Fixing TARP

The choice, from the outset, has been the Japanese approach, of “shoring up” insolvent banks under the delusion that this really a liquidity problem, or the Swedish approach, of nationalizing the banks. The Japanese approach was a disastrous failure. The Swedish approach worked.
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But as long as a central goal of the bank bailout that shareholders not be stripped and senior management keep their jobs, there is no chance that the finance sector will be revitalized.

KT-I don’t think any thing is going to really work until we actually find out what went wrong. I know a lot conventional wisdom on the Hill would probably say we don’t want to get bogged down at this point in investigation, but I don’t see how we can honestly deal with this situation until we know, what went wrong and who was responsible for it.
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I’m not necessarily talking about putting people in jail, although in clear cases of fraud that would be nice, but getting to the bottom of how the system became so completely broken. If to do that we need to grant immunity and just have everyone pony up to their role I think we should do it to ensure this never happens again.

jayack – While I agree the Swedish model has much to teach us (as Swedish models always do), there are a lot of differences between it and our current crisis. for starters, it was a much smaller bite of the world economy and there was not a global meltdown in full sway at the time.
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I agree that a lot of people and institutions are still trying to evade responsibility for their role in precipitating this crisis, but that does not automatically mean that nationalizing is the cure for all ills. What is becoming distressingly apparent is there is still a lot of pain to come from this mess, and it’s not clear how to minimize it and also start the process of repair.
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Ugh.

@KT — “Private investors will not get a penny of their money back until the federal government recoups its own investment, plus some agreed-upon profit.”

sounds like a simple 2 tranch mortgage backed security arrangement!

There is no winning, ever. Four months ago the idea of private sector helping instead of the public carrying the entire load would have been welcomed. Now it’s met with suspicion.

And Friday I had to endure an entire NPR piece on why NOT having earmarks in the stimulus package is a recipe for disaster. I wish we had a press we could trust. Just once.

KT:

You’re right about guaranteeing priority among potential beneficiaries of bailouts – taxpayers first. That said, I’m not sure why we’d oppose private sector participation in the rescue of the private sector. If the Sage of Omaha wants to put capital at risk, understanding the public has first rights to any profits, let him go for it. He, unlike many in the money biz, evidently realizes this kind of potential receding tide is likely to ground all boats.
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Let’s focus on saving the victim (the economy) first, THEN bring holy hell down on the heads of the perps. Reverse that priority and we may well get a Second Great Depression, with the cold comfort of punishing those responsible.

That’s true billiecat. But I still don’t see how there can be a resolution that has, as a goal, that shareholders in insolvent businesses should have their holdings propped up by the taxpayers.
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Also, without some clawback of bonuses, we will have rewarded fraud. and, gunny, I don’t think there is any question that this fraud. Congressman Brad Miller makes the case: http://tinyurl.com/af8faq
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Also, Miller points out why the banks are refusing to work out foreclosures–doing so will weaken their balance sheets, which currently value properties in foreclosure at full appraised value.

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jayack – I believe the lack of modification is due to more complicated circumstances than just fraud. There may be some overvaluation of loans held in portfolio, but from my experiences talking to attorneys for banks who are dealing with foreclosures, if they actually hold the loans they’ve already taken the write down, or will do so to avoid foreclosure.
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On the other hand, loans held in securitized pools are governed by pooling and servicing agreements that limit what the trustee and servicer may do to work out defaults. If the servicer or trustee goes too far out on a limb with modifications, the investors in these trusts can sue for breach of fiduciary duty. Because these investors could care less what happens to the economy so long as their cash flow is unharmed, workouts only trickle in. Sure, in the long run it’s better to take a haircut than risk the catastrophe, but if people were uniformly reasonable the Republicans would not be calling the recovery act pork because it (gasp!) spends money to stimulate the economy.
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That this is what’s happening is confirmed in my view by a recent suit from a group of investors against Countrywide to prevent the implementation of the much-ballyhooed settlement with the state AGs, because it might stretch out the time it takes to get their expected ROI.
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The best thing Congressman Miller could do to get workouts going would be to pass legislation that allows a trustee or servicer to have a defense of qualified immunity against claims for breach of fiduciary duty by investors when a loan modification of a loan held in a securitized trust was made in good faith to prevent foreclosure and/or default. That would put the skin of these investors into the game.

P.S. – clawback, hell, yes! Jail time, too. They’re lucky there are no tumbrels and guillotines in their future.

On the other hand, loans held in securitized pools are governed by pooling and servicing agreements that limit what the trustee and servicer may do to work out defaults.
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Thanks for that reminder. And, of course, the holders of the safest tranche are going to be completely unwilling to eat the risk that they paid to avoid.

What people need to realize is the failure wasn’t at the markets crash, the failure came years ago when these poorly regulated systems started building up. We’ve been living in an imaginary economy for a long time now.

If you look at things that way, the crash doesn’t look so bad. It only feels bad because we’ve dropped really hard off an imaginary high. Basically, the economy was on drugs. The problem wasn’t the crash when the drugs stopped working and we put the baby in the oven, the problem was when we started taking them.