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Saturday, February 7, 2009


Krishna Guha offers a sexy breakdown of the shitty asset insurance scheme being debated by Obama's econonerds. The benefits of such a such a scheme, as opposed to a government-run bad bank, are as follows:
  • banks will actually have to pay something for it.
  • the government wont actually have to physically engage in the embarrassing transaction in which it purchases a turd sandwich for more than the value of a turd sandwich...
  • so the accurate pricing of assets, therefore, becomes somewhat less important.
  • to the extent shitty assets are insured, it will cap banks' potential losses on them. Theoretically this eliminates the uncertainty of catastrophic losses and will kick-start the financial markets by allowing investors and lenders to do something other than cower in the basement.
The unbenefits of an insurance scheme, however, are that:
  • there's no reason to believe this scheme will be significantly less costly to the taxpayer since...
  • the government takes the brunt of the losses as it is, and probably all of any catastrophic loss.
  • pricing the shitburgers is still important because the government could potentially undercharge for insurance.
  • also any difference between the book value of the assets and the amount the government agrees to insure will need require more capital to fill the hole, from the government.
  • the assets will still be on the banks' balance sheets.
  • shareholders don't get stripped and beaten in public.
This plan really is the Anything But Nationalization (ABN) plan. The biggest problem to me seems that working out insurance schemes individually for all these fucking things will take months, while they remain on bank's balance sheets, which seems the antithesis of a speedy, definitive bank rescue however you structure it. And coupled with a new recapitalization scheme and a smaller bad bank seems to make the plan needlessly complex, where mind-numbing complexity was already an issue. At least with the bad bank, which I also hate, the toxic assets are gone and banks can get on with it. Instead, years from now, they'll still be there.

A year and a half into it and Obama's promised deathblow to the financial crisis is turning into a slow, plodding clusterfuck of bad ideas already proposed and discarded for whatever reason, and that not even smarts will be able to understand anyway.

Temporary nationalization seems to me the easiest, most straightforward approach, not that it doesn't present problems of its own. But pricing the toxic assets wont matter, since the government can hold them to maturity for all anyone cares, or simply wait until a market for them materializes. Shareholders will actually be punished for investing in the things that brought down the planet, which is what's supposed to happen when your company gets bailed out anyway. And finally, ahem, let's recall these banks are already insolvent, for fuck's sake.
It may be indelicate to say so, but many of these banks are, realistically, bust. While policymakers are admirably reluctant to extend the process of nationalisation, more public ownership is both inevitable and potentially helpful. For state control can facilitate more lending. It also removes the acute conflict of interest between taxpayers and shareholders regarding finding a value at which bad assets can be extracted from bank balance sheets without favouring one group at the expense of the other.
The only way the proposed rescue plan makes sense is to avoid the above. So far, as Paul Krugman says, its like socialism without the justice.

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