Treasury White Paper on the financial bailout [Archive]

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Winehole23

03-23-2009, 11:20 AM

March 23, 2009

Treasury Department Releases Details on Public Private Partnership Investment Program (http://www.treasury.gov/press/releases/tg65.htm)
Fact Sheet
Public-Private Investment Program (http://www.treasury.gov/press/releases/reports/ppip_fact_sheet.pdf)

View White Paper and FAQs at http://financialstability.gov (http://www.treasury.gov/cgi-bin/redirect.cgi?http://financialstability.gov/)
The Financial Stability Plan – Progress So Far:Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the American Recovery and Reinvestment Act – lay the foundations for economic recovery:

Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.

The Challenge of Legacy Assets: Despite these efforts, the financial system is still working against economic recovery. One major reason is the problem of "legacy assets" – both real estate loans held directly on the books of banks ("legacy loans") and securities backed by loan portfolios ("legacy securities"). These assets create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending.

Origins of the Problem:The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.
Creation of a Negative Economic Cycle: As a result, a negative cycle has developed where declining asset prices have triggered further deleveraging, which has in turn led to further price declines. The excessive discounts embedded in some legacy asset prices are now straining the capital of U.S. financial institutions, limiting their ability to lend and increasing the cost of credit throughout the financial system. The lack of clarity about the value of these legacy assets has also made it difficult for some financial institutions to raise new private capital on their own.

The Public-Private Investment Program for Legacy Assets

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:

Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.
Two Components for Two Types of Assets: The Public-Private Investment Program has two parts, addressing both the legacy loans and legacy securities clogging the balance sheets of financial firms:

Legacy Loans:The overhang of troubled legacy loans stuck on bank balance sheets has made it difficult for banks to access private markets for new capital and limited their ability to lend.
Legacy Securities:Secondary markets have become highly illiquid, and are trading at prices below where they would be in normally functioning markets. These securities are held by banks as well as insurance companies, pension funds, mutual funds, and funds held in individual retirement accounts.

http://www.treasury.gov/press/releases/images/ppip_chart.jpg

The Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the Federal Deposit Insurance Corporation and Treasury are launching a program to attract private capital to purchase eligible legacy loans from participating banks through the provision of FDIC debt guarantees and Treasury equity co-investment. Treasury currently anticipates that approximately half of the TARP resources for legacy assets will be devoted to the Legacy Loans Program, but our approach will allow for flexibility to allocate resources where we see the greatest impact.

Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged. The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.
Using FDIC Expertise to Provide Oversight: The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks.
Joint Financing from Treasury, Private Capital and FDIC: Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from the FDIC.
The Process for Purchasing Assets Through The Legacy Loans Program: Purchasing assets in the Legacy Loans Program will occur through the following process:

Banks Identify the Assets They Wish to Sell:To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
Pools Are Auctioned Off to the Highest Bidder:The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
Financing Is Provided Through FDIC Guarantee:If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.
The Legacy Securities Program:The goal of this program is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit. The resulting process of price discovery will also reduce the uncertainty surrounding the financial institutions holding these securities, potentially enabling them to raise new private capital. The Legacy Securities Program consists of two related parts designed to draw private capital into these markets by providing debt financing from the Federal Reserve under the Term Asset-Backed Securities Loan Facility (TALF) and through matching private capital raised for dedicated funds targeting legacy securities.

Expanding TALF to Legacy Securities to Bring Private Investors Back into the Market:The Treasury and the Federal Reserve are today announcing their plans to create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit. The intention is to incorporate this program into the previously announced Term Asset-Backed Securities Facility (TALF).

Providing Investors Greater Confidence to Purchase Legacy Assets:As with securitizations backed by new originations of consumer and business credit already included in the TALF, we expect that the provision of leverage through this program will give investors greater confidence to purchase these assets, thus increasing market liquidity.
Funding Purchase of Legacy Securities: Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.
Working with Market Participants: Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.

Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available to partner with private capital providers to immediately support the market for legacy mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination.

