Define The Geithner Plan"Working"

Joe Nocera writes:

Will it work? Isnít that the only thing that matters at this point?. . . I concluded, somewhat to my surprise, that it might well work. By this, I certainly donít mean that it will, all by itself, revive the economy. But I think it could put a real floor on the price of the bad assets ó critically important to stabilizing the banks ó and change the market psychology so that securitized assets can begin to trade again, which is important to get credit flowing. And it will give regulators a far sounder basis to ask Congress for more money to recapitalize banks ó or take them over, if it comes to that. . . .

(Emphasis supplied.) What strikes me about this analysis is that Nocera thinks that spending a trillion dollars (the Geithner Plan will cost at least hundreds of billions of dollars) to set the stage for actual policies to fix the problem is a good idea. Frankly, it is an amazing statement. More . . .

Nocera writes:

Once this process gets under way, does it mean that banks are likely to need additional capital? You bet it does. . . Is the plan perfect? Surely not. Is it guaranteed to do the trick? Of course not. But it is an effort to try something that seems to make a certain amount of intuitive sense, and could, in the best case, make our banks a little healthier and a little better able to extend credit. It doesnít represent the end of the crisis, not by a long shot. But it represents the beginning of something we should be applauding, not condemning: cold, hard reality.

The cold hard reality Nocera WANTS us to accept is that the Masters of the Universe should have their little world put back together again, at the expense of trillions of taxpayer dollars so they can go back to what they were doing.

Some people seem to believe that that is a good plan and that it will not effect any efforts at enacting a progressive agenda. I think that is insane.

Speaking for me only

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    Count me as experiencing a tad of (5.00 / 2) (#2)
    by Militarytracy on Sun Mar 29, 2009 at 09:09:29 AM EST
    despair after reading that.  He says that he thinks the Geithner plan for banks can put a floor on toxic asset worth and lets be realistic, with the way the economy is lopping off jobs......there is a floor.  We are on an elevator descending so quickly the floor dropped out from under us, we will make contact with it again when the elevator slows or stops but I doubt any attempts to create false floors are going to hold.  I also hate dumping all this money into "legacy" assets while Citi and BofA buy a fresh round of mortgage backed securities on the secondary market in the middle of a GIANT unemployment crisis.  It's like the banks can't stop doing what they did that made them money once upon a time but is a high risk investment now.  They're like junkies, and in six months time we are going to be dealing with a brand new fresh batch of foreclosures because people have no jobs.  Without jobs there will be no Wall Street, and with all the futile "aid" this administration is feeding Wall Street it is going to create such a sore spot with the homeless, pensionless, jobless, and struggling that Americans are going to despise Wall Street for a solid generation or more after this.

    I love that "legacy" riff... (5.00 / 3) (#6)
    by lambert on Sun Mar 29, 2009 at 09:36:19 AM EST
    It's such Orwellian  language.

    And then there are the legacy jobs, legacy houes, legacy 401ks....


    I think it's working fine (none / 0) (#28)
    by hookfan on Sun Mar 29, 2009 at 02:58:48 PM EST
     if what I fear is the long term plan: paying for all this debt on the backs of social security, and healthcare. Just think of the necessity of "shared sacrifice" for all but the bankers. After all, that's what we're "accustomed too". I'm just waiting for Obama to support delaying social security by raising full retirement, to go along with supporting mandating all paying to the other "legacy institutions" in Insurance, while doing next to nothing in guaranteeing any improvement in actually getting healthcare. Unfortunately, that suspicion is based on what I'm becoming accustomed too.

    And of course I'm not done (5.00 / 1) (#3)
    by Militarytracy on Sun Mar 29, 2009 at 09:19:24 AM EST
    I just have to break up my posts or they would go on for miles.  So to go on, then there's this sh!t

    "There is something called the leverage cycle," said John Geanakoplis, an economics professor at Yale. During the bubble, he continued, when the country was awash in debt, toxic assets rated AAA were leveraged at an outlandish 16-to-1 ratio. That leverage was the primary reason those assets made such big returns. Now we're in the opposite end of the cycle. There is no leverage at all available -- yet without it, the return on these assets would simply be too small to make them interesting enough for investors to purchase. The only entity capable of injecting leverage in the system is the government.

