Kevin Drum calls criticisms of the Geithner plan "glib." Which takes some real chutzpah when Drum glibly declares:

Obviously, then, there's tremendous uncertainty about future default rates. But the market appears to be valuing most mortgage-backed securities these days at something like 30 cents on the dollar. That's crazy. . . . 30 cents on the dollar simply doesn't represent a reasonable long-term value for most of this stuff.

Let's assume Drum's glib assertions are true. Why in heaven's name then does the government need private sector "skin" at all? Why not just buy these 'obviously' undervalued assets? Why does the government have to give non-recourse loans to private players to get them in? I'll tell you why - because the Geithner plan is about saving Wall Street, not saving the economy. More . . .

If Kevin realy believes what he wrote, he should be denouncing the Geithner Plan for having ANY private sector involvement. There is a killing to be made that could pay for health care, climate change and all the liberal dreams one could imagine. Of coruse the truth is Drum's asertions are not true. Nobody knows what the value of these assets is. But it is damn easy to glibly assert that they are wildly undervalued. After all, when you have no skin in the game, what's it to you?

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    Would Drum invest his own money (5.00 / 3) (#1)
    by andgarden on Sun Mar 22, 2009 at 02:20:10 PM EST
    in the sh*tpile? I sure wouldn't.

    Nobody will (5.00 / 3) (#2)
    by Big Tent Democrat on Sun Mar 22, 2009 at 02:25:03 PM EST
    And that is why the government steps in, negotiates with counterparites and gets any upside as well as downside AFTER negotiations.

    The banks holding sh*tpile take a hit now, but it is a certain hit and not 100%. Then they try and do the best they can.

    As do the rest of us.

    In the meantime, the government mangaes the sh*tpile and hopes for the best, but it can not lock in all the losses and just some of the gains.

    My point is simple, if Drum believes what he is writing, the government does not need any private sector skin.

    I agree, but for a different reason, the private sector won't have any skin in this under the Geithner plan, so what's the point?

    And yes, the counterpartioes need to decide if they are going to take their hit now, or just have a full default where the get to hold their part of the sh*tpile.


    That's a lot of glib BTD (5.00 / 1) (#3)
    by Militarytracy on Sun Mar 22, 2009 at 02:28:37 PM EST
    Imagine the Great Wall of China, now imagine it make completely out of glib. (Anybody else see Will Ferrell?)

    If the banks "take the hit" now, it will (none / 0) (#5)
    by andgarden on Sun Mar 22, 2009 at 02:31:58 PM EST
    become obvious to the rest of the world that they are insolvent. Heck, it already IS obvious.

    So we wait for the shoe to drop.


    Then let's deal with it now (5.00 / 1) (#13)
    by Big Tent Democrat on Sun Mar 22, 2009 at 03:41:04 PM EST
    I think people like Geithner are (none / 0) (#16)
    by inclusiveheart on Sun Mar 22, 2009 at 03:54:57 PM EST
    basically trying not to deal with it now.  I think his objective is to wait to bring these things to market on a day when their value is higher.

    When that day will come and how many injections of liquidity will be required in the interim is the fantastically scary question in my mind.

    I think he really thinks that these financial institutions can grow their way out of their insolvency and that we can get away with never actually facing the depth of the problem because the market will eventually restore itself - with a lot of cash from the government of course.  rolling eyes.


    How much money do you want (none / 0) (#9)
    by iluvela on Sun Mar 22, 2009 at 03:24:05 PM EST
    Uncle Sam to print? How much deeper do you want the budget deficit?

    Under the Geithner plan, whatever it end up being,  the risk is spread out among the government and the private sector. As opposed to the government taking the entire hit, whatever that may end up being.

    Also under the Geithner plan the market will determine the value and that value can be different from transaction to transaction as the market dictates. If the government flies solo then it will most likely end up being one price fits all because to do otherwise would be discriminating on securities that no one right now knows what they are worth. And if the players know this then they will collude to get the highest price they can for everyone, as opposed to being at the mercy of the market.

    If I am a holder of these assets I want the government to fly solo. I want that because I would hold no greater leverage than to have the government as my trading partner because no one has more motivation to help me than the government given the situation they are in with the economy.

    The private investors on the other hand can take their money elsewhere. There is no leverage with them.

    So if you want to pay top dollar to everyone then having the government be the sole purchaser is the surest way to do that.


    Now you're worried asbout 30B? (5.00 / 2) (#12)
    by Big Tent Democrat on Sun Mar 22, 2009 at 03:40:48 PM EST
    Cuz that is what the private sector skin is. When the government is printing trillions, another 30B is a drop in the bucket.

    30B now (none / 0) (#17)
    by iluvela on Sun Mar 22, 2009 at 03:55:52 PM EST
    With loans and/or guarantees 30B is pennies compared to what the private sector will invest. Geitner hinted at a trillion alone in loans. Of couse if that happened we don't know what he would require of the borrowers as to their own money in order to qualify for the trillion. Match the trillion to play?

    And then you have those who don't need to borrow. The Saudis as just one example, who can pump all the money they want for a good deal.

    I'd bet the ranch that Obama is not going to go your route. In fact he hasn't even hinted anything close. That they call a clue.

    Obama they call 'risk adverse' at anything he does. He isn't going to hang himself with anything. He is not one to take the big gamble. That they also call a clue.

    The risk will be spread between government and the private sector. Bet on it.


    As for what Obama is going to do (5.00 / 1) (#20)
    by Big Tent Democrat on Sun Mar 22, 2009 at 03:58:28 PM EST
    Well duh he is not for what I and others want to do here.

    Sort of the freaking point of my writing about it.



    you simply are uninformed (none / 0) (#19)
    by Big Tent Democrat on Sun Mar 22, 2009 at 03:57:23 PM EST
    the private sector's investment loss is capped at 30B. the government would be on the hook for less.