Side-by-Side Investment with Qualified Fund Managers: Treasury will approve up to five asset managers with a demonstrated track record of purchasing legacy assets though we may consider adding more depending on the quality of applications received. Managers whose proposals have been approved will have a period of time to raise private capital to target the designated asset classes and will receive matching Treasury funds under the Public-Private Investment Program. Treasury funds will be invested one-for-one on a fully side-by-side basis with these investors.
Offer of Senior Debt to Leverage More Financing: Asset managers will have the ability, if their investment fund structures meet certain guidelines, to subscribe for senior debt for the Public-Private Investment Fund from the Treasury Department in the amount of 50% of total equity capital of the fund. The Treasury Department will consider requests for senior debt for the fund in the amount of 100% of its total equity capital subject to further restrictions.

Sample Investment Under the Legacy Securities Program

Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2:A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3:The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6:The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.

REPORTS

White Paper (http://www.treasury.gov/press/releases/reports/ppip_whitepaper_032309.pdf)
Legacy Securities Summary of Terms (http://www.treasury.gov/press/releases/reports/legacy_securities_terms.pdf)
Legacy Securities FAQs (http://www.treasury.gov/press/releases/reports/legacy_securities_faqs.pdf)
Application for Private Assets Managers (http://www.treasury.gov/press/releases/reports/legacy_securities_ppif_app.pdf)
Legacy Loans Summary of Terms (http://www.treasury.gov/press/releases/reports/legacy_loans_terms.pdf)
Legacy Loans FAQs (http://www.treasury.gov/press/releases/reports/legacy_loans_faqs.pdf)

Winehole23

03-23-2009, 11:21 AM

Treasury expects the PPIFs to initially target non-agency RMBS and CMBS originated prior to 2009 with a rating of “AAA” at origination.

Winehole23

03-23-2009, 01:12 PM

Geithner's WSJ oped (http://online.wsj.com/article/SB123776536222709061.html).

Winehole23

03-23-2009, 01:27 PM

A rash of scathing critiques can be found here (http://economistsview.typepad.com/economistsview/2009/03/despair-over-financial-policy.html).

Winehole23

03-23-2009, 01:33 PM

I've just been reading the NYT report (http://www.nytimes.com/2009/03/21/business/21bank.html). The central Treasury assumption, at least for public consumption, seems to be that the underlying mortgage loans will largely pay off, so that if the PPIP buys and holds, at an above-present-market price governed by auction, the government's loan to finance the purchase will not go bad.

Recovery rates on sub-prime residential mortgage-backed securities (RMBS) so far appear to belie this assumption. ...

The way to find out who is right is ... examination of the underlying loan tapes -- and comparison to the IndyMac portfolio -- would help determine whether these loans or derivatives based on them have any right to be marketed in an open securities market, and any serious prospect of being paid over time at rates approaching 60 cents on the dollar, rather than 30 cents or less.

Note that even a small loss of capital, relative to the purchase price, completely wipes out the interest earnings on the Treasury's loans, putting the government in a loss position and giving the banks a windfall.

If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy. ...

If I were a member of Congress, I would offer a resolution blocking Treasury from making the low-cost loans it expects to offer the PPIPs, until GAO or the FDIC has conducted an INDEPENDENT EXAMINATION OF THE LOAN TAPES underlying each class of securitized assets, and reported on the prevalence of missing documentation, misrepresentation, and signs of fraud. In the absence of a credible rating, this is the minimum due diligence that any private investor would require.

Winehole23

03-23-2009, 01:43 PM

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem. ...

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

boutons_deux

03-23-2009, 01:51 PM

Geithner is truly a Goldman graduate, an ultimate insider/wealthy elitist, how to enrich the rich, his colleagues in corruption, while fucking over everybody else.

ex-Goldman Paulsen's bailout of AIG led directly to AIG paying Goldman the most it paid out to anybody, $12B. Paulsen also shit-canned Lehman, Goldman's direct competitor.