    So all this bundling of mortgages and all this CDS crap is really just fine, see what happened Joe six pack is that we hit a certain portion of the leverage cycle.  If you don't understand what that is and what it means don't worry because very important people do, hopefully though you do understand what cycle is meant to imply here.  It means that the wheel will go around and all these problems will just simply go away in time so just give us your god damned money to blow. Don't worry about what these assets are really worth because it's all about cycles and fairy dust.

    Investors should not be in the housing (5.00 / 1) (#18)
    by Inspector Gadget on Sun Mar 29, 2009 at 11:23:20 AM EST
    market! They are the ones who drove the prices through the roof to start with.

    Houses in some areas right now with zero down would have payments of under $500 a month. Plenty of people could afford to handle those payments and get things moving toward normal again.


    But, but. . . (none / 0) (#32)
    by hookfan on Sun Mar 29, 2009 at 03:27:28 PM EST
    the banks wouldn't make tons of money! And why should they go back to that when taxpayer money can be used for banker welfare, while they gamble?
       I remember when welfare became a dirty word. Why isn't that being applied to the rich bankers? Welfare cheats and frauds, welfare kings and queens. . . yay!!! Let's give em mo' money!!!

    And the realtors are sufferring enough that (none / 0) (#39)
    by Inspector Gadget on Sun Mar 29, 2009 at 06:25:24 PM EST
    they will probably do anything to get a commission coming in.

    I've been watching one specific house in the Phoenix area. The odd things happening with the listing tell me the realtors are manipulating the prices for the investors and hiding the listings from the public until they secure an investment buyer.


    And lastly (5.00 / 2) (#7)
    by Militarytracy on Sun Mar 29, 2009 at 09:36:41 AM EST
    Freudian slippage:

    Having spent the better part of this week mucking around in the details of the new plan,

    A new defintion for side by side effort that sounds like terrific sex and YOU THE INVESTOR only need to lay there:

    The plan would create incentives for private investors to put up small amounts of equity, side by side with the government, to buy toxic assets from the banks' balance sheets. To sweeten the deal, the government will also be putting in debt, at leverage ratios that could reach as high as six to one -- and will provide guarantees against most of the potential losses.

    It's hard to say who is going to be effed though when people stop getting effed first and get sick of this and quit paying those mortgages on those upside down houses.

    Oh and this one just fries me blackened with cajun spices:

    Still, to get investors to buy those assets -- and get a market flowing again -- they still need some leverage to bolster potential returns. Critics complain that the government-provided debt amounts to a bribe to get investors to purchase the assets at inflated prices. But I don't think that's what's really going on. Instead, it appears that the government is trying to return some normalcy to the workings of the market.

    It appears to YOU buddy that the government is trying to return some normalcy to the workings of the market but if you want normalcy in the markets then you have to embrace market corrections!  This market has not fully corrected yet, cannot have with the horror of the employment of the little people.  This is so premature there is zero chance of conception!  And the only hope we ever had was nationalization of the banks.

    So it will not revive the economy (5.00 / 3) (#8)
    by Cream City on Sun Mar 29, 2009 at 09:38:48 AM EST
    which to really work would mean getting the middle class able to get spending again, which would get the middle class working again.  Instead, our money will go to big banks.  

    Sounds like a plan that won't work -- unless you're a bank -- and actually could put more people out of work.

    I doubt it will work for the banks either (5.00 / 2) (#14)
    by Militarytracy on Sun Mar 29, 2009 at 10:28:26 AM EST
    because the banks want to make money speculating.....not doing real work.  They want to continue to speculate on the corpse of the housing bubble. They're nuts, with our money.

    Geithner Plan Deals With One... (5.00 / 1) (#11)
    by santarita on Sun Mar 29, 2009 at 10:10:48 AM EST
    aspect of the financial problem - the  toxic securities and loans held by banks.  At some banks these holdings are large enough to affect the capital position of the banks.  The banks with capital problems are not about to do much traditional banking.  At the same time banks with large chunks of these toxic assets won't get rid of these assets through sales because they contend that the assets are undervalued significantly.  (If they were to accept the sales price, that would set the asset price and in all likelihood make their capital positions even weaker.)