    You simply do not know what you are talking about.


    Capped! LOL (none / 0) (#22)
    by iluvela on Sun Mar 22, 2009 at 04:14:33 PM EST
    Sure thing. Maybe you meant to say a CAPitalism. Where there is no such thing as capped capital in the free market.

    Capped! Like if someone came along and said I'll buy a 10 trillions worth Obama would say - nope - capped.


    I see (5.00 / 3) (#23)
    by Big Tent Democrat on Sun Mar 22, 2009 at 04:17:49 PM EST
    I tell you what, if there is so much private sector money dying to be the sh*tpile, why in the frak do we need the Geithner Plan at all?

    Rightly or wrongly here's why: (none / 0) (#28)
    by steviez314 on Sun Mar 22, 2009 at 04:36:44 PM EST
    There IS private money wanting to buy bank assets.  But hedge funds want to use leverage to enhance theri returns.  Obviously, that got insane with 10- up to 30-1 leverage they were getting from the banks.

    Now, HFs are getting zilch.  Banks aren't making loans to them, just like they're not making loans to anyone else.  So, the government is acting as the bank, providing leverage of about 6 to 1. (That's 850B in loans to 150B in capital--pleae keep in mind that 120B in capital is the government's..the HFs are not putting in 30B leveraging it to 1T, they get only 20% of the equity)(my reading of the plan is that 20% is the minimum-the HFs might want more).

    Now, why is the gov't getting the hedgies involved at all?  This is actually to keep the gov't honest.  Despite what you might have read, there is no incentive here for the hedge funds to overpay..they still need a lower cost to make a higher profit, they are guaranteed nothing.  Without HFs bidding, it would be easier to cliam that the gov't was overpaying for the assets to help the banks, which is not something an ordinary equity partner would do.


    that would be WRONGLY (none / 0) (#34)
    by Big Tent Democrat on Sun Mar 22, 2009 at 04:53:51 PM EST
    We're not in this to bail out wall Street or the banks.

    You make my point.


    I think all points of disagreement end up coming (none / 0) (#40)
    by steviez314 on Sun Mar 22, 2009 at 05:09:47 PM EST
    down to "do we haircut the bondholders or not."

    If the answer is "not", then the question becomes what plan has the best chance of increasing lending.  I think this one has a good shot as any other.


    the answer must be yes (none / 0) (#48)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:23:46 PM EST
    See my latest post.

    This makes some sense (none / 0) (#37)
    by Militarytracy on Sun Mar 22, 2009 at 05:01:20 PM EST
    yet, why is Drum whining about 30 cents on the dollar then?  How he can expect the private sector to overpay and not look for profit as if it were a charity of sorts in this economic turmoil and risk?  If HFs take on this risk shouldn't there the possiblity of profit involved?

    Here's another problem I have (none / 0) (#43)
    by Militarytracy on Sun Mar 22, 2009 at 05:19:09 PM EST
    with attempting to clean up the balance sheets in this manner.......is this it?  Because most of this toxic stuff is unregulated how do we know there isn't more out there that isn't being disclosed at this time and it's going to show up in the next quarter and a new crisis all over again?  

    The private sector investments are NOT (none / 0) (#41)
    by Green26 on Sun Mar 22, 2009 at 05:15:00 PM EST
    capped at $30 billion. In fact, there is no cap at all on private investments.

    Again, according to the NY Times article, there are 3 prongs in the approach, only 2 of which involve private investment.

    1. "the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money."

    This looks like the risk and reward would be shared 50-50 between private investors and the Treasury. There is no cap on private investment.

    2. "the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money"

    "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, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent."

    Again, there is no cap on private investment. Private investment will be between 3% and 20% of the equity portion (15%) of the special investment partnerships.


    Of course (5.00 / 2) (#46)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:22:42 PM EST
    There is private money linging up to take the deal I imagine - Heads they win, tails the taxpayers lose. What's not to like from their perspective?

    That's the part that is going to fry (5.00 / 1) (#62)
    by Militarytracy on Sun Mar 22, 2009 at 05:54:05 PM EST
    Americans even more, as if they aren't fried enough!  Sort of reminds me of IPOs too, how come we (you and I) can't get a non-recourse loan for 85% to buy into this?  

    Iluvela is correct. (5.00 / 1) (#60)
    by Green26 on Sun Mar 22, 2009 at 05:50:58 PM EST
    The new plan is being created to develop and encourage a process that will more accurately determine the market value of the bad assets.

    There will be auctions for the assets, with presumably multiple bidders. Thus, some bidding competition.

    The new proposal will create and encourage multiple bidders.

    Some, including even the US I suspect, believe the multiple private sector bidders will be better at pricing the assets than the government.


    So we create a new junk market? (5.00 / 1) (#64)
    by Militarytracy on Sun Mar 22, 2009 at 05:55:37 PM EST
    Because I don't think this is going to be the only time we are going to be doing this.

    Missing Something? (5.00 / 3) (#75)
    by BackFromOhio on Sun Mar 22, 2009 at 06:32:13 PM EST
    How can we talk about market value when government $ would be propping up everything?
    How come it's capitalism when the government intervenes in the market place to give equity and debt to financial institutions but socialism when the government proposes to intervene in anything that would help mainstreet or the average citizen, as with healthcare?  

    The reason (5.00 / 1) (#6)
    by iluvela on Sun Mar 22, 2009 at 02:58:15 PM EST
    a lot of people won't buy without government guarantees is because the derivatives themselves have yet to be unwound. They are vehicles that hold both good AAA paper loans and sub-mortgage loans.

    You call them sh*tpiles but it yet to be determined which are good investments and which have already reached the point of little returns. That is the problem. It is the uncertainty of what exactly you are buying that is the bigger problem - not necessarily the remaining derivatives  themselves as again it is yet to be determined what they hold. If the derivatives could be unwound and people knew exactly what they were buying then they would buy those that made sense.