The Magik Negro will destroy his first term if he let's Goldman grads continue to fuckover taxpayers.

Winehole23

03-23-2009, 01:59 PM

The Magik Negro will destroy his first term if he let's Goldman grads continue to fuckover taxpayers.Your predecessor was prone to similar outbursts.

Carry the moniker with pride, b_d.

(Did your vMoney vanish in the casino, boutons?)

Winehole23

03-23-2009, 03:14 PM

Wall Street loves (http://www.msnbc.msn.com/id/3683270/) it. (Spidey-sense tingling...)

coyotes_geek

03-23-2009, 03:38 PM

Wall Street loves (http://www.msnbc.msn.com/id/3683270/) it. (Spidey-sense tingling...)

I'm sure they do. I'd love it too if the government wanted to give me money to invest in something where they take the risk and I get the rewards.

boutons_deux

03-23-2009, 03:41 PM

The people who trashed the world's economy are now being paid to fix it.

The inmates are running the insane asylum.

RandomGuy

03-23-2009, 03:49 PM

Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined.

"Haircuts"

Slang term used in finance to describe write-downs of various sorts, usually directly affecting ending equity/surplus.

http://financial-dictionary.thefreedictionary.com/Haircut

FWIW

mogrovejo

03-23-2009, 03:52 PM

For once, Krugman is right: this will recapitalize the banks at taxpayer expense.

And I think this administration is into a huge shock if they expect the banks to start lending like crazy once they get rid of the bad assets.

LnGrrrR

03-23-2009, 04:00 PM

I hate the way the report makes it sound so sanitary. I know it has to, but it still gives me a weird sense of the creeps.

coyotes_geek

03-23-2009, 04:09 PM

And I think this administration is into a huge shock if they expect the banks to start lending like crazy once they get rid of the bad assets.

Agreed. The banks sure as hell aren't going to just start loaning money to anyone and everyone like they were in the past. And unfortunately the ones who the banks would be willing to loan money to are the same ones who are going to be afraid to borrow because their investments are still in the shitter and they're looking at a giant Obama tax hike coming their way.

Marcus Bryant

03-23-2009, 04:14 PM

How fucking convenient. The DC Party screws the people. Again.

MannyIsGod

03-23-2009, 05:22 PM

I'm sure they do. I'd love it too if the government wanted to give me money to invest in something where they take the risk and I get the rewards.

For once, Krugman is right: this will recapitalize the banks at taxpayer expense.

And I think this administration is into a huge shock if they expect the banks to start lending like crazy once they get rid of the bad assets.

How fucking convenient. The DC Party screws the people. Again.

Pretty much agree with most of this. Even if this works, for the government to hold a large amount of risk here with far from the equal prospect of making money is fucking foolish. I doubt they would be able to nationalize at this point, but had they started down that road months ago then perhaps it would be a different story.

This may be the only path that has any political will behind it at the moment, but that situation itself was one of the administration's own creating.

Best case scenario is that we don't get fucked here. Worst case is the shit stays broken and we're out the money for the loans.

Winehole23

03-23-2009, 05:45 PM

Pretty much agree with most of this. Even if this works, for the government to hold a large amount of risk here with far from the equal prospect of making money is fucking foolish. I doubt they would be able to nationalize at this point, but had they started down that road months ago then perhaps it would be a different story.

This may be the only path that has any political will behind it at the moment, but that situation itself was one of the administration's own creating.

Best case scenario is that we don't get fucked here. Worst case is the shit stays broken and we're out the money for the loans.Brad de Long's half-hearted defense of Geithner (link at #4) basically proceeds along the same lines. QE has already started. Whatever money is lacking for the plan, will be created to fill the gap.

Winehole23

03-23-2009, 05:57 PM

NYT's Opinionator (http://opinionator.blogs.nytimes.com/2009/03/23/toxic-reaction/) blog.

