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Eric Cantor Is Right About The Geithner Plan

By Big Tent Democrat, Section Economy
Posted on Mon Mar 23, 2009 at 03:58:58 PM EST
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Via TPM:

As described, the plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer. In its current form, Secretary Geithner's plan is a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it. Six months after Congress debated the first TARP, it is inexcusable that taxpayers still have not been told their true exposure.

That's right. Eric Cantor's critique of the Geithner Plan is correct.

Speaking for me only

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    Eric Cantor Is Right About The Geithner Plan | 57 comments (57 topical)

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    even if its true (5.00 / 1) (#2)
    by Capt Howdy on Mon Mar 23, 2009 at 04:04:23 PM EST
    I will never admit it.  

    Well, as they say... (1.00 / 1) (#8)
    by Thanin on Mon Mar 23, 2009 at 04:13:38 PM EST
    throw enough spaghetti and somethings bound to stick.

    Parent
    or (5.00 / 2) (#9)
    by Capt Howdy on Mon Mar 23, 2009 at 04:15:24 PM EST
    a stopped clock is right twice a day

    Parent
    Cantor's lying. (5.00 / 1) (#5)
    by Farmboy on Mon Mar 23, 2009 at 04:10:20 PM EST
    I saw his lips move.

    I realize this is a little off-topic (5.00 / 2) (#49)
    by lilburro on Mon Mar 23, 2009 at 05:29:37 PM EST
    but apparently we should just shove it:

    - If not Geithner, who do you realistically think should be nominated for Treasury Secretary?

    • What makes you so certain that your favored candidate would survive the Senate confirmation process in what would surely be a newly rarified media circus surrounding it?

    • Let's call this question "the Gillibrand `you break it, you buy it' factor": How can you possibly be sure you won't get a replacement nominee less distasteful to big business and banking (see: Summers, Larry)?

    • And why should we take your call seriously if you won't or can't answer those three simple questions?

    What would the "the obvious potential consequences of the chaos that would more likely than not come from a sudden vacancy at Treasury" be?  Hell, put Paul Krugman in the post, he'll come up with a plan in a month or less.

    Republicans have been calling (none / 0) (#1)
    by andgarden on Mon Mar 23, 2009 at 04:00:41 PM EST
    for the Swedish model for at least a month.  

    If the tables were turned (5.00 / 2) (#10)
    by TeresaInSnow2 on Mon Mar 23, 2009 at 04:17:05 PM EST
    The Republicans would be screwing us and the Democrats would be calling for the Swedish model.

    Both parties are corrupt.  The only protection we have at all from them is their hatred of each other.

    Parent

    Sadly (5.00 / 1) (#17)
    by Faust on Mon Mar 23, 2009 at 04:32:31 PM EST
    there is some truth to this.

    Parent
    Hard to believe (none / 0) (#3)
    by Ga6thDem on Mon Mar 23, 2009 at 04:04:52 PM EST
    isn't it?

    Parent
    I think there's some jujitsu here (none / 0) (#4)
    by andgarden on Mon Mar 23, 2009 at 04:08:08 PM EST
    involving the source of Democratic contributions. Or maybe they're just being contrary to be contrary.  

    Parent
    Who knows (5.00 / 1) (#6)
    by Ga6thDem on Mon Mar 23, 2009 at 04:11:01 PM EST
    but it's really kind of sad when you see them picking up the mantle of defending the regular guy when Bush completely dropped it.

    Parent
    Is this an attempt to hide the zombie (none / 0) (#7)
    by jeffinalabama on Mon Mar 23, 2009 at 04:11:40 PM EST
    aspects of the current market, instead of fixing the problem?

    And yet others feel... (none / 0) (#11)
    by Addison on Mon Mar 23, 2009 at 04:18:32 PM EST
    ...that the problem with the plan isn't that private buyers have no incentive to buy, but instead that sellers have no incentive to sell.

    I think the latter is ridiculous, personally. But oh well.

    I think the real problem isn't cost or motivation, it's that no matter what the final price tag or the relative level of enthusiasm this plan generates, it's not a plan that will fix anything fundamental anyway, so its success is sort of irrelevant.

    It is connected (none / 0) (#12)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:21:48 PM EST
    The incentives to buy include to buy at a price where the banks will sell.

    Parent
    Well... (5.00 / 1) (#24)
    by Addison on Mon Mar 23, 2009 at 04:46:04 PM EST
    ...to me that seems like an either/or situation in the actual application.

    When a price is "set" either the buyers or the sellers will have a huge problem.

    Now, if all this money is going to both sides, somehow, in the attempt to find that "butter zone," that would be truly stupid.