    Problem is that it will likely take years to do that and the economy can't stand to add those extra years to the recovery process. So faster ways are being devised much to the chagrin of those who don't understand the urgency involved and the minimum amount of viable solutions available.

    Given the foreclosure rate I'd say that the derivatives on average are worth way more than 30 cents on the dollar as the foreclosure rate does not justify such a markdown. Add in the fact that most of the homes that have been foreclosed still hold present value and even higher future value,it just adds to the value of the derivatives. 30 cent on the dollar is way to low especially if the government guarantees them. With government guarantees they are as sound an investment as T-bills and most likely more profitable. Those wanting to pay 30 cents are looking for a killing on ROI. They rightfully should not receive that if the derivatives are guaranteed. But if they are not guaranteed then that is an entirely different matter.

    Obama's biggest challenge is to get them sold and off the banks books asap. His secondary problem is to do so at the least expense to the taxpayer. Now whether it is cheaper to lend out non-recourse loans or to underwrite and guarantee the value or portion of the value is what they are trying to determine imo. The winning combination is ASAP & Lest Cost. Of course when even the administration is flying blind as to the value of the derivatives it makes finding the right combination a daunting task. Meanwhile the clock is ticking on the economy and they must bite the bullet in the very near future and pull the trigger.


    Ok, then (none / 0) (#8)
    by Democratic Cat on Sun Mar 22, 2009 at 03:07:00 PM EST
    I'd say that the derivatives on average are worth way more than 30 cents on the dollar

    If you're so sure, how much money are you putting down to buy them?  And don't say that the "average" value doesn't matter because there's a distribution of values and you can't be sure of what you are buying.  If their average value is "way more than 30 cents," then you should invest some money and on average you'll make a bundle.


    Almost no one is selling these assets (5.00 / 1) (#51)
    by Green26 on Sun Mar 22, 2009 at 05:34:45 PM EST
    for 30%. Sellers generally won't sell for that amount.

    This is why the US is trying to come up with a way to encourage more purchasers, especially more purchasers who will pay enough to get the banks to sell.


    If they do not want to sell (5.00 / 3) (#52)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:37:23 PM EST
    why is Gawd's name should we try to encourage a sale?

    Because they need the cash to (5.00 / 2) (#55)
    by inclusiveheart on Sun Mar 22, 2009 at 05:43:28 PM EST
    pay the bonuses!

    Well, okay.  Its as good an answer as any at this point isn't it?

    Yes.  Guilty.  Being glib.  Sorry.


    We want to encourage the sale of (5.00 / 1) (#65)
    by Green26 on Sun Mar 22, 2009 at 05:56:00 PM EST
    the bad assets to assist the banks in cleaning up their balance sheets. Eliminating bad or questonable assets will also improve the markets for the banks' stock and bonds, which eventually will allow them to raise additional funds, if necessary, at a more affordable rate.

    Uncertainty over the amount and value of bad or questionable assets is probably the biggest thing impacting the banks at this time. The recession is also affecting them too.


    Getting a defensible... (5.00 / 2) (#82)
    by santarita on Sun Mar 22, 2009 at 07:56:32 PM EST
    valuation of those assets is key. If this plan does it, Geithner will look like the hero instead of the goat.

    Could be good ... (5.00 / 2) (#83)
    by santarita on Sun Mar 22, 2009 at 07:59:30 PM EST
    for the banks or bad.  Once there is a benchmark value, it may become much clearer which banks are too weak to survive.

    Bingo (none / 0) (#85)
    by gyrfalcon on Sun Mar 22, 2009 at 09:01:30 PM EST
    My impression is that all banks (none / 0) (#86)
    by Green26 on Sun Mar 22, 2009 at 09:37:04 PM EST
    will look better, because the price paid will be better than what is being offered now and above what the banks are carrying the assets at on their balance sheets. Plus, the toxic assets will be off the balance sheets, and no one will be able to worry or complain about the toxic assets anymore.

    I am curious as to how the auctions will work. Will the bank have to commit to sell the particular assets, or will their be a minimum bid--either disclosed or undisclosed.


    I'm out there looking (none / 0) (#18)
    by iluvela on Sun Mar 22, 2009 at 03:56:33 PM EST
    There are investment groups looking for money to pool, especially if the government goes with the guarantee plan. So if I see a deal with enough potential upside I'll play just like I did with Citi. I bought on the good news and rode it for 8 or 9 days almost tripled my investment and got out.

    I think there is a good chance of similar quick flips with the derivatives also. Once people see others buying it creates the Herd Theory and the prices will go up. Buy as low as you can in the beginning and ride it for a quick flip. It probably won't offer triple profits but if I can add 25% in a short period without much risk or any risk at all then who wouldn't do that?


    This post answers a lot of questions (5.00 / 3) (#27)
    by FreakyBeaky on Sun Mar 22, 2009 at 04:25:57 PM EST
    Namely, as far as the poster is concerned, the proper approach to the financial crisis is one that will allow him or her to speculate using as much taxpayer money and as little of his/her own as possible.

    Word to the poster, riding "it" for 8 - 9 days and getting out, Herd Theory, quick flip, etc., has nothing to do with solving the financial crisis and undermines  your credibility.  Yours is the mentality and behavior that has caused the financial crisis.  Yours is the sort of expertise that is NOT needed.  Those of us who oppose using taxpayer money to prop up zombie banks and artificially inflate the price of otherwise worthless (oh, alright, $0.30/$1.00) paper are tired of being ridden and flipped, and not interested in spending billions after billions after billions to finance another pump-and-dump (you left that buzzphrase out).  


    Wrong (5.00 / 1) (#36)
    by iluvela on Sun Mar 22, 2009 at 04:59:50 PM EST
    My playing the stock market does nothing to undermine my credibility. If anything I added to the economy by helping Citi Stocks go up which lends confidence in the marketplace to Citi which is what they need in order to produce more deposits and profits.