It is easier to abstractly argue the virtues of successful nationalization than contemplate the consequences of unsuccessful nationalization. As such, it should be the absolute last resort. And this plan preserves it as such. There is a non-trivial chance, after all, that the banks will not sell to the private investors because the private investors will not buy the assets at a price that makes the banks solvent. If the private market determines the assets are worth 30 cents on the dollar but the banks will collapse if they’re not bought for 45 cents on the dollar, then the auctions will reveal insolvent banks that cannot be rendered whole through market measures. In that scenario, nationalization will become a consensus strategy, and as such, lose much of its downside.

Winehole23

03-23-2009, 06:00 PM

[T]he [plan's] subsidies are in the form of no recourse loans rather than direct appropriations, so the government has the authority to move forward under existing TARP legislation and other laws.

MannyIsGod

03-23-2009, 06:01 PM

Its true that if the shit hits the fan we'll nationalize anyway, but the fact is that by doing that then we lose more of the upside we'd gain if we didn't have to do that. No matter how you slice it the taxpayer just isn't getting an equal shot here. If our money is going to be used to save the system we have, I don't have a problem with that providing that we receive the benefit.

However, making some assholes richer under the cover of fixing our system is a really just a kick in the ass. This shit isn't change. Its what always fucking happens.

Winehole23

03-23-2009, 06:15 PM

Virtually no one thinks that Congress is willing to quickly offer either the legislation authorizing such an action nor the massive upfront money that receivership would require. Will Ben Nelson and George Voinovich vote to take control of the banks? And what happens to the market while Congress is debating? And to Congress if the market dives?

No one knows if the Treasury Department has the technical capacity or simple competence to swiftly assume control of much of the United States banking sector. If Treasury seems unable to simply build out a banking plan and claw back bonuses, what makes anyone think they can run the banking sector?

MannyIsGod

03-23-2009, 06:19 PM

Thats a fair point.

Winehole23

03-23-2009, 06:26 PM

Hell, Geithner barely has any deputies yet. Paul Volcker's cri de coeur (http://blogs.abcnews.com/politicalpunch/2009/02/volcker-shamefu.html) a few weeks ago described Geithner as "sitting there alone" at Treasury.

mogrovejo

03-23-2009, 06:27 PM

Innovative ways of not overpaying for the toxic assets and find out which banks are solvent:

Reorganising the banks: Focus on the liabilities, not the assets (http://www.voxeu.org/index.php?q=node/3320)
Jeremy Bulow Paul Klemperer
21 March 2009

Fixing the banks is an absolute priority in G7 nations. Doing this by buying toxic assets is costly, inefficient, and risky. Governments should focus on which liabilities, rather than which assets, they need to support. This column proposes creating “bridge” banks as a way of re-establishing a healthy banking system.

Mechanism design and the bailout (http://www.noisefromamerika.org/index.php/articles/Mechanism_design_and_the_bailout#body)

It has been widely claimed that one of the main reasons of the current troubles in the banking sector is the inability to properly price some assets, in particular Mortgage Backed Assets. The managers of the banks claim that the assets are worth more than the price at which they can currently be sold. The claim implies that managers have better information about these assets than the general public, a plausible assumption. The only way to solve the problem is to eliminate the asymmetry of information. Bank managers should be forced to invest part of their wealth and their compensation in the assets that they claim to be worth more than the market is willing to pay.

boutons_

03-23-2009, 07:41 PM

"assume control of much of the United States banking sector"

"Much"? how much? As with the housing stock of which 90% is not distressed, not at risk, same with the banks.

Same with unemployment, which is at 90%+ employment.

No one is not talking about taking possession of the entire banking sector, or even half of it, or even "much" of it.

Winehole23

03-23-2009, 09:06 PM

Winehole23

03-23-2009, 09:07 PM

If, as it is often claimed, a strategy of ''buy and hold'' for these assets can produce very high returns at the current prices then the managers should have no problem accepting the scheme here proposed. On the other hand, if the managers oppose the proposal we will have obtained valuable information anyway: that their claims on the high value of the toxic assets are not to be trusted.