    Reading between the lines, my guess is that large banks and their regulators are at an impasse.  The large banks are saying that they are well-capitalized (as long as the toxic assets are valued at the higher hold-to-maturity level).  The regulators and everyone else are highly dubious.  While the regulators have a lot of power over the banks, the exercise of the big club- shutting them down and putting them into receivership - is not without legal problems - witness the lawsuit by Wamu, Inc (the holding company of Washington Mutual) against the FDIC.

    The Geithner Plan, if it works, would create a third party pricing mechanism for the toxic assets, even though it is not completely  neutral because of the government involvement.  I think that the way Geithner is hoping it will work is that the first few pools will sell, the market will feel comfortable with the pricing and the assets will be liquidated.  If it works that way, the government involvement will be at around $100 billion.  

    If it works, Geithner is assuming that it will expose holes in the capital positions of some banks and at that time, the banks may need further government capitalization.  

    One of the reports of the meeting between Obama and the bank CEO's was that he was doing some arm-twisting with them to get them to sell the assets under the Geithner Plan.

    Will it work and is it the most effective way of dealing with the issues?  I dunno.

    I hope the banks wreck this plan (5.00 / 1) (#23)
    by Big Tent Democrat on Sun Mar 29, 2009 at 11:55:11 AM EST
    that would mean they do not need it.

    Like the banks who took TARP at Paulsen's insistence who will, so they say, give the money back if restrictions are placed on them because of it.

    Good. If you do not need it, do not take it.


    Restructuring the Banking System... (5.00 / 1) (#13)
    by santarita on Sun Mar 29, 2009 at 10:19:18 AM EST
    Once the financial institutions stabilize, then the banking system needs to be restructured.  Ever since the S & L and banking crisis of the 1980's, there has been a general agreement about "Too Big to Fail" (or as Sheila Bair says ("Too Big to Liquidate") issues and other structural problems (e.g. shopping for regulators).  Congress and the Administration need to step up to the plate and do this (without bending to the will of the large banks).  I look at Geithner and Bernanke as firemen at this point.

    Begs the question (5.00 / 2) (#15)
    by Big Tent Democrat on Sun Mar 29, 2009 at 10:28:38 AM EST
    How to "stabilize" the banks? Trhow a trillion dollars at them seems the wrong answer to me.

    Then what is the most cost... (5.00 / 1) (#16)
    by santarita on Sun Mar 29, 2009 at 11:01:05 AM EST
    effective and least painful solution?

    Nationalization?  Don't you think that this will end up costing the taxpayers a bunch of money?  The RTC solution cost the taxpayers approximately $124 bn in 1990 dollars (i.e. not adjusted for inflation).  There is no free lunch here.

    Does the Geithner Plan preclude nationalization?  Or merely forestall it?  


    This is about the amount of solution gleaned (5.00 / 2) (#19)
    by Militarytracy on Sun Mar 29, 2009 at 11:27:07 AM EST
    from the dollar spent.  These dollars represent sweat and toil for people who shower after work.  There is no free lunch. The baloney sandwich with the beef wellington price tag is going to set the masses on fire though, and afterwards they will not be supportive of this portion of our economy for as long as they live.  The people in the financial sectors of our culture right who fight for this insanity and try to justify it have no idea what forces they are setting in motion with their crazy freakshow entitlement belief system.  The only money they ever had to play with was our money and they have all lost their damn minds to the point that this reality eludes them.

    MT: yesterday (none / 0) (#21)
    by oculus on Sun Mar 29, 2009 at 11:44:33 AM EST
    I met an actress who was in "Annie" for many years. When she mentioned Hooverville I thought of your comments here.  

    If the Bushvilles today (5.00 / 2) (#24)
    by Cream City on Sun Mar 29, 2009 at 12:01:58 PM EST
    become Obamavilles, that may finally worry the pols in power.

    Btw, today's Bushvilles are in interesting places -- such as my state capitol, where homeless now congregate in daytime in such numbers that it made the pols uncomfortable, seeing the suffering up close and personal.  So the pols are, y'know, contemplating what to do.  Gosh, what could be the answer?  Not the grates outdoors, where those homeless have to go at night in northern winters.