    As for speculating with taxpayer money - that is funny. There are two ways to go here. The private sector or nationalization. With nationalization and government holding the assets as some are now suggesting it is the government who is then speculating with your tax dollars as opposed to private investors. In either case they are both speculating on the future value of the assets. Right?

    So if the government decides, as they have so far, to sell to the private sector then why should I or you not participate in making money form a investment that the government is making available?

    Are T-Bill bad and evil. Because it is our tax dollars that pay the interest on those. So why shouldn't our tax dollars pay interest on other government offered investments - which without the economy would take decades to recover?

    You guys are funny who take the angry populist approach to how you see things. If I am willing to risk my money to buy assets that will rid the banks of them and therefore help the economy recover that is a bad thing? And is it evil to expect to profit from my investment to help the economy? H*ll no it isn't. Who is going to buy them without the chance to make money. I may as well buy T-Bills and let our taxes make me guaranteed profit from them. Either way it is taxpayer money. Get it?


    It's a hyper-capitalist (none / 0) (#84)
    by gyrfalcon on Sun Mar 22, 2009 at 09:00:38 PM EST
    system. Frankly, I'd far rather live under a socialist one (and I've tried, the good ones won't take me).  But given what we have is a capitalist system, seems to me kinda sorta we should maybe perhaps be using capitalist incentives and dynamics to fix this.

    IOW, I basically agree with you.  Don't like it much, but I don't see an effective alternative.


    Oh boy did I call it right with you :) (5.00 / 1) (#67)
    by Militarytracy on Sun Mar 22, 2009 at 06:00:42 PM EST
    It is bizarre (5.00 / 2) (#7)
    by Democratic Cat on Sun Mar 22, 2009 at 03:03:36 PM EST
    to see people claim that the market has it wrong where the valuation of these assets is concerned. You are right on the money: If these assets are so "obviously" undervalued, then their market value would inevitably and quickly rise.  The fact that they haven't and that government intervention is necessary suggests that they aren't "obviously" undervalued. No one knows what they are worth, but the current market value is the market's best guess.

    Does anyone else feel like they've (5.00 / 7) (#21)
    by inclusiveheart on Sun Mar 22, 2009 at 04:01:38 PM EST
    gone down the rabbit hole when they are reading about a whole market of stuff that people are selling comprised of things that no one can price and no one can define?

    This discussion keeps making me feel like I'm at the Mad Hatter's Tea Party.


    That's because you assume there is a 'market' (5.00 / 1) (#25)
    by steviez314 on Sun Mar 22, 2009 at 04:21:08 PM EST
    in the sense of a stock market, with many, many players, centralized exchanges and clearinghouses and published prices.

    There really is no such thing for banks' mortgage loans, CDOs and CDSs.  You'd be very surprised what average daily volumes are here, and how the need for one illiquid seller to sell causes pressure on the "last price" that mark to market has forced non-sellers to use.


    Even Better! (5.00 / 1) (#63)
    by inclusiveheart on Sun Mar 22, 2009 at 05:55:20 PM EST
    Can't price them!

    No one knows what they are!

    And... there's no market for them!

    This story is an absurdists dream.

    This is an off Broadway play.

    Makes "Waiting for Godot" look small time.


    Inclusive, some of what you say is (none / 0) (#68)
    by Green26 on Sun Mar 22, 2009 at 06:07:43 PM EST
    true. No real market. Thus, the market can't price. Buyers concerned about what's actually in some of the complicated securities. Banks (and others) have had to write down many of the assets, due to the mark to market rule and otherwise. Uncertainty over the value of real estate. Uncertainty over the rising number of foreclosures. Yet, many of the mortgage-back and related securities have not defaulted and are still paying (but no one knows their true value).

    Mainly bottom feeders willing to buy. Banks not willing to sell because they believe the price is far too low. While I don't know what it is, the bid and ask for many of the assets is way apart. In extreme cases, maybe as much as 30-40% to 70-80%.

    The bid and ask in many real estate markets is similar, like in some high-end resort markets (where there are owners who don't have to sell). Buyers are only willing to pay a lower amount; sellers want a higher amount. Huge gap. Few sales.


    It is more and more difficult to (5.00 / 1) (#74)
    by inclusiveheart on Sun Mar 22, 2009 at 06:26:09 PM EST
    believe that these things actually exist and even harder to take seriously any claims of loss that are being made.  Not that they do not exist and not that there are no losses, but the sob story from these financial institutions is starting to sound a lot like my Grandmother who complained when "a nice man" came to her front door promising all kinds of amazing wealth if she wrote him a $10,000 check - which she did.  Not surprisingly the "nice man" never came back to deliver the boatloads of cash he promised to bring back to her.  Nobody bailed her out.  She had all the money in the family for one thing and apparently the US government didn't until recently swoop down and give you cash because you are stupid.  I know.  Yes.  I DO understand that my Grandmother's personal loss is not the same as the losses at these financial institutions because hers did not threaten the global economy, but I do still think that the foolishness here has to be addressed and I'm not seeing that.  There seems to be nothing in the government's response to this situtation that is aimed at preventing these firms from creating yet another round of unpriceable, undefineable, unmarketable products to invest in and not be able to sell.  At least my Grandmother stopped pulling her check book out every time "a nice man" came to the door after her experience.

    There is no real market for many (5.00 / 1) (#49)
    by Green26 on Sun Mar 22, 2009 at 05:25:51 PM EST
    of these assets at this time. The "market" for some of the assets is illiquid, thin and irrational. There are few interested buyers.

    That's why banks won't sell the assets now--because the buyers are basically bottom feeders looking for a screaming deal or a desparate seller.