    We don't need to pay both the buyers to buy and the sellers to sell. One or the other is sufficient. My guess is that in some fashion the government will pay both sides to participate in the free market, though.

    Parent

    You identify the problem (5.00 / 2) (#31)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:51:56 PM EST
    "We don't need to pay both the buyers to buy and the sellers to sell. One or the other is sufficient. My guess is that in some fashion the government will pay both sides to participate in the free market, though."

    This is exactly the objection.


    Parent

    Why is this a problem? (none / 0) (#39)
    by Green26 on Mon Mar 23, 2009 at 05:11:09 PM EST
    The banks and financial system are in crisis. The government has stepped in to help rescue the financial system and banks. Some of what has been done so far has worked, and some hasn't--at least yet. The new Gaithner plan is a more advanced, and I think much better, plan than what was proposed by Paulson when the first TARP legislation was done in the fall.

    While people have different ideas on how to approach bank and financial crisis, most people believe the toxic assets on the banks' financial statements are a signficant problem (and impediment to ending the crisis) and that things would be much better if those assets were not on the balance sheets.

    Parent

    Because (5.00 / 1) (#44)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:14:02 PM EST
    we have better uses for our money than to protect the Master of the Universe.

    Parent
    And things in my life would be much better... (none / 0) (#54)
    by kdog on Mon Mar 23, 2009 at 05:35:41 PM EST
    if I didn't have to pay my losing bets off, or pay my bills even. I wanna always win too!

    You make it sound like the banks magically gained possesion of these toxic assets through no fault of their own.  I should try that next time at Aqueduct..."I didn't place this 50 win bet on that nag, that was my evil twin, gimme my money back!"

    Parent

    But the plan isn't billed as a panacea (none / 0) (#13)
    by Farmboy on Mon Mar 23, 2009 at 04:24:16 PM EST
    It's a (final?) pass through the toxic funds in search of anything salvageable, before what's left is written off.  It also forces the banks to open their books, which up until now has been impossible.  And it also uses some of the TARP balance as carrot, as opposed to more blind handouts.

    The plan isn't a return to re-regulation, or any other type of market fix.  It's more like taking all the parts that still work off the old Chevy before throwing it in the crusher for scrap.

    And besides, if Cantor says the plan is bad, then I'm saying he's wrong.

    Parent

    Huh? (5.00 / 4) (#14)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:27:24 PM EST
    What do you mean by this?

    "It's a (final?) pass through the toxic funds in search of anything salvageable, before what's left is written off."

    What could you possibly mean by that?

    As "forcing the banks to open their books," receivership would be a much cleaner and inexpensive way to do that.

    Parent

    To expand on my statement, (none / 0) (#25)
    by Farmboy on Mon Mar 23, 2009 at 04:46:55 PM EST
    Step 1: The Gov't (with a 3% outside stake) buys up any potentially salvageable assets from the toxic pile
    Step 2: they hold onto them until the assets increase in value
    Step 3: sell for profit!

    The remaining assets are deemed worthless - and I'd write them off.

    As for receivership being a preferable outcome, we'll just have to agree to disagree there.  I'm not ready to burn down the house because the renters vandalized the place. Glass half full and all that.

    Parent

    Um what? (5.00 / 1) (#29)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:51:04 PM EST
    Step 1 is inflate the price of toxic assets because the government takes the loss and the investor gets the gain.

    Step 2 is watch the overpriced assets go down

    Step 3 is watch the taxpayer hold the bag, again.

    Step 4 is watch the financial industry fall apart.

    Step 5 is the Next Great Depression.

    Parent

    Let's try that again: (5.00 / 1) (#35)
    by steviez314 on Mon Mar 23, 2009 at 05:05:19 PM EST
    1.  The government is an 80% equity investor.  If the private investor gets a gain, so will the taxpayer.

    2.  If there is no gain, but a loss instead, that is no different than the loss the taxpayer would take under nationalization, ASSUMING they do the Swedish model with 100% bank debtholder guarantees.  I have no idea if anyone saying Swedish model (besides you and your modification) knows the debt holders got 100%.  Even Krugman didn't know that until a few weeks ago, and he doesn't seem to mind, so he's focusing on the control aspects of nationalization rather than the pure financial ones.

    3. Since the private equity inestors don't care about the banks, it's actually better to have them bidding.  If you think they would overpay more than the government would have (under Paulson's original plan), you're wrong.

    4.  If you think Eric Cantor--whose alternative plan was for the gov't to just guarantee the assets and charge the banks an insurance premium (talk about unlimited risk, limited reward!)--has anything in mind but trying to wound Obama in this, you're wrong.  


    Parent
    We have discussed 2 already (none / 0) (#37)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:07:29 PM EST
    Negotiated terms are important to this approach.