    Arnold says tent city (5.00 / 1) (#25)
    by oculus on Sun Mar 29, 2009 at 12:09:21 PM EST
    In Sacto must move. Not sure to where.

    Ha! I live there (none / 0) (#40)
    by Militarytracy on Sun Mar 29, 2009 at 07:26:37 PM EST
    Guess what I learned about Shelby that I didn't know?  He was the only Republican who didn't vote for the banking modernization act that got us here.  If he chose to not vote for the bill for different reasons it doesn't matter now, now he's free to say whatever he wants.  If he were younger I swear he'd run against Obama in 2012, I think he's looking for a protege to arm with his righteous indignation and back for the run.

    Ha Delayed admission! (none / 0) (#41)
    by oculus on Sun Mar 29, 2009 at 08:32:30 PM EST
    I do not think that (none / 0) (#17)
    by Big Tent Democrat on Sun Mar 29, 2009 at 11:17:47 AM EST
    Explain to me why you do think that.

    I Must Not... (5.00 / 1) (#20)
    by santarita on Sun Mar 29, 2009 at 11:38:56 AM EST
    have had enough coffee this morning.  I'm not understanding your replies.

    I'm guessing that you don't think that nationalization of the banks will cost a bunch of money.  If that's what you mean, then I disagree.  Taking over a bank like Citi is doable but it will cost money.  And there is a potential that the money will not be recoverable.  Assets can be sold but at not high enough prices to pay all creditors.  Asking (or forcing) the various classes of creditors to take pennies on the dollar will spread the losses and mitigate the direct cost to the taxpayers.  But there will indirect costs (loss of faith in the US banking system, for one) and not all creditors are within the jurisdiction of the US.  I think that ultimately foreign creditors will take a loss (and I assume that negotiations are going on with other countries on this now).  But at the end of the day, the taxpayers will pay in one way or the other.  

    Don't mistake me - I think some large banks may go under.  But the Geithner Plan is worth a try.  

    And one thing to think about is that what generally happens in these banking crises is that the surviving banks get bigger because they are the ones that buy the assets.  


    Why do you think the Geithne rPlan (none / 0) (#22)
    by Big Tent Democrat on Sun Mar 29, 2009 at 11:53:47 AM EST
    is more cost effective?

    The question is simple and you have spent a good deal of time defending this plan without actually explaining why you think it is better than other plans offered.

    Explain why you think the Geithner Plan is better.


    I Don't Know If The ... (5.00 / 1) (#30)
    by santarita on Sun Mar 29, 2009 at 03:22:06 PM EST
    Geithner Plan will work.  If it does work, it will work in one of two ways.  Either it will allow the banks on life support to start breathing on their own (raising capital) with a little temporary help from US.  Or it will make obvious to those banks themselves that they are on not viable.  At that point the groundwork will have been laid for an effective and efficient dismantling of the problem banks.

    The growndwork includes (but is not limited to): additional regulatory authorities (which the regulators say they need) for dealing with holding companies and foreign subsidiaries, finding suitable institutions that will be able to take on additional operations without imperiling their existence and negotiating with foreign countries and domestic creditors how their debts will be repaid.  And Congress will be on board.

    I'd say nationalization right now without the groundwork might be more costly.    


    Explain your last sentence (none / 0) (#34)
    by Big Tent Democrat on Sun Mar 29, 2009 at 03:45:08 PM EST
    WHy do you think that?

    Because... (none / 0) (#36)
    by santarita on Sun Mar 29, 2009 at 04:20:20 PM EST
    without the groundwork, the government will do what it did with AIG - replace a few senior execs, shuffle the board a little and then allow it to go on its merry way without effective government control.  

    For example, I would assume that the idea of nationalization in part would be to dismantle the business units and sell them for a reasonably good price to a buyer that itself is not going to need a baiilout (like B of A and Merrill).  This takes some homework or else you'll end up relying on a person like Desantis to do the winding up.  

    In all candor, I don't know if the government is doing this kind of planning.  I hope that they have a Plan B.  

