Saturday, March 21, 2009

The Bad Bank Bailout Plan


Was that an ambiguous title? It works both ways. Seriously, how can I make sense of this? Why do Geithner and Obama believe its okay to keep trucking out the same, tired idea without responding to the critics, explaining why their plan is better than the alternatives, or explaining why we should expect it to work? I have tried to assess the plan sympathetically, but what's to love?
The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.
So we give money to "investors" who can safely overbid on securities, while the government protects them from taking losses. The most charitable interpretation of this would seem to be that the Obama Administration believes that market prices for toxic securites are significantly below their actual worth, and thus that there's minimal downside in creating a system that inflates their price. A far less charitable interpretation is that this is seen as a quick way to clear banks' balance sheets of garbage assets for something close to book value, with the difference between the inflated purchase price and actual value being absorbed the taxpayer over time... perhaps $100-$200 billion per year, or so.
To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.
As others have pointed out, taxpayers do the best under this plan when sale prices are low, as we're protecting the investors from taking losses. Auctions don't protect taxpayers - higher purchase prices make eventual losses more likely, and thus increase the risk to taxpayers.
The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.
Call it the "hair of the dog" cure - fix the hangover from excessive leveraging of debt with a bit more leveraging.
Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.
Why are we betting, when it's... not necessarily easy, but perfectly feasible to check beneath the hood? What about that isn't supposed to make me conclude that the last thing Geithner wants to do is find out what these securities are truly worth. If you don't trust market value, why not look at the underlying assets, the default rate, recoveries after foreclosure, the number of properties that aren't likely to ever recover in value....
Analysts worry whether the prices investors offer will be high enough to induce the banks to sell assets. The hope is that high valuations at the auctions will increase the price of assets that remain on the books of banks, bolstering confidence in the sector.
This part has never made much sense. It's a given that these assets are overvalued by banks, at least compared to current market values. Swapping the bad assets for cash doesn't improve the bank's balance sheet, but perhaps we've injected enough cash into the banks that Geithner no longer regards that as a concern. Yet it's reasonable to assume that banks aren't going to want to worsen their balance sheets.

This notion that "auctions will increase the price of assets that remain on the books"? Where's the basis in reality for that type of optimism?
Many investment executives said they were worried that participating in any bailout program would expose them to political wrath and potentially steep new restrictions on their own pay.
Yeah, so many that you can't even name one. Spare me.

Rather than trotting out the same plan, with a few details changed, time and time again, I would really like it if the Obama team would explain (a) the assumptions they are using, particularly in relation to toxic assets; (b) why they believe toxic assets are undervalued by the markets, using objective data; (c) why they believe banks are either fairly valuing or undervaluing those same assets, even though they're listing them far above recent market prices, using objective data; (d) the precise nature of their plan; (e) why their plan is better than alternatives - in detail; and (f) how much they expect it to cost taxpayers, both if it goes as planned and if it turns out that critics of this plan are correct.

I'll add this; I'm still willing to assume that Geithner is a dedicated, hard-working public servant who means well, and who believes in this approach to the problem. But if he can't or won't explain himself, he deserves no deference.

11 comments:

  1. "I'm still willing to assume that Geithner is a dedicated, hard-working public servant who means well, and who believes in this approach to the problem."

    I am amazed you can say that and not have your tongue jump out of your mouth and run away for shame.

    If you believe this I'd like to introduce you to the son/daughter of a former high ranking African official who keeps sending me e-mail because he/she has a large sum of money in a bank account that only you can help him/her access . . .

    Ordinarily I am one of the first people to admit that we shouldn't attribute to "baser motives" what could be justified by ignorance, but come on . . .

    CWD

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  2. Really, if Geithner wanted to pursue a more self-enriching career path, he could easily have found one.

    The fact that he's arm-in-arm with the financial industry, seeing what's good for bankers as being what's good for the country - doesn't necessarily make him corrupt. That's the world he's long lived in, and he appears uncomfortable considering any other possibility.

    Geithner's conventionality probably explains why Thomas Friedman is so comfortable with him, while Paul Krugman is not. It has much less to do with expertise - Geithner hasn't tried to publicly show off subject matter expertise either in advancement or defense of his plans - and more to do with a willingness to question or doubt the status quo ante.

    Let me put it to you this way: Other than having me make caricatures of him as "Beaker", having 90% of the public associate him with excessive payments to "the crooks at AIG", and a salary not much in excess of yours, at the end of the day what does Geithner get out of this? His path to a seven figure salary or, if he prefers, a comfortable academic position was much more obvious before he took his current job; now it's largely dependent upon whether his bailout plan succeeds.