    Shorter Drum (5.00 / 1) (#10)
    by TeresaInSnow2 on Sun Mar 22, 2009 at 03:30:41 PM EST
    My cubic zirconium is worth more than diamonds.  
    The market is wrong ;-).


    So now we "eat it?" (5.00 / 4) (#15)
    by Big Tent Democrat on Sun Mar 22, 2009 at 03:50:47 PM EST
    Just a post before, there was a big upside.

    It all sounds freaking glib to me.

    Oh by the way, nationalization does NOT mean paying off the counterparties at a 100 cents on the dollar.

    But the Geithner Plan DOES contemplate that.

    Drum is so full of sh*t on this, it is not even funny. He should just shut up because he is making a fool of himself.  

    I'd remind you that nationalization, the Swedish (5.00 / 1) (#26)
    by steviez314 on Sun Mar 22, 2009 at 04:25:04 PM EST
    way, DOES involve paying off the bondholders 100%, just not the equity holders.

    I am for modifeid Swedish (5.00 / 1) (#33)
    by Big Tent Democrat on Sun Mar 22, 2009 at 04:52:25 PM EST
    We determine who is insolvent and negotiate with the stakeholders. We can provide guarantees to banks that pass a real stress test.

    I can't imagine how those negotiations would go! (none / 0) (#38)
    by steviez314 on Sun Mar 22, 2009 at 05:04:35 PM EST
    This was the beauty of the good bank/bad bank approach.

    It took the bad assets, matched them up with certain liabilities and put them into a seperate entity.  It was telling the creditors, "look, we have no idea what these assets are worth, and we don't care..they're yours.  Your liability isn't maturing yet, so maybe by the time it does, the assets will cover it, but at least you have time and the market with you."


    You can't? (5.00 / 1) (#39)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:09:04 PM EST
    Obviously you have never seen a bankruptcy situation where the debtor brought in a new post petition creditor who insisted upon haircuts for existing creditors and seniority over all creditors.

    You make this sound more difficult than it is.  


    I was more thinking about how a negotiation (none / 0) (#42)
    by steviez314 on Sun Mar 22, 2009 at 05:16:00 PM EST
    vs. the full force of the Federal government would go.

    On the other hand, the way the AIG bonus issue has gone, perhaps a bondholder shouldn't be worried about facing the US gov't on the other side of the bargaining table.

    On the third hand, if the bondholder is the Cinese governmnet, THAT would be a very interesting negotiation.


    Indeed (none / 0) (#45)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:21:17 PM EST
    The government would be in a tremendous bargaining position. BTW, see my latest post re: GM bondholders crying about getting shafted.

    The big banks are NOT insolvent (none / 0) (#57)
    by Green26 on Sun Mar 22, 2009 at 05:45:26 PM EST
    at this time. The capital ratios of the big banks look pretty good at this time. Citi and BofA have been profitable the past two months.

    The FDIC doesn't have authority to take or close a solvent bank with good capital ratios, and there's no reason to take over or close a solvent bank.

    Banks, with their advisors and accounting firms looking closely over their shoulders, have been looking very closely at valuations in recent quarters. I can't imagine the valuations are off much on the high side. In fact, due to the mark to market rule--and the lack of a market for some assets--I suspect that many assets are under-valued.

    In this age when accounting firms get sued left and right, do you think accounting firms are allowing their banking clients to over-value assets?

    The biggest risks are that the housing market and US economy will decline even further and/or last for many years.


    That's great news!!! (5.00 / 3) (#58)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:46:29 PM EST
    So why the frak do we need this Geithner Plan?

    Admitting that I'll be going (5.00 / 1) (#80)
    by Green26 on Sun Mar 22, 2009 at 07:42:02 PM EST
    beyond my knowledge and expertise on this one, I'll take a stab at the question.

    The spigot for lending still hasn't been turned back on enough. My theory is that this is caused in part by banks wanting to keep their powder dry while they wait to see what happens with the housing market and the economy. By powder dry, I think the banks, who now have good capital ratios (in part due to the US investment), want to be careful to make sure their capital ratios don't go south on them again--due to further deterioration in certain asset values (which includes possible deterioriation of real estate loans) and the two things I already mentioned.

    The banks can't and/or don't want to raise more money, via stock or bonds sales, due their low stock prices and their likely having to price any bonds at high rates (i.e. high interest rates)--assuming there would be many buyers.

    People, including some on this site, don't trust the banks or their balances sheets--especially with these "toxic" assets. Removing some or most of the toxic assets would result in more trust of the banks balance sheets and there would be no risk that the banks would fail.

    However, the banks don't want to sell assets they believe are undervalued, at very low prices, i.e. to the bottom feeders. If someone was willing to pay more for the assets, I assume it is thought that the banks would sell some of them.

    Recall that the publicity on the original TARP plan was that the government was going to buy the toxic assets. My understanding was that Paulson abandoned that plan primarily because it was realized that there wasn't a good way to set a fair sale price, i.e. without the government running a big risk that it would be paying too much. I believe it was thought that the government would recoup all or most of its purchase price eventually--assuming it didn't pay too much.

    Keep in mind that most of these securities and many of the real estate loans are still paying and not in default. While this may change in the future (especially if the real estate/housing market goes down further or doesn't recover for several years and/or the current recession gets worse or doesn't end for several years), it is likely, even highly likely, that these assets will ultimately be worth way way more than what people are willing to pay for them now.

    Since I believe the mortgage default rate is around 10% (or 12), it doesn't make sense that mortgage/real estate-related securities would be worth only 30% or 40%. This isn't quite an apples to apples comparison, but hopefully you can see the general point. A huge percentage of the subprime ARM's are in default.

    Since the government can afford to hold the securities and assets for a long time, or even to maturity, it is thought that the US, or its money, is the ticket to helping get these assets off the books of the banks.


    The first mistake was reading Drum (5.00 / 1) (#31)
    by pluege on Sun Mar 22, 2009 at 04:45:10 PM EST
    the second is responding to him and quoting him.