Winehole23

03-23-2009, 09:26 PM

The Bulow/Klemperer piece suggests what should be commonsensical: that a bridge institution like the RTC (http://www.fdic.gov/bank/analytical/banking/2005jul/article2.pdf) take charge of failed banks and isolate their liabilities. The patients need to see a triage nurse. Unfortunately, this consultation will be postponed as long as possible.

Winehole23

03-23-2009, 09:56 PM

No one is not talking about taking possession of the entire banking sector, or even half of it, or even "much" of it.Remember *nationalization*?

If they're not talking about it now they should be. One or more of the megabanks are rotters.

http://a1.vox.com/6a00d09e5cb15ebe2b00f48cdc66e10003-500pi

At some point the government's hand will be forced. Default will not be mocked forever.

TDMVPDPOY

03-23-2009, 10:09 PM

http://www.theaustralian.news.com.au/story/0,25197,25234229-601,00.html

Timothy Geithner backs Kevin Rudd's strategy on global financial crisis

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Matthew Franklin in Washington | March 24, 2009
Article from: The Australian

US Treasury Secretary Timothy Geithner has endorsed Kevin Rudd as being "A-plus" on issues relating to the global recession in Washington this morning.
"If we did what he advised we'd all be in a better place,” said Mr Geithner, who is driving the US response to the recession.

The unexpected endorsement came at a business forum in Washington organised by influential newspaper, The Wall Street Journal.

Mr Geithner appeared in a question-and-answer session before Mr Rudd and, as the audience was advised to sit tight for Mr Rudd's looming appearance, said: “Just let me add my voice on this. The Prime Minister is A-plus on these issues.”

Earlier, Mr Geithner told the audience of businesspeople that they should not underestimate the “anger and frustration” among average Americans over how excessive risk-taking in the US finance sector had triggered the recession, which was now affecting the entire world.

As he explained his plans for public-private partnerships worth $1 trillion to remove toxic assets from bank balance sheets, Mr Geithner said his country must reorganise its financial markets to to restore confidence in its "ability to act sensibly”.

Mr Geithner's endorsement came after Mr Rudd enthusiastically welcomed the US Treasury plan.

The Prime Minister said this morning the Treasury plan, which triggered a massive surge on stock values on Wall Street, was the first step along the road to ending the global recession.

The plan, revealed in the US this morning, would see US taxpayers joining with the private sector to buy as much as $1 trillion worth of bad and doubtful debts which are sitting on the balance sheets of major banks.

Once the soured assets are removed from bank balance sheets, the banks will be free to resume lending, thereby kick-starting the stalled global economy.

"I welcome today the statement by Treasury Secretary (Timothy) Geithner on the financial stability plan and the particular operation of the public-private partnership which he has outlined within that plan,” Mr Rudd said in Washington.

"This is the core of the global economic problem _ it is the core of the global financial problem,” he said, stressing that a recovery of the US banking sector would lift bank stock values and allow a resumption of credit flows throughout the world, including to Australia.

In recent months Mr Rudd has used the G20 to champion the need for the "ring-fencing” of toxic assets as a vital step to ending the financial downturn.

Earlier this month Wayne Swan pressed G20 finance ministers meeting in the UK to accept the need to deal with toxic assets and the meeting produced a framework for action that acknowledged different nations might use different models for action.

Mr Rudd will attend a G20 leaders meeting in London next week to press for further action.

“This of course is important in the broader framework of acting on global bank balance sheets that is necessary right across Europe as well,” Mr Rudd said.

Only problem i have here is the solvent banks with credit, a majority of them arent even lending atm.....

Winehole23

03-23-2009, 10:24 PM

Only problem i have here is the solvent banks with credit, a majority of them arent even lending atm.....I assume you mean Australia. It's not a good environment for lending here either. There's major pucker factor. Appetite for risk has yielded to the instinct for wealth preservation. Can't say I much blame the banks for declining to shoulder additional risk in the present environment.

