Treasury White Paper on the financial bailout

[boutons_]

"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]

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.

[Winehole23]

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]

The Bulow/Klemperer piece suggests what should be commonsensical: that a bridge ins ution like the RTC 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]

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.





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

[TDMVPDPOY]

http://www.theaustralian.news.com.au...29-601,00.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]

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. Appe e 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]

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

http://www.ft.com/cms/s/0/7851925a-1...0779fd2ac.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]

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

Sucks 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]

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 ing mortal just like the rest of us.

[MannyIsGod]

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.

[boutons_]

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]

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 ing 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]

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.

The guy does have a point, as does Winehole. We need to pop a cap in a few banks' heads and get them out of the picture.

There is currently a large uptick in failed banks anyways. I think we need to really dismantle the larger zombies as fast as possible, and feed whatever is worth selling to healthier banks.

The plan is a first step, but needs to be coupled with some method of killing off the banks that need it. Krugman correctly points out that getting the bad loans off an insolvent bank's books will not magically make it solvent. It will keep it from losing more money, and might save those teetering on the edge though.

[Winehole23]

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 ins utions appears to be brewing.


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


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

[Winehole23]

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 ing 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]

"non-bank financial ins ution?"

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]

"non-bank financial ins ution?"

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]

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

that 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? NO.

Everyday you hear reports how undervalue the stocks and assets are, no 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 s 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]

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.

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

What is so ing hard to comprehend? China is heavily invested in our debt. That's basically a public 'knock this 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' .

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 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 and grow a ing brain for once.

[MannyIsGod]

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

What is so ing hard to comprehend? China is heavily invested in our debt. That's basically a public 'knock this 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' .

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 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 and grow a ing brain for once.

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 quan ative 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 is anyone going to take you seriously AHF?

[mogrovejo]

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]

lol hey you mofos, try and keep ur 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 , china buyin in more stake of RIO TINTO this ....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.....

[Cant_Be_Faded]

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]

Successful bank rescue still far away

By Martin Wolf

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 ins utions, the US is at an impasse.
(...)
If this is not frightening, I do not know what is.
----------

If Wolf is right and the subsidies aren't enough to recapitalize the banks, this is going to get ugly.