    Geithner et al (none / 0) (#24)
    by Alien Abductee on Sun Mar 22, 2009 at 04:20:06 PM EST
    have evidently calculated that it's preferable to try to keep the game running but to ease it back onto sounder financial footing over time. They don't need to believe the values of the securities are worth either what the banks say or what the market says right now. If things can be kept running, if money still flows enough to keep the system afloat, that might be preferable to the alternative. End the expansion of the scheme that was fuelled by endless debt, cut off the big payday for the schemers by shutting down their operations like AIGFP, keep the mortgage payers paying into the system as much as possible, and hope that over time the bubble gets worked through and burped out of the system. It sounds awfully like a recipe for 90s Japan though.

    Me, I'd be happy to see nationalization...Chavez style. :)


    I think you don't understand. (5.00 / 2) (#32)
    by Romberry on Sun Mar 22, 2009 at 04:47:12 PM EST
    You wrote "hope that over time the bubble gets worked through and burped out of the system."

    That isn't what the Geithner plan does or attempts to do. What they are trying to do is re-inflate the damn bubble. What they are saying, in effect, is that the tulips really are worth what people were paying for them...and the tulip market will recover if we're patient. Well, I have news for Geithner: Burst speculative bubbles don't re-inflate (nor should they) and the tulip market never did come back.

    (Funny tulip toon here.)


    I think there's a little more (none / 0) (#72)
    by Alien Abductee on Sun Mar 22, 2009 at 06:21:19 PM EST
    sleight of hand involved than that. It's more like falling off a cliff only hurts once you hit bottom. They're trying to buy time, thinking that if that moment can be put off, eventually there'll be enough updrafts to glide to a nice soft landing instead. It's Japan all over again, except they're pursuing that course actively instead of by failing to act.

    They can't imagine that maybe things SHOULD be allowed to hit the ground and go splat, with a safety net in place to protect the innocent bystanders, and that new and more socially beneficial ways of doing things could be created after the old system is allowed to kill itself off with its own excesses. I'm quite disappointed with the administration's self-limiting choices on this whole disaster, which could have been an opportunity.


    Got that right (none / 0) (#29)
    by Romberry on Sun Mar 22, 2009 at 04:40:47 PM EST
    Drum does need to shut up before he makes an utter fool of himself. He has absolutely no understanding of how MBS work and why default rates need not be anywhere close to even 20 percent for a great many of these toxic assets to be worthless for all time.

    Nothing hurts us so much as what we know that isn't so. Apparently Kevin Drum knows a thing or three that isn't so.


    Great (5.00 / 3) (#35)
    by Big Tent Democrat on Sun Mar 22, 2009 at 04:54:35 PM EST
    so obviously the sh*tpile is a bad investment unless subsidized entirely by the government.

    Stupid sh*t.

    I don't know about (none / 0) (#44)
    by iluvela on Sun Mar 22, 2009 at 05:20:18 PM EST
    subsidized entirely by the government. I said in another post that an option was to have them guaranteed or 'partially' guaranteed. If Obama goes the guaranteed route then I'd like to see them only partially guaranteed because if they will pay more than T-Bills then there should be more risk involved. That would be in line with market dynamics.

    Optional? (none / 0) (#47)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:23:21 PM EST
    Well, that's different. Optional for whom? Sheesh.

    I didn't say "optional" (none / 0) (#53)
    by iluvela on Sun Mar 22, 2009 at 05:38:59 PM EST
    I said "option". As in one option being, as opposed to lending money, to guarantee the assets when sold. To which I favor only a partial guarantee, not a 100% guarantee. There should be risk with a higher return investment. And there does need to be a higher return on these assets to guarantee investment in them.

    So again I favor only a partial guarantee of the assets if Obama takes the guarantee route.


    Why is it an option? (5.00 / 3) (#56)
    by Big Tent Democrat on Sun Mar 22, 2009 at 05:43:36 PM EST
    You just told me private money is dying to buy the Sh*tpile? Why should we not just let all these "eager buyers" just buy it?

    Forget the option part (5.00 / 1) (#70)
    by iluvela on Sun Mar 22, 2009 at 06:14:05 PM EST
    you just can't wrap your maid around what I said. Not important at this juncture anyway.

    Why aren't these "eager buyers" just buying it now? Because right now it is not a good investment without incentives. Which is what Obama is trying to do - create incentives for investors to buy via loans or via guarantees of asset value. Either one makes the investments more attractive.

    Now on the other hand if the government were to buy the assets and sit on them as you suggest where is the value for the taxpayer? There is none. They get dead assets that no one else will buy without incentives. Now that is a great deal for the taxpayer! Saddle them with bad debt and either stop the flow of borrowed money or affordable borrowed money from China because the balance sheet of America has all these trillion$ of bad assets with no market outlet for them. That would not exactly be smart capitalism.


    Heh (none / 0) (#73)
    by Big Tent Democrat on Sun Mar 22, 2009 at 06:22:30 PM EST
    "Because right now it is not a good investment without incentives."

    How about we give them a tax credit or something? Why give them a trillion dollars? You are so funny.


    I'm funny? (5.00 / 1) (#76)
    by iluvela on Sun Mar 22, 2009 at 06:37:52 PM EST
    How about you? You want the government to spend trillons of those same taxpayer dollars to buy them and then sit on them.

    That's like overpaying for a junk car and then letting it sit up on blocks in the driveway for all the neighbors to see! LOL. Meanwhile it sits and rusts.

    And speaking of rusting, buying and sitting on those assets does nothing to stimulate the sale of similar assets in the rest of the world. It's not like we are in this alone. There is a world economy at stake here and buying and sitting on assets by the US government does nothing for the bigger picture.