Aggie Hoopsfan

03-23-2009, 11:00 PM

And of course, we now get China's response to the Geithner plan:

http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Winehole23

03-23-2009, 11:22 PM

And of course, we now get China's response to the Geithner planSucks for us, but the credibility of our system is somewhat impaired at the moment.

China's *response* is of the same kidney as Europe's: both point to a basket of currencies that will be the new reference point. IMO it's a valid countermove to the outlandish magnitude of risk taken onto the US balance sheet since September 2008, plus the global burn suffered in wake of the AIG financial products flameout.

Cant_Be_Faded

03-24-2009, 01:33 AM

MannyIsGod

03-24-2009, 02:12 AM

boutons_

03-24-2009, 06:01 AM

Krugman's blog on the math of subsidies to the the capitalists

March 23, 2009, 10:11 am Geithner plan arithmetic

Leave on one side the question of whether the Geither plan is a good idea or not. One thing is clearly false in the way it’s being presented: administration officials keep saying that there’s no subsidy involved, that investors would share in the downside. That’s just wrong. Why? Because of the non-recourse loans, which reportedly will finance 85 percent of the asset purchases.

Let me offer a numerical example. Suppose that there’s an asset with an uncertain value: there’s an equal chance that it will be worth either 150 or 50. So the expected value is 100.

But suppose that I can buy this asset with a nonrecourse loan equal to 85 percent of the purchase price. How much would I be willing to pay for the asset?
The answer is, slightly over 130. Why? All I have to put up is 15 percent of the price — 19.5, if the asset costs 130. That’s the most I can lose. On the other hand, if the asset turns out to be worth 150, I gain 20. So it’s a good deal for me.

Notice that the government equity stake doesn’t matter — the calculation is the same whether private investors put up all or only part of the equity. It’s the loan that provides the subsidy.

And in this example it’s a large subsidy — 30 percent.

The only way to argue that the subsidy is small is to claim that there’s very little chance that assets purchased under the scheme will lose as much as 15 percent of their purchase price. Given what’s happened over the past 2 years, is that a reasonable assertion?

Update: Another way to say this is that by financing a large part of the purchase with a non-recourse loan, the government is in effect giving investors a put option to sweeten the deal.

=========

iow, the govt is subsidizing cash-for-trash. It's still trash (bad mortages), and it's always our cash.

RandomGuy

03-24-2009, 09:07 AM

So private investors get basically a super low risk gamble handed to them on a silver plate. The only one who can lose is the taxpayer.
Terrific.

These assholes on capitol hill and the assholes on wall street are going to push and push, and one day are going to push too far. When there are more and more lower income families being pushed to the street, and all they heard on tv was wall street this, wall street that....eventually there will be a price paid in blood.
Maybe that's what we really need so these assholes wake up and realize they're fucking mortal just like the rest of us.

I am somewhat torn over this. If we don't get the questionable assets off the banks' books, then we all suffer anyway. I don't think I like this, but I don't see much other recourse.

I am going to guess that within a year or so, we will see the first bank/financial executive murdered by some unemployed nutjob.

RandomGuy

03-24-2009, 09:10 AM

Winehole23

03-24-2009, 09:55 AM

The plan is a first step, but needs to be coupled with some method of killing off the banks that need it. A plan to give Treasury the power to seize non-bank institutions (http://dealbook.blogs.nytimes.com/2009/03/24/geithner-expected-to-seek-new-powers-for-treasury/?hp) appears to be brewing.

Is the proximate aim to seize AIG? Hedge funds? What all counts as a "non-bank financial institution?"

Seems like this puts the cart before the horse, but maybe Sec'y Geithner knows something we don't.

Winehole23

03-24-2009, 10:39 AM

So private investors get basically a super low risk gamble handed to them on a silver plate. The only one who can lose is the taxpayer.
Terrific.CNBC advertised a 7/93 private/public split yesterday. So skin in the game is minimal and losses are capped on the private side.