    I also don't know if the government will bite the bullet if the Geithner plan doesn't work.  This is where Congress (and the American people) have to make a lot of noise.  Nationalizing a bank like Citi is a big job and the regulators in the past have had to be pushed into do it (look at the regulatory and Congressional dithering with  Continental Illinois and the S & Ls in the 1980's).  Right now I still think that the regulators are in a wait and see stage, hoping that everything falls into place at the right time and armageddon is avoided.  I'm ok with that as long as they are preparing for Plan B.    

    I am also of the belief that there are major pieces of the puzzle that we aren't privy to - the negotiations with other countries would be very interesting to see, for example.  So right now I'm still in the wait and see mode.


    If both are going to cost (none / 0) (#29)
    by hookfan on Sun Mar 29, 2009 at 03:08:10 PM EST
    I want my pound of flesh from the bankers, not from social security, healthcare, or jobs for the middle class. How about giving us a trillion to make things work? I bet we would do a better job than betting in a fixed market like the bankers want to do. . .

    I'd Rather See Some Officers and Directors... (5.00 / 1) (#31)
    by santarita on Sun Mar 29, 2009 at 03:25:16 PM EST
    joining Mr. Madoff.  

    And the government making decisions to fix the banking side permanently.


    The casino side of financialing (none / 0) (#33)
    by hookfan on Sun Mar 29, 2009 at 03:43:03 PM EST
    needs a bullet in the head and the carcass drawn and quartered for the rest of us to feed off of. The banking side (which many have limited themselves too, and are doing fine) needs a leg up to continue their honest lending practices. The wallstreet gamblers need a special place in Dante's inferno. . .

    I'll Have to go back and... (5.00 / 1) (#37)
    by santarita on Sun Mar 29, 2009 at 04:21:27 PM EST
    check but I think Dante provided a place for them.

    They do (none / 0) (#38)
    by hookfan on Sun Mar 29, 2009 at 04:44:57 PM EST
    money lenders sentenced to crouch in the flames of eternity. However, additional punitive measures may be in order-- (fill in your own fantasy)

    Who wrote the Geithner Plan? (none / 0) (#1)
    by Saul on Sun Mar 29, 2009 at 09:04:25 AM EST
    Was it him, Obama or did  the best economic minds available today propose this plan for Obama and Geithner?

    Since Treasury has had no staff... (5.00 / 2) (#5)
    by lambert on Sun Mar 29, 2009 at 09:34:43 AM EST
    .... (see here for list of vacancies) it's hard to see how Treasury could have written the plan. Who would have done it? So, I'm guessing it was outsourced to the banksters.

    Memo from Hank Paulson. . . (5.00 / 1) (#10)
    by andgarden on Sun Mar 29, 2009 at 10:04:48 AM EST
    Since the Geithner plan is really just... (none / 0) (#35)
    by Romberry on Sun Mar 29, 2009 at 04:00:32 PM EST
    ...the same pig with new lipstick as the Paulson plan (I call it the Gaulson Plan), I'd say that Paulson/Goldman Sachs came up with it, or at least the fundamental part (overpay for toxic assets and find a way to re-inflate that bubble) of it. All Geithner has done is find a way to apply additional complexity and over-leveraged risk (with taxpayers on the hook for basically any downside)...which is the new lipstick.

    And (none / 0) (#9)
    by Warren Terrer on Sun Mar 29, 2009 at 09:49:40 AM EST
    [...] could, in the best case, make our banks a little healthier and a little better able to extend credit.

    Sounds like 'working' to me. That's gotta be worth a couple trillion bucks. ;-)

    Truly incredible (5.00 / 1) (#12)
    by Big Tent Democrat on Sun Mar 29, 2009 at 10:11:52 AM EST
    With defenders like Nocera, who needs critics?

    Typical Newsweek (none / 0) (#26)
    by KoolJeffrey on Sun Mar 29, 2009 at 12:53:44 PM EST
    Fareed Zakaria is the only columinst worth a damn in that rag. I don't know what keeps them in business.

    Wrong thread (none / 0) (#27)
    by Big Tent Democrat on Sun Mar 29, 2009 at 12:56:01 PM EST