Geithner Bank Plan: A ‘Third Way’
The Obama administration’s new bank rescue plan is simultaneously a statement of faith in free markets and an acknowledgment of free market failings. The plan represents a “third way” between the first TARP giveaway to banks on the one side and private companies and the “stimulus” bill on the other.
Geithner’s plan is to utilize investors to affix a market price to toxic assets such as mortgage-backed securities, and then use government and investor money to purchase those assets in order to remove them from bank balance sheets. Investors will compete with one another to purchase toxic assets in an auction-type environment. The percentage of private investor money used in the purchase of these assets is small, somewhere on the order of 5-20%. The rest of the money will be from the government in form of loans or matching funds or a mix of both.
Some in the media have been calling this plan a “partnership” between private investors and the government. The term “partnership” is quite an exaggeration. Private investors are not “partners” if they are putting in 10-20% of the money and the government 80-90%. The plan attempts to turn Wall Street investors into honest consultants or secondaries acting on the government’s behalf by establishing an environment in which market forces will be at play, with mostly government money at risk. It does not establish a partnership in the sense that both partners are equally sharing the financial risk.
This plan is a carefully crafted, deliberate attempt to use government bailout money as efficiently as possible to remove toxic assets from bank balance sheets. Unlike with previous bailout attempts, Geithner has probably wargamed potential outcomes with various Wall Street investors in order to determine the ideal percentage of private investment required to obtain a fair market price for the government. Geithner is gambling that investors would be scared away from investing at all if they had to put a greater percentage of their own assets down in order to play ball.
The most important aspect of Geithner’s plan is not necessarily the details of the scheme but rather the increase in confidence in the market that this plan has already brought (the Dow jumped almost 7% on Monday). As confidence in the market increases, so does the value of the troubled assets that are weakening bank balance sheets and making banks nervous about new lending. Geithner’s calculated leaking of the plan for Wall Street to mull over last weekend was intentionally designed to prep the market for a strong week, which will further increase confidence in the plan and the market itself.
I’m not sure if your being tongue in check… or maybe you don’t know history. The last socialist to offer his “third way” economic plan… well he isn’t looked kindly unpon by history(even less then other socialist).
“The most important aspect of Geithner’s plan is not necessarily the details of the scheme but rather the increase in confidence in the market that this plan has already brought (the Dow jumped almost 7% on Monday).”
The DOW then proceeded to lose 115.65 points the very next day. Monday’s results may be evidence of a sucker bounce. Third Way policies are inherently dubious. At the end of the day, the politicians run the show and the business community is of secondary importance. The free market no longer decides the winners and the losers. Investors must now constantly worry about the Obama administration arbitrarily changing the rules anytime it so desires. What happens, for instance, if they earn “too much money?” Also, who will receive the new loans? The high likelihood is that they will go to those favored by the political establishment. The so-called green technologies will most assuredly benefit. Drillers for oil and builders of coal plants will be ignored.
OK
Let me get this straight. The taxpayers bail out the banks or buy out their toxic assets so that they will lend us money that we gave or lent them.
Great! We give them money so that they can lend us money and charge us interest on the money we gave them or freed by buying their toxic assests.
This is a win win situation for, oh yea, us, because we will once again have confidence in our government? our markets? our financial institutions?
Hey how much would it cost to buy some honesty and integrity? Never mind that’s PRICELESS, I know, I know.
Greed is good. Greed is good. Greed is good. Greed is good…
Please explain to me how banks, which hold many assets at or near par as Held to Maturity, are able to circulate bid lists without either 1) writing down said assets, and hitting either shareholder equity (if moved to Available for Sale) or net income (if moved to Trading), 2) violating GAAP. I’ve seen nothing that would indicate how this were to be done.
And the Obama administration has gone all in on this one. After the bid lists circulate, everyone will know who is holding what. I expect this is part of the plan – get banks to disclose their bad loans/securities to the FDIC (although I don’t know why they can’t simply ask under current regulations). I expect banks to avoid circulating their absolutely worst investments first.
This may work in the short run….but never in the long run. I agree with the above…#2 “a sucker bounce”
They will continue to TAKE as long as they can with whoever is in the treasury position!
So who will bid, and why are those bidders kept secret? Because the very banks who are holding toxic crap at 85% or better in Level 3 hidyholes, are going to find a way (hedge, 3rdparty, direct, ect) to bid on their own crap they know the market will only value right now at 35% (the spread is huge). They will get the taxpayer via the FDIC to cover the spread because their exposure won’t be more than 10%. The way the banks look at it, this is a way to get the spread to move as close to par as possible, with the gov’t taking all the risk. If the banks selling the trash can be prevented from buying/manipulating the trash can be kept out, this might work, but I do not see that happening. This is just a complex and evasive way to get the banks to get their garbage out of level 3 caves with the gov’t buying and storing it.
I think they should turn it into a game show: Who Wants to Buy a Toxic Asset.
You show up with a bundle of “toxic” assets and it is valued by, say, ten groups of money men who are fronted by sexy models. But the first step is “Government roulette.” A wheel is spun, and purely by chance the government will offer you anything from 10 cents on the dollar to, say, 60 cents on the dollar (about a hundred to one shot for the high amount).