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  3. "Really, if Geithner wanted to pursue a more self-enriching career path, he could easily have found one." - but could he have found one that gave him more power and influence amongst his peers in the financial industry?

    I don't think that he is getting a "bribe" to do something. I think that he is not doing what is best for the nation as a whole.

    More to the point, I don't think he much cares about the nation as a whole . . . a point with which you evidently at least half agree, "The fact that he's arm-in-arm with the financial industry, seeing what's good for bankers as being what's good for the country - doesn't necessarily make him corrupt."

    I didn't say he was corrupt, I said (or implied) that he is a long, long, way away from being a "dedicated, hard-working public servant who means well, . . . "

    I think that he cares a "whole lot more" for his friends and peers in the financial industry then he does for the nation as a whole. I think that pretty much disqualfies him from "well meaning dedicated public servant" status.

    Prior to this administration he played a role in pouring billions of dollars "no strings attached" into the TARP and related programs and he seems to be dedicated at this point to doing more of the same. I'm inclined to think that his aversion to nationalizing banks as opposed to pouring tax payer dollars into them has more to do with not wanting to hurt his peers than it does with the good of the nation.

    With no disrespect intended, the last paragraph of your entry sounds an awful lot like the people who are defending Liddy by reminding me that he is "only working for 1 dollar a year" and therefore he must be altruistic in his motives . . . I don't buy either argument.

    CWD

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  4. "I think that he is not doing what is best for the nation as a whole."

    That's fair.

    But that leaves open the question, does he truly believe that the interests of the businesses he's protecting are aligned with the nation or, in the alternative, that to the extent that they're not the possible downside of the alternatives outweighs the benefits undeservedly received by those groups? Its possible to be both dead wrong and completely sincere.

    I think it's fair to respond to the implication that he has an ulterior motive by both asking what the motive is, and by pointing out that his recent choices aren't the fastest path to riches. If you told me that Liddy took on the AIG job to get rich, the $1 salary (and he gets no other compensation, stock or otherwise) would weigh against that particular claim. But the $1 doesn't resolve all questions about his motives, and certainly doesn't mean he's above criticism.

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  5. I'll add - the presumption of innocence is often followed by a guilty verdict. I'm interested to see how the evidence lays out.

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  6. I don't disagree with your most recent comments, but I'll leave you with this (admittedly cheap shot):

    I think the way the financial sector is being handled by this administration is just about as bad as the way it was handled by the last one (and just about as bad as the way the last administration handled the energy/oil sector).

    I don't recall there being a lot of people giving the last administration the benefit of the doubt as to motive.

    CWD

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  7. "Just about"? I think Geithner's current policy is a continuation of the Pauson/Geithner policy.

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  8. Does that mean you believe that Pauson was a ". . . dedicated, hard-working public servant who means well, and who believes in this approach to the problem . . ."? : )

    CWD

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  9. Possibly. But I'm not convinced that he was competent. Concerns over competence also carry over to Geithner. There are lots of examples of the Peter Principle in government.

    I'll note, there are many more obvious potential conflicts of interest with Paulson than with Geithner. The treasury seemed, time and time again, to question Paulson's motives for entering government (he reaped an astonishing tax benefit), and many of his decisions seemed to either hew to the benefit of Goldman Sachs or to the detriment of its competitors.

    In one interpretation - not charitable but seemingly quite plausible - Paulson cooks up a self-serving, industry favoring scheme that he can't quite sell to anybody but his credulous sidekick, who later moves into Paulson's position and... well, we'll find out later today.

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  10. At risk of again being accused of being soft-hearted, kind, and too trusting, I suspect Paulson was competent to head the Treasury under normal circumstances; I've yet to be convinced he knew what he was doing (or could... or even wanted to... separate the nation's interests from that of Goldman Sachs) within the context of the world financial crisis. And within the context of his being competent, that's judging him "by industry standards", as somebody competent by any less generous measure should have seen this coming.

    It's sad, actually, that we're still supposed to look upon people who (a) didn't see the collapse coming, (b) saw the collapse coming and did nothing, or (c) saw the collapse coming and said nothing while enriching themselves, as people suitable to lead the nation out of its financial crisis.

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  11. My head is firmly buried in the sand right now. I'm trying to avoid this news (although my husband put channel 4 Ruth to the Rescue crap on just now) because I'm so upset with this whole issue. So, I have nothing to add other than to encourage you both to keep at it--your debates are great :) Let me know when you do the live version!! :)

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