Maybe that's what we really need so these assholes wake up and realize they're fucking mortal just like the rest of us.They were the masters of the universe, or so they thought. Reality will come to them gradually if it does not come suddenly.

boutons_deux

03-24-2009, 04:03 PM

"non-bank financial institution?"

private investors/lenders/"hard money", aka capitalists looking for a higher return by lending a sub-prime rates, and enriched by 100s of $Bs of liquidity from dubya's tax cuts (about $1T from estate tax cuts alone), were huge players in inflating the housing bubble.

Winehole23

03-24-2009, 04:31 PM

"non-bank financial institution?"Insurance companies and hedge funds, most obviously. I'm not too sure what else might count though. I'm pretty sure individual investors wouldn't count.

TDMVPDPOY

03-24-2009, 05:11 PM

private investors + ppl cash up will not invest in such projects if it not guaranteed ROI.

Fuck that shit you know what im saying, whats the incentive to invest? what happens if it goes busts, is the govt going to bail out the private investor? FUCK NO.

Everyday you hear reports how undervalue the stocks and assets are, no shit its undervalue, but are they makn profit or is there any foreseeable quick turn around of the economy where you can offload these assets in a 2-3 year spand, ppl are not committed in such investments cause of the economy.

The only ppl who i think should have a look are 401k funds, pension/super funds....cause these shits are usually in the long haul due to ppl cant have access to their money when they are at retirement age, but they can dictate where there money is invested.

Aggie Hoopsfan

03-24-2009, 06:29 PM

Blaming that move by China on Obama is not a surprising move by AHF, but that doesn't make it any closer to being true. They're obviously worried about being too heavily leveraged on the dollar, but if you think that's because Obama then you simply have no clue whats happend here over the past year.

At this point the generic GOP hack's response to anything is to blame Obama.

Fuck off Manny. You used to be capable of independent though, now you're just an Obamapologist.

What is so fucking hard to comprehend? China is heavily invested in our debt. That's basically a public 'knock this shit off before you destroy the dollar' comment from China.

At this point the generic Obama nutsucker's response to anything is to reply to any criticism of this administration with the same tired 'you're just blaming Obama' shit.

Funny, for the last 4 years you jackasses have blamed Bush for everything, now the shoe's on the other foot you're being a bitch about it. Disappointing to say the least, Manny.

For someone who has an affinity for bashing Wall Street, etc., you sure seem defensive about Team Obama's plan that basically tells private equity to get in the game, and if they fail don't worry the losses will be born by the American taxpayer.

This is a move by the power brokers in D.C. to take care of their rich buds, and it's born across both sides of the aisle, and led by Team Obama and Geithner.

Quit trying to act like the Messiah isn't culpable in this shit and grow a fucking brain for once.

MannyIsGod

03-24-2009, 07:05 PM

Fuck off Manny. You used to be capable of independent though, now you're just an Obamapologist.

What is so fucking hard to comprehend? China is heavily invested in our debt. That's basically a public 'knock this shit off before you destroy the dollar' comment from China.

At this point the generic Obama nutsucker's response to anything is to reply to any criticism of this administration with the same tired 'you're just blaming Obama' shit.

Funny, for the last 4 years you jackasses have blamed Bush for everything, now the shoe's on the other foot you're being a bitch about it. Disappointing to say the least, Manny.

For someone who has an affinity for bashing Wall Street, etc., you sure seem defensive about Team Obama's plan that basically tells private equity to get in the game, and if they fail don't worry the losses will be born by the American taxpayer.

This is a move by the power brokers in D.C. to take care of their rich buds, and it's born across both sides of the aisle, and led by Team Obama and Geithner.

Quit trying to act like the Messiah isn't culpable in this shit and grow a fucking brain for once.

:lmao What?

Are you even capable of reading? Its funny because the posts are in this very thread.