If you refuse the government offer, you then get to choose among the boxes that contain the offer of the various money men. You open the first three boxes at random. You get to choose the highest bid. If you open the next five, you get to choose the second highest bid but it is bought by the highest bidder. If you open the next two, you get the highest bid and the highest bidder buys it. But once you decide there, is no going back.
You might need the contestant to spin the wheel a few more times, and have cheering Wall Street types shouting advice. You know, to help the ratings.
Basically, there are two possible definitions of wisdom:
1. Recharge the battery first.
2. Use the battery first.
If money was electricity, the bank would be batteries. If credit was available, the batteries would be okay. Right now, we are kindly informed that the batteries need some serious maintenance, but we don’t want to say where the juice went…
No problem! We have a “grand switching station” (a.k.a. a governement by some lights) through the agency of which the taxpayers can recharge the bank’s batteries before the economy starts again…
Whoops, the taxpayers batteries don’t measure up to the challenge (God forbid they should need credit!). No sweat, all we have to do is borrow! No question about it, our grand liberator from energy dependance is a great innovator in the field of wisdom. Al Gore was only using ordinary wisdom when he managed to get his Nobel prize before St Obama was given a chance to claim it.
If he put any real faith in the invisible hand, he would have allowed the failed companies to be liquidated and their valuable assets sold to healthier companies.
This is still alchemy. The government is painting gold leaf onto lead and trying to sell it as pure gold. The government takes money from me by devaluing what I have (raising the money supply by 1 trillion or more), then uses it to free up capital (help purchase “toxic assets”) to lend to me to spend while I must pay a premium to borrow and spend it. Just leave my money alone and let me spend, save or give to charity as I please.
The “Poor Banks”, let me get my handkerchief out. Hay wait a second, aren’t these banks who gambled on what turned into toxic waist, the very same people who got us in this mess in the first place? Why is our government so intent on helping banks who dealt in fraud and deceit in order to make extra profits. Seems to me that they should be thinking about ways to send these bank executives to jail instead of giving them more of our money to gamble with. Why don’t they let these banks who gambled and lost die a natural death. It seems to me that the banks who did not indulge themselves would fill in to grow and prosper. Could it be that most of these government financial gurus deciding the outcome of the country’s banking system were ex presidents or CEO’s of banks or financial houses and are in fact the very same people who were up to their elbows in starting this toxic waist business to begin with. I believe the government should be more concerned with the millions of this county’s citizens who were financially hurt by the” greed of the financial industry” and be focusing on helping them instead of the “Poor Banks”.
#9 Mike T – Exactly. These guys should have been put into receivership and either: had these assets sold off; or had their other assets sold off and let the original company be the holding companies for these bad assets. They should simply all have been in bankruptcy court. That’s what it’s for.
I read a great comment in another blog… Let the Wall Street folks receive toxic assets as their bonus. Then they will be incentivized to use their expertise to deal with its value (or lack thereof) themselves.
Elvis @ 5 and 6 uburoisc are spot on. If, as Greg says, “this plan will go further to stabilize the market than either the first TARP handouts or the “stimulus” bill,” then it will only be kicking the can down the road. The fact that our economy is overleveraged, with 3.5 times total debt to GDP won’t change and it’ll come back to wreak havoc later.
Temporary receivership is the only way to go, plus it would save taxpayers billions of dollars. But the Wall Street insiders who run the Fed and Treasury won’t do this, because they must preserve their own construct at all costs (taxpayer cost, that is). The true extent of insolvency must be hidden from the public eye too.
Calling upon the unregulated to bail out the regulated and government.
Gee, yeah, that has to tell you something about government and regulations. If the unregulated are so good at doing these things, then why do folks want to regulate them? And do note that the regulations that got us into this mess have still, to this day, not been repealed and banks are downgraded if they do *not* lend sufficiently to those who can’t pay loans back. And don’t you dare try to make any money off of helping government!
Why is it that economic Calvinball is supposed to be enticing?
It’s a no-fail way for private investors, though what the payoff is for the taxpayer in involving them, I’ve yet to see.
“They have skin in the game,” is obviously a lie, since the money comes from the government if I’m understanding correctly.
It would appear to be a lie, just as “We didn’t know about the bonus plans” are another lie that just got busted big-time.
None of these “lies” bug me by the way.
Neither did Bush lies about weapons of mass destruction. Anyone who didn’t realize what they were voting in is, to me, an idiot. He was always going to go to war.
Always.
And Obama is always going to push for government control. Always.
When I read the title of this article, I could have sworn it said Geittner BLANK Plan…
“The plan represents a “third way””
Yes, The Third Way: Fascism was the Third Way… is the third way…
People still ask why I call him “Il Duce” Obama…
“THIRD WAY” YOU MEAN THIRD “RAIL”,THIS IS OBAMA’s FLUNKEY LICKSPITTLE WE’RE TALKING ABOUT!
Geithner must go. Today the ‘genius’ said he would consider another world currency than the dollar. He’s OUR Treasury Secretary. He’s the biggest toxic asset we’ve got.