    Parent
    I wish that were openly discussed as the issue (none / 0) (#41)
    by steviez314 on Mon Mar 23, 2009 at 05:12:09 PM EST
    behind "nationalization".  I know we have here, but I don't think that issue--which is the real decision that needs to be made--is focused on out there.

    Obviously, a decision not to haircut the bondholders makes nationalization equivalent to almost any kind of Geithner plan, except for the ability to fire everyone.

    Why do I suspect that half the talking heads who say "Swedish model" don't know about that.

    Parent

    I can't speak for anyone else (none / 0) (#43)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:13:26 PM EST
    but I have been pretty clear about my view on the matter.

    Parent
    Now it's my turn to be quizzical (5.00 / 1) (#38)
    by Farmboy on Mon Mar 23, 2009 at 05:10:09 PM EST
    The only assets purchased are ones which can appreciate, even if the appreciation doesn't occur until the economy recovers.  They are only sold when mature or hold increased value. When sold the taxpayers share in the profit.  

    So, where are the "overpriced assets" going?  I don't understand your sentence. And why are you calling them overpriced?  The 5-1 leverage value stated in the plan might lead one to term them over-valued, perhaps, but they're being bought for minimal amounts.  Is over-valued what you meant to say?

    If pulling the (estimated) $1 trillion in viable assets out of the $4 trillion toxic pile doesn't help get the economy moving, then yeah, gloom et doom.  But at that point, the financial market will be the last thing on folks' priority list.

    Parent

    Where did you get that from? (5.00 / 1) (#42)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:12:32 PM EST
    How do you know the price will be one "that can only lead to appreciation?" If that is the case, then the private sector is a bunch of dummies.

    Or better yet, why do we need "private skin" at all? why not have the government get all the gain?

    Parent

    The reason we are using private capital is (5.00 / 1) (#48)
    by steviez314 on Mon Mar 23, 2009 at 05:20:19 PM EST
    that if the government alone were buying the assets from the bank, NO ONE would ever believe that they weren't overpaying for them to help the banks out.

    By having private investors, who don't care about the banks, doing the bidding, it provides a bidder who has no hidden agenda except to get the lowest price.

    Even if you think that price might be overpaying becasue of the gov't leverage, there can be no question that private equity wants to pay as little as possible.

    Parent

    And as far as the banks go, (5.00 / 1) (#56)
    by Alien Abductee on Mon Mar 23, 2009 at 06:08:12 PM EST
    that there won't be UNDERpaying for them either. It's meant to get them over their resistance to accepting the losses they're going to have to take.

    Parent
    Say what? (none / 0) (#51)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:30:11 PM EST
    The opposite is true in my opinion.

    Parent
    I got it from the fact that they only want to buy (5.00 / 1) (#52)
    by Farmboy on Mon Mar 23, 2009 at 05:31:29 PM EST
    salvageable assets, i.e., assets that have any chance of showing a profit.  If the banks price their assets above their potential value, then they don't get bought and they become "dead" assets.

    If I've got two notes for $1 million each, but one is really worth $10 thousand and the other is completely upside down, then yeah, I'd be a dummy to try and price them both at anything more than their real value if the gov't gets to see my books - and they do, under this proposal.  The idea of this plan is for the gov't to say, "yeah, we'll start the bidding at ten grand for that note, cause we think it'll be worth twenty when things get better."

    As to why we need the $30 billion "private skin" investment - my guess is for psychological reasons, not economic. YMMV

    Parent

    Salvageable assets? (none / 0) (#55)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:37:55 PM EST
    What does that even mean?

    Parent
    Looks like the whole thing is (none / 0) (#15)
    by Alien Abductee on Mon Mar 23, 2009 at 04:30:27 PM EST
    just a carrot to lead to price discovery. A mighty expensive carrot.

    As you say (5.00 / 1) (#16)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:31:54 PM EST
    a trillion dollar carrot.

    Parent
    Congress could do it for free (none / 0) (#18)
    by andgarden on Mon Mar 23, 2009 at 04:32:55 PM EST
    heck, they're probably required to show the regulators this info anyway.

    Parent
    How can they know? (5.00 / 1) (#21)
    by Alien Abductee on Mon Mar 23, 2009 at 04:37:55 PM EST
    It's a good part psychological. The market really has to discover it.

    Parent
    I'm sure the regulators have been (5.00 / 1) (#26)
    by Green26 on Mon Mar 23, 2009 at 04:47:17 PM EST
    all over these "legacy" loans and securities and have seen everything they've wanted to see. In this new process, the regulators will be signficantly involved and will see/learn anything else that they want.

    I assume that Treasury has already consulted with the regulators, so Treasury must have a good idea of what's in the legacy assets and what their likely ranges of value are at this time.