    So your deal is no deal. You buy and sit on them thereby stopping the flow of borrowed money or at the least driving up the cost of that money from China - and then in addition you freeze/kill the world market for the sale of such assets elsewhere in the world. Brilliant my man!


    Why do I feel like I'm arguing with a broke (none / 0) (#50)
    by Militarytracy on Sun Mar 22, 2009 at 05:26:55 PM EST
    day trader?

    This is reminding me of the guy (5.00 / 1) (#54)
    by inclusiveheart on Sun Mar 22, 2009 at 05:39:09 PM EST
    who came into the ice cream parlor I was working in one time wanting change for a twenty.  He was really good.  By his calculation in making change for him, I was going to end up giving him about $35 bucks in return for his twenty.  Fortunately for me, I was able to keep up with his math and I smiled - because he really was good - and told him that I was done making change.  He smiled and thanked me and went looking for another mark at some other cash register.

    He must have gotten that from (none / 0) (#59)
    by steviez314 on Sun Mar 22, 2009 at 05:46:43 PM EST
    Abbott and Costello's "Two tens for a five":



    Actually, anyone who has ever worked (none / 0) (#69)
    by inclusiveheart on Sun Mar 22, 2009 at 06:12:54 PM EST
    in retail has probably encountered one of these old time grifters at one point or another - whether they knew it or not.  I had heard about guys like this before I met this man.  They come in asking for change in a particular assortment like "eight quarters, three fives, a ten, and seven ones" for a twenty.  Then if you agree to that - keeping in mind they've already gotten more than they put in - they "change their minds" and ask you to break the ten or the five and basically they can turn a twenty into a lot of money if someone isn't really following the math.   It was sad because he was definitely gifted where it came to numbers.  His problem with me was that I was pretty talented myself.  He could have been a very productive member of society or even a brilliant WS trader lol - but he probably didn't get the opportunity to go to Harvard or Yale.  But the reason why most retail outfits tell you they won't make change is because of this scam.  I, however, was up for the challenge and figured that if I came up short, I'd pay any losses I contributed to into the til which is what they made you do anyway if you screwed up.

    Bizarre (none / 0) (#61)
    by iluvela on Sun Mar 22, 2009 at 05:53:47 PM EST
    Day trader? My post does not even hint at day trading. Not that there is anything wrong with day trading. I will on occasion play a stock if I think it is going to rise in value over the short term. But I don't see that as day trading because I don't trade everyday. Instead I see it as smart occasional short term investing.

    It's not much different than breeding and then selling the new puppies. You know, born a few weeks ago and then flip them for a quick profit.


    And that sort of an attitude (5.00 / 1) (#66)
    by Militarytracy on Sun Mar 22, 2009 at 05:57:32 PM EST
    about breeding dogs is called a puppy mill.

    99.9% (none / 0) (#71)
    by iluvela on Sun Mar 22, 2009 at 06:19:16 PM EST
    of breeders are puppy mills because they sell puppies. Save for the one or two they keep every few litters to keep their line going they sell the puppies. That is the business they are in.

    I see you don't know your puppymills (5.00 / 2) (#77)
    by nycstray on Sun Mar 22, 2009 at 06:40:36 PM EST
    or breeders.

    How does someone develop a (none / 0) (#89)
    by Militarytracy on Mon Mar 23, 2009 at 05:51:32 AM EST
    line, something they would want to keep going? By having dogs with certain identifiable attributes within the standard that are considered exceptional animals.  How does that happen though, this acknowledgement that the animal is exceptional and also meets the breed standard?  By going before judges of the breed and acquiring evaluations of excellence from more than one or two judges......do you have any idea of the expense involved there?  There is no profit in breeding dogs if your goal is to produce animals of excellence within the standard that will in essence provide some protection of the gene pool and insure to some extent that the standard is maintained.  Puppy mills do not care about the breed standard, they only care about producing an animal with documentation that it is "purebred".  My last litter was seven dogs.  One male went to a couple who had been waiting six months for one of my dogs.  The other six are four months old and still with me because the litter was so consistent and so exceptional it hasn't shaken out yet which animals I need to keep for my line.  When these pups leave here they will probably be about six months old and already be able to pass a basic obedience test by then, and I can promise you I will not be making one single nickel on them.  Is it possible that at some point my line becomes so well known and sought that I will make a profit due to demand?  Sure, but with this economy  and its future....doubtful.  I love my breed though.

    Bizzare ... (5.00 / 1) (#78)
    by FreakyBeaky on Sun Mar 22, 2009 at 06:46:25 PM EST
    ... is asking the taxpayers to finance your short-term stock flipping.

    Which, by the way, is not investing.  It's speculating.


    30 cents on the dollar? (5.00 / 1) (#90)
    by BobTinKY on Mon Mar 23, 2009 at 07:59:44 AM EST
    As was pointed out by Atrios, if you are being told the Treasury Secretary, who has the full confidence of the President, will soon enact a plan to provide a trillion dollar subsidy to those who will buy these toxic assets, why should anyone buy one today?  Wait until next weke when you only have to put up 5% of your own money.

    So the Geithner plan not only provides no "market solution" to price discovery, the mere promise of it is already distorting the market value, such as it is , of these assets.  

    If we assume the auction with 95% government susidy to the bidders results in the banks unloading 100% of these assets, what happens in the secondary market when potential purchasers/traders are not being subsidized?  Absent a continuing subsidy to all subsequent purchasers, how on Earth do the assets continue to maintain the value received by the banks in the auction?  

    Even if I put in only $5 of my own money and someone else provides the other $95 needed to make a given inestment, I don't want my $5 to turn into $3 or $2 or $1.  And that is exactly what will happen if post-auction investors are not similarly subsidized, which the plan, thankfully, does not do.

    So, like Krugman, I believe the plan will fail, but not as catastrophically as Krugman believes.  Krugman seems to assume the auction will proceed and the price of toxic assets will be initially propped up and later crash.  I think the auction will never get off the ground and that this plan is a Spruce Goose.  