From Ben Smith’s blog at Politico:
Geithner, at the Council on Foreign Relations, said the U.S. is “open” to a headline-grabbing proposal by the governor of the China’s central bank, which was widely reported as being a call for a new global currency to replace the dollar, but which Geithner described as more modest and “evolutionary.”
If this guy were really ‘evolutionary’ – then natural selection would have gotten rid of him years ago. Maybe generations – he’s just that dumb.
#13 Geofizz – Great idea, paying toxic assets as bonusses. Hilarious! Won’t happen, of course.
#14 ajacksonian – “Economic Calvinball” Brilliant description! Making up the rules as you go along, and no repeating of the same rule.
uburoisc has it right. There is no way to stop the banks, via straw buyers, from bidding for their own crap at inflated prices and sticking the taxpayer with 90%+ of that inflated price.
This is just a way for the US treasury to buy the banks absolute crap at highly inflated prices.
“The most important aspect of Geithner’s plan is not necessarily the details of the scheme but rather the increase in confidence in the market that this plan has already brought (the Dow jumped almost 7% on Monday).”
This renders the entire article inoperable. For the writer to assume a small 1 day bump in the market somehow validates the plan is ludicrous. The bump mainly occurred probably because of the mere fact a plan was announced. Since then I am not hearing people raving about it. THE DETAILS ARE ALWAYS THE MOST IMPORTANT PART OF A PLAN, especially in a situation like this where the particulars are incredibly complex.
The article misses the main point anyway, which is the fact that the world economy rests on what one man (a tax cheat who couldn’t figure out Turbo Tax at that) comes up with is a sad commentary about where we have come. This is the best proof I can think of that government needs to get out of the private sector, that is where the root of this problem lies. To involve them more will not solve it but make it worse.
Even if Geitner were not an idiot, no one person is smart enough to solve this problem. The free market already has mechanisms in place to deal with problems like this, we should let them work and take the pain now so we can move on.
12. Marc Malone:
“#9 Mike T – Exactly. These guys should have been put into receivership and . . . They should simply all have been in bankruptcy court.”
I’ve been having the same thoughts: let the big companies that messed up go into bankruptcy (AIG, BofA, Citi) and give ALL the bailout money to the good and small banks to handle the toxic mortgages. Hopefully Obama and Guithner will catch up on that. Legislation can be reversed.
FEDERAL GOVERNMENT ISSUES ZERO ALERT
THE FEDERAL GOVERNMENT IS ISSUING THE FOLLOWING ALERT
Due to the increased demand of our zeroes, they are now in short supply. Please conserve your zeroes. The Federal government needs all we can get. During the wars in other countries we asked you to conserve certain items so that our soldiers fighting over there would have the food and supplies they needed.
Your country is calling on you again to show your patriotism by conserving our zeroes. This time we need more zeroes. There are more zeroes going out than coming in. Please cut back on your use of them. If you have any extras, please turn them in to us.
Please send your extra zeroes to:
Secretary of the Treasury
Timothy F. Geithner
1500 Pennsylvania Avenue NW
Washington DC 20220
He will make sure they are distributed where they are needed most. He is an expert on zeroes.
Secretary Geithner feels that if we can link enough of the zeroes together we can end our financial crisis. Right now there aren’t enough zeroes to form a long enough link. You could be “THE MISSING LINK” that supplies the zero that makes the number big enough to end the financial crisis. It is your duty as a citizen of the USA to do your part in saving, collecting, and sending us your zeroes.
You could start a local drive to collect zeroes, just like they did during the wars to collect metals and other items. Any patriotic citizen would be proud to give your group their extra zeroes. You will be a hero to your community and to your county.
As we did with the wars we fought all over the world, we need to pull together as a nation to end the financial crisis. We need to send Secretary Geithner all the ammunition he needs to fight this war. He needs your zeroes. It would be tragic if we were only one zero short of our goal. Don’t be THAT missing zero. If a soldier runs out of bullets, they have little chance of serving. If Secretary Geithner runs out of zeroes, we could loose this war.
TRAVELING IN OTHER COUNTRIES
If you travel to other countries, and they let you get some zeroes, please get as many as you can. Even if you can only get a few, that will help us end this economic crisis that much sooner. A zero is the same in any country, so the ones they use in the country you visit will work her in the USA. There is no limit on how many you may bring into the USA. Customs has been alerted, and any zeroes you bring in will be collected there. They will expedite the transfer of your zeroes to Secretary Geithner.
WAYS TO SAVE YOUR ZEROES
(1) When you pay for items, don’t pay in even dollars. Pay the exact cents of the bill. That will give you two zeroes on most transaction.
(2) Pay for each item individually instead of all of them at once, following rule number (1).
I wonder how it feels to stand in front of the flag and praise the people who are destroying it?
Capitalism…two people exchange stuff they don’t want, for stuff they do want; both go away happy, nothing for the welfare state.
Socialism…all profits go to welfare state politicians for redistribution
Third way….all profits go to private investors, all losses paid by taxpayers.