at delong’s blog:

    Twofish and Raven, after working my way through everything here, this is quite a discussion, but I’d like to point out that this should not be a question of just the profession of banking, or these wide angle sideswipes. There is a real thing going on here, and you guys are having an academic argument.

    The real thing is that there is real corruption, Tim Geithner is a connected man of Wall Street (I’ve gotten accounts of such from DC lobbyists with decent grasp), and that this is not a swipe on all of Wall Street (or shouldn’t be), but rather in the way this has all been handled. Investment bankers run the show (or enough of it), between the lobbying/campaign finance/intellectual firepower/pure profit, they are by far the most powerful lobby. If government is a business, they are taking a nice profit from it. Now, which investment bankers is a good question, for it is not all, bankers are shrewd business persons, not everyone knows everything. Subsequently, they run great shell games, and putting the pieces together is the hardest part. So we deal with what we do know, and what we do know is ugly. Some evidence: Zero Hedge got a good account as to how AIG ended up being the main reason that several large banks were profitable in the last couple of months:
    http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html

    Or we have Simon Johnson’s account: http://www.theatlantic.com/doc/print/200905/imf-advice
    And of course, there is much, much more, anyone is free to ask questions, I will promptly respond.

    So yes, a colluded game is going on. One that is not beneficial to the United States as a country, or to most of the populace, unless if there is some greater plan – of course I have no idea, and to even go beyond musing such an idea would be mind boggling to me (maybe not, but I shouldn’t have to have such thought, that is the whole idea behind transparency – which we no longer have in government in this country).

    In the US, there is bankruptcy for failure, period. However, this no longer applies to those with the most significant monied interests. This has to stop. Otherwise we are stuck with the old line of let them eat cake.

    No bankruptcy, no transparency, no effective populist political party, no real prosecution (Madoff, or Mozilo, or Cramer (yes pumping and dumping is a crime)), and we are supposed to believe that the issue is a lack of proper regulation, or mistakes? No, I was in politics too long to not understand the concept of qui bono.

    The regulatory system was dismantled, it did not just fall behind although falling behind played a role as well. The regulations that you are talking about for equities/bonds are not there in the CDS market (see the Zero Hedge post). The CDS market is not the equity/bond market. Not that there isn’t corruption there as well, either dealing with the ratings agencies, or the fraudulent lending practices, or the misinformation provided in the offering of so many of the sub-prime bonds, or the pump/dump schemes, or the depth of naked shorting in the market. The list can go on and on and on. Yes, there are plenty of good people in banking, but business is business, and for many, business wins over a public ethic. When so few could amass such influence, they ran away with it. That’s kinda where I agree with you Twofish, it is more difficult to do something about the morality/ethics of a large group of people. At the end, I’m disappointed with the banker fraternity and the American Idol great unwashed. I’m disappointed with myopic professors and McMansion hair dressers. I’m disappointed to such an extent, I’m writing this at 1:30 AM, and I won’t sleep an easy night until much more is done to fix all of this. Crime must lead to punishment, and the longer we go on thinking that “As long as the music is playing, you’ve got to get up and dance,” Charles O. Prince told The Financial Times, “We’re still dancing.” And that music is just in a few people’s heads, we are going to have problems beyond belief.

    These are all things that are part of life, but still, don’t tell me this was just a mistake. Don’t piss in my cup and tell me it’s lemonade. I don’t appreciate it.

    Comment by Independent Fiscal Analyst — March 30, 2009 @ 5:35 am


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