    I believe this because traders/investors don't want to lose dollar one, much less $5 even if that means Uncle Sam loses on $95 in the same deal.  Misery may love company but when misery is as apparent  as is the case here it is best avoided all together.

    After the Spruce Goose failes to lift off, then perhaps we can go about doing what is required, cram down, receivership etc.  The failure will be more in the form of wasted time not so much money.

    They won't maintain value (none / 0) (#91)
    by Militarytracy on Mon Mar 23, 2009 at 08:21:41 AM EST
    And people stupid enough to attempt trade and invest in them will eat that molten toxicity, and whatever the first in buyers take and isn't sold is what the taxpayer will eat.  It is an utter Spruce Goose, it will only fly once if it flies at all.

    Agreed (5.00 / 1) (#92)
    by BobTinKY on Mon Mar 23, 2009 at 08:39:30 AM EST
    which is why, if you think it through, you can be reasonably sure it won't fly at all.  Unless the plan actually promises to shift enough of the potential upside (& there is none without continuing subsidies in the secondary market) on the Govt's 95% to the 5% investors, which may make it a worthwhile gamble for a few cowboys.  

    I do agree with Krugman that this plan will cost Obama needed political capital.  I am less concerned it will, after it fails, cost the US Treasury a whole lot.  I just don't see anyone but the gamblers being interested, and it is a bad gamble.  Prudent investors are not going to want to put at risk even their 5%.


    Bumbling, stumbling blindly on our way (none / 0) (#93)
    by Militarytracy on Mon Mar 23, 2009 at 08:47:05 AM EST
    to nationalization of the banks.  And as far as banks earning their way out of this, I'm pretty skeptical too.  Our banking industry isn't used to making money by providing service anymore and their idea of earning their way out of this is by providing giant service charges.

    What is the private (5%) investor's role? (none / 0) (#94)
    by BobTinKY on Mon Mar 23, 2009 at 09:01:47 AM EST
    It appears to me like the private partner is allowed in only to provide the mechanism for setting price.  And if that is the case I hope we are not planning on allowing the banks who hold these assets to also bid on them.  If we do then you can expect a very active auction in which the sellers are also the bidders.  In this way a bank could get an immediate 95 cents on the dollar courtesy of taxpayers and the "new owner (aka the selling bank) wouldn't care that any subsequent reasle of the toxic asset would be unsubsidized.  The taxpayer bailout would already have been 95% complete.

    If sellers are allowed in the auction as bidders then I would agree with Krugman that it will be catastrophic financially to the US Treasury as well.  

    Wall Street's reps in the Administration can't be THAT stupid (or self-serving)? Rhetorical question.


    OOps, <made> completely out of glib (none / 0) (#4)
    by Militarytracy on Sun Mar 22, 2009 at 02:29:22 PM EST

    I would consider putting in some money (none / 0) (#11)
    by Manuel on Sun Mar 22, 2009 at 03:37:13 PM EST
    into the deal as outlined (though only a small fraction of my investments).  It looks like a great deal for the private side.  They should open this up to retail investors through a mutual fund or ETF.

    I sympathize with the difficulty of pricing all assets.  Hell, what is the fair market value for the Dow?  The 14,000 we saw 18 months ago or the 6000 (and below) some predict.  Obviously, confidence is a big part of it.  Getting a market going for these assets and getting them off the banks books is the goal.  I prefer pre privatization but if this is going to be the plan, I'd like to see it improved. Opening the opportunity up to everyone and controlling speculative excesses through the tax code would help.  I wonder if the AIG bonus Tax law will pass constitutional muster.

    Might you reconsider (5.00 / 1) (#79)
    by BackFromOhio on Sun Mar 22, 2009 at 07:07:59 PM EST
    if you knew that AIGFP is slated to pay further bonuses of approximately $230 million due in March 2010 to another 407 people?  See John Kass piece in Chicago Tribune, quoting representative Crowley who was the one brave enough to ask Geithner about the bonuses on Mar 3.  Kass piece is linked at realclearpolitics.

    The AIG CEO has said (5.00 / 1) (#81)
    by Green26 on Sun Mar 22, 2009 at 07:48:06 PM EST
    he will work to reduce the future bonus payments. He will have more time to do it. There will be more pressure to do it. The employees will see the handwriting on the wall.

    On the other hand, the CEO will have to figure out a way to keep enough qualified employees around for long enough to do the work, or find replacements.

    The future of AIG, and AIGFP, is much better forseeable now than it was in early 2008, I assume. Thus, the CEO can probably better align any retention bonuses with the real needs of the company at this time--and will have to factor in the views of the government and the political climate for bonuses.


    The AIG bonuses would not affect my decission (none / 0) (#87)
    by Manuel on Sun Mar 22, 2009 at 10:59:28 PM EST
    Yes, they are significant.  Yes, they are undeserved.  However, they are not the most significant detail in the transaction.  A lot of people in this world are getting undeserved rewards.  The important detail in the proposal is that the government is willing to take most of the downside while leaving most of the upside for the private investors.  I'll take a piece of that.

    From the NY Times: (none / 0) (#88)
    by Green26 on Mon Mar 23, 2009 at 12:15:29 AM EST
    1. "The plan relies on private investors to team up with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk."

    2. "But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

    Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said."

    1. ""The deal is good, but it's not worth it if I'm buying myself into a retroactive tax or a Congressional hearing," the chief executive of a major investment firm said, insisting on anonymity because he did not want to seem at odds with the Treasury Department in the event that his firm ends up participating."

    2. "Executives briefed on the plan said it did not address the central question of how to bridge the divide between what the banks want to sell the assets for and what investors are willing to pay for them. The government hopes that the subsidies it provides to investors are so rich that they will be willing to risk overpaying somewhat for the assets."