I can't decide whats funnier. Your pinning of the "destruction of the dollar" on the current round of quantitative easing and not the years of reckless American financial policy that were all heading down this path or the fact that you're so busy trying to fit me into your mold of perception that you can't be bothered to read my posts where I say the exact opposite and explain how disappointed in Obama I am.

How in the hell is anyone going to take you seriously AHF?

mogrovejo

03-24-2009, 07:09 PM

Thx for the link, mogrovejo.

Question: doesn't Geithner's PIPF auction process obtain similar information to Mr. Brusco's scheme? At the very least it may reveal who is insolvent at a given price, which is almost the same thing.

The suggestion that fund managers have some skin in the game comports with motivating rational self-interest and stimulating fiduciary responsibility; but it also gives the manager an incentive to maximize the value of his investment.

This is a moment of danger for the US taxpayer, one of many in this many-tentacled bailout.

Brusco's solution would avoid overpaying for the assets to the extent it will undoubtedly happen with Geithner's plan. But Geithner wants to recapitalize the banks and save as many of them as possible; Brusco's plan is not feasible, bank managers would never supplement collateral to back their pricing.

Insurance companies and hedge funds, most obviously. I'm not too sure what else might count though. I'm pretty sure individual investors wouldn't count.

I read somewhere that some funds opened to high-end individual investors will probably be created.

TDMVPDPOY

03-24-2009, 07:38 PM

lol hey you mofos, try and keep ur shit in american hands, not in foreign hands, dont sell ur soul to the devil in the east, which you guys have already did with bonds....

china wants to buy australian companys which controls alot of the worlds natural resource operations... :( :( DONT SELL OUT.

ARG fkn shit, china buyin in more stake of RIO TINTO fuck this shit....these dumb kents shouldve allowed BHP to buy them out, but no they got to greedy and wanted more during the good times, china will buy a stake and probably a full take over in the future.....:bang

Cant_Be_Faded

03-24-2009, 08:58 PM

AggieHoopsFan's posts in the political forum have gone from entertainingly wrong to pathetic and not even worth glancing at.
Denial is always the first step to overcome.

mogrovejo

03-25-2009, 06:45 PM

Successful bank rescue still far away (http://www.ft.com/cms/s/0/1bdc2a28-1890-11de-bec8-0000779fd2ac.html)

By Martin Wolf (http://www.ft.com/cms/s/0/1bdc2a28-1890-11de-bec8-0000779fd2ac.html)

I am becoming ever more worried. I never expected much from the Europeans or the Japanese. But I did expect the US, under a popular new president, to be more decisive than it has been. Instead, the Congress is indulging in a populist frenzy; and the administration is hoping for the best.
(...)
Will it work? That depends on what one means by “work”. This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks’ trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody – certainly not the Treasury – thinks this scheme will end the chronic under-capitalisation of US finance.
(...)
Why might this scheme get in the way of the necessary recapitalisation? There are two reasons: first, Congress may decide this scheme makes recapitalisation less important; second and more important, this scheme is likely to make recapitalisation by government even more unpopular.

Imagine what happens if, after “stress tests” of the country’s biggest banks are completed, the government concludes – surprise, surprise! – that it needs to provide more capital. How will it persuade Congress to pay up?

The danger is that this scheme will, at best, achieve something not particularly important – making past loans more liquid – at the cost of making harder something that is essential – recapitalising banks.

This matters because the government has ruled out the only way of restructuring the banks’ finances that would not cost any extra government money: debt for equity swaps, or a true bankruptcy.
(...)
I fear, however, that the alternative – adequate public sector recapitalisation – is also going to prove impossible. Provision of public money to banks is unacceptable to an increasingly enraged public, while government ownership of recapitalised banks is unacceptable to the still influential bankers. This seems to be an impasse.
(...)
The conclusion, alas, is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster. On the contrary, with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government’s ability to pour public money into undercapitalised institutions, the US is at an impasse.
(...)
If this is not frightening, I do not know what is.
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If Wolf is right and the subsidies aren't enough to recapitalize the banks, this is going to get ugly.