    The specific information related to each package of loans and securities will presumably be given to the private investment funds under a confidentiality agreements. Thus, it isn't likely that the specific information gets into the public.

    Parent

    So what they do next (none / 0) (#19)
    by Alien Abductee on Mon Mar 23, 2009 at 04:35:07 PM EST
    if they get some price discovery is really more important. Once they can separate the solvent from the insolvent, hopefully they'll be politically freer then to move on to nationalization/pre-privatization as needed.

    Parent
    They will have bought it (5.00 / 2) (#20)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:37:34 PM EST
    at inflated prices by then. No do overs.

    Parent
    Hopefully not all of it (none / 0) (#22)
    by Alien Abductee on Mon Mar 23, 2009 at 04:40:01 PM EST
    before what's obvious becomes inarguable - ie,, which banks are insolvent.

    Parent
    And the basis of this hope (none / 0) (#23)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:42:35 PM EST
    is what?

    Parent
    The regulators have already said (5.00 / 1) (#30)
    by Green26 on Mon Mar 23, 2009 at 04:51:12 PM EST
    the big banks are well-capitalized and solvent.

    Only further deterioration, and this would have to be significant is my impression, of asset quality and value would cause the banks to become insolvent.

    If a decent chunk of the legacy assets are removed from the banks' balance sheets, there is no way that the banks will become involvent.

    Parent

    According to Bank of America's... (none / 0) (#53)
    by santarita on Mon Mar 23, 2009 at 05:34:07 PM EST
    chief investment officer, we should be selling bank stocks because until there is consolidation in the banking world the problems remain.  Geithner's plan just forestalls the day of reckoning.  

    My own theory is that this is a last step before receivership.  

    Parent

    It depends on what the (none / 0) (#27)
    by Alien Abductee on Mon Mar 23, 2009 at 04:48:14 PM EST
    actual purpose of the plan is to the administration. If it's price discovery, it should let them step in before buying up every last bit of bad stuff. If it's bailing out every last bad bankster, well, then, there is no hope...

    Parent
    I do not see (none / 0) (#28)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:49:11 PM EST
    the provision for that pause you are describing.

    Parent
    Why would there need to be a pause? (none / 0) (#32)
    by Alien Abductee on Mon Mar 23, 2009 at 04:52:11 PM EST
    They can step in any time they choose to.

    Parent
    They can step in now (5.00 / 1) (#33)
    by Big Tent Democrat on Mon Mar 23, 2009 at 04:53:00 PM EST


    Parent
    They want the assets priced (none / 0) (#34)
    by Alien Abductee on Mon Mar 23, 2009 at 04:57:35 PM EST
    in a way accepted by the banks. Not a price set by either the government or by the banks but by the market. This is a bribe to drag the banks to do that.

    Parent
    How does that make it good? (none / 0) (#36)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:06:48 PM EST


    Parent
    It doesn't (none / 0) (#40)
    by Alien Abductee on Mon Mar 23, 2009 at 05:11:14 PM EST
    But it does make what has to be done more politically palatable to people who are apparently terrified of being called socialists. We're not Sweden. Too bad.

    Parent
    But when it does not work (5.00 / 1) (#45)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:14:38 PM EST
    then what?

    Parent
    You think they won't get (none / 0) (#47)
    by Alien Abductee on Mon Mar 23, 2009 at 05:16:47 PM EST
    price discovery out of this plan?

    Parent
    I hope there is more ambition (none / 0) (#50)
    by Big Tent Democrat on Mon Mar 23, 2009 at 05:29:39 PM EST
    to the plan than that.

    Parent
    Not Sweden (5.00 / 1) (#46)
    by squeaky on Mon Mar 23, 2009 at 05:16:14 PM EST
    Sweden has just decided to let Saab fail. They are not Sweden anymore either.

    But Sweden has a right-leaning government, elected in 2006 after a long period of Social Democratic rule, that prefers market forces to state intervention and ownership. That fact has made the workers of Trollhattan wish the old socialist model were more in evidence.

    NYT


    Parent

    Cantor is being an opportunist. (none / 0) (#57)
    by AX10 on Mon Mar 23, 2009 at 09:10:16 PM EST
    If he Heaven forbid gets into a place of power,
    he would do as Wall Streets commands him to do.
    It is quite tragic that the GOP may come out on top in all of this (in the worst case scenario).

    Note: Don't ever post this at "Ratland" (DemocraticUndergound).  They still have their head up Obama's rear end.
    It does seem that Huffington and Kos have finnally woken up though and realize that they have to hold Obama accountable to ensure he does what is right.

    Eric Cantor Is Right About The Geithner Plan | 57 comments (57 topical)

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