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Wednesday, February 11, 2009

FT financial rescue plan roundup: The Legend of Geithner's Gold

Tim Geithner, who has enjoyed fucking with our heads for the past two weeks, whipped out his financial rescue package at a press conference yesterday to audible gasps of delight. See, there he is trying to dodge questions by impersonating a flag pole.

The plan had four major points: shoring up banks with new capital and regulations; kick-starting credit markets with new Fed monies, particularly securitization markets; cleaning up banks' toxic assets; and tackling the foreclosure crisis.

With regard to the toxic assets, noticeably absent were plans for both the 'bad bank' and an insurance scheme, which means I wrote all that shit the other day for nothing. Thanks, Tim. Dick. The plan will now focus on a public-private partnership to finance purchases of the shitburgers and a renewed effort to recapitalize banks who end up selling them below their booked value, which means they'll all need to be recapitalized.

The public-private partnership will encourage private investors, "co-investors", to purchase toxic assets by providing them with low cost government financing and probably some kind of insurance program in case of catastrophic loss. The difference is investors get the insurance, not the banks. This sounds similar to the super-SIV that was originally proposed by Hank Paulson, but with actual government money behind it. An alleged benefit of the public-private approach is that it absolves the government from attempting to price the toxic assets and leaves that to private players. That sounds like more of a political benefit than anything, but subsidizing private investors doesn't exactly sound like a political winner either.

The big surprise in the plan is that banks don't seem they'll be getting gobs of free money they expected and additionally will be subjected to new regulation and "stress tests", which helps explain Wall Street's reaction yesterday. The parts of the plan that had leaked earlier seemed much more lenient on banks but those, fortunately, wont come to pass.

It's still very unclear how this will all actually be implemented, let alone whether it will work. One major unanswered question is what happens if a bank fails a stress test, if you want to be generous and say they haven't already failed several. It all still looks like a Herculean effort to avoid nationalization of insolvent banks, remember, but it doesn't specifically close the door to it either. The longer that question goes unanswered the more reluctant banks will be to lend, and if the point of the plan is to restart financial markets, it seems an odd, lazy way to go about it, making banks pee their pants in anticipation. Then there's the issue of whether the plan merely stalls the inevitable, wasting a ton of money in the process.

That said, to the extent investors are actually willing to buy the fucking things, the government will still be exposing itself to the biggest losses and will have to spend billions more refilling the hole left over from the sales. Brad DeLong notes that leaks within the Obama team are making it perfectly clear that this is the "Geithner Plan", so people will know whose house to burn down if it doesn't work.

Martin Wolf has more. He is pessimistic, to say the least.
Why Obama's new Tarp will fail to rescue the banks
The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers.


Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. [...]

If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. [...]

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. [...]

By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.

In other front page news...

General Motors in cutting 14% of it's white-collar work force. It is unclear what color unemployed people's collars are.

No one knows which right-wing asshole won Israel's election. Tzipi Livni of the "centrist" Kadima party, if you're willing to make the leap that Ariel Sharon was a centrist, claimed victory. Binyamin Netanyahu of Likud hasn't conceded. Any viable government will depend on Yisrael Beitenu's Avigdor Lieberman, who is by far more right-wing and an asshole than either of them.

And advertisers are overhauling their strategies in order to target America's fastest growing demographic: really fucking poor people.

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