Geithner Plan Decoded

Joe Klein:
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It’s also good to remember that those assets–the homes in foreclosure
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Are you aware that “those assets” are not homes, but securities –shares, stocks– on the mortgages of homes…mortgages that value the homes at bubble prices?
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These are not houses. If they were, we wouldn’t be in this mess, because the banks would know which mortgages were good, and which mortgages were in default.
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Are you deliberately simplifying things for public consumption? If so, you’re misleading, instead of informing, Joe Klein.
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We need clarity, not simplification.

Joe: I wonder about “lazy” journalism. First the “excellent” Nocera to now “it makes sense to me” de Long. Are you firing up the Commenteriat?

Here is what Soloman said in the WSJ.
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http://online.wsj.com/article/SB123741761708377783.html
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The missteps threaten to complicate Mr. Geithner’s ability to fix the financial crisis. Already, lawmakers are seeking to impose even tougher restrictions on firms receiving bailout aid, something Treasury officials worry will further damp participation in programs aimed at restoring the financial system’s health.
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In other words the smokescreen by the now enraged incompetents on Capitol Hill will circumvent any private investment. Especially now that they know the Government will impose a 90+ percent tax on any profits they may garner from a US / Private relationship.
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This is all a farce, and the people will suffer for years to come.
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Start to buy your guns, ammo, needles and seeds to grow your own food people. The end is near!!

The first comment on the thread reflects my thinking immediatly:
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http://delong.typepad.com/sdj/2009/03/the-geithner-plan-faq.html?cid=6a00e551f08003883401156f31a9e0970b#comment-6a00e551f08003883401156f31a9e0970b
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I would say, then, that we have a problem, because other than the underlying land (and in some cases that too) many of the toxic mortgages have no, or very little, value. Certainly in the Inland Empire, where 10s/100s of thousands of unneeded townhouses were built from 2000-2006 and priced at $350,000, areas of the far Chicago exurbs, and presumably similar regions around the US.
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He’s referring to Hastertland. 90 Minutes West of Chicago in the heart of nowhere are vast tracts of fresh housing inventory. The prevailing style also includes cramming huge houses on tiny lots even though the neighborhoods themselves are surrounded by farmland.

Commenters:
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The conflict will probably start to be presented as an economist vs economist debate, e.g. Krugman vs DeLong, but it is not.
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The conflict is between DeLong and the New York Times, which he claims got the story completely wrong:
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Q: This sounds very different from the headline of the Andrews, Dash, and Bowley article in the New York Times this morning: “Toxic Asset Plan Foresees Big Subsidies for Investors.”
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A: You are surprised, after the past decade, to see a New York Times story with a misleading headline?
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Q: No.
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A: The plan I have just described to you is the plan that was described to Andrews, Dash, and Bowley. They write of “coax[ing] investors to form partnerships with the government” and “taxpayers… would pay for the bulk of the purchases…”–that’s the $30 billion from the private managers and the $150 billion from the TARP that makes up the equity tranche of the program. They write of “the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money…”–that’s the debt slice of the program. They write that “the government will provide the overwhelming bulk of the money — possibly more than 95 percent…”–that is true, but they don’t say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well.

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Again, this is not a case of journalists being compelled to throw their hands up in the air and say “Who knows for sure? If economists can’t agree on what it means, then who can ever say what the plan does?“.
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This is a case of Brad DeLong saying that the New York Times’ reporting on the plan is fundamentally unsound and misleading.
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The only exception to that is where he basically says “The toxic securities in question must be worth something, because if they aren’t the plan will fail, and we’re all f*cked“:
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Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
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A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

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DeLong is saying that the headline “Toxic Asset” is misleading because mortgage-backed securities aren’t toxic, which is sort of incredible.
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The argument between Krugman and DeLong is over what “toxic” means. DeLong is saying that the stocks the banks own in pooled mortgages aren’t toxic, we just don’t know how much they’re worth. Krugman is saying that the stocks are toxic precisely because we don’t know how much they’re worth. They’re both making predictions.
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That said, while important, this debate over the meaning of the word “toxic” (and the value of the banks’ mortgage stocks) isn’t the real argument.
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The real argument is over whether the government will put up 97 percent of the money (the Times’ version of the plan) –which defies any description of the plan as a private/public “partnership” or whether the government will put up 80 percent of the money or less –the terms that could possibly be described as a “partnership”.
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This is not economist he said/she said.
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This is accurate vs inaccurate reporting.

I see Rusty’s reliving his Y2K fantasies again.

SZ
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Personally I believe that the toxic assets ARE fundamentally undervalued as is most anything at this point precisely because of the recession and the financial crisis. Do I really believe that GE stock should be where it is? Hell No. And I could say that of plenty of other stocks and or durable goods. Now I think the real question is HOW MUCH the assets are fundamentally undervauled. And that to me goes to the reason why the government has to step in to begin with. The banks think they are undervalued and should be around 60% of face value. I certainly don’t believe that. However I can believe that they should be valued at say 45 to 50 percent of face value. Houses that were once priced at $250,000 are shouldn’t be valued at $75,000 and if they are 5 years from now I agree with DeLong that we are phucked. But here is another thing that DeLong pointed out about the Times report.
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They write that “the government will provide the overwhelming bulk of the money — possibly more than 95 percent…”–that is true, but they don’t say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche.

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That to me makes a hell of a difference. There IS an upside to this but the NYTimes didn’t seem to include that point in their report.

…unless I’m wrong, and Brad DeLong really is saying that shares of stock in pools of mortgages on houses valued at bubble-height prices must worth at least 30 billion dollars because…well, because we’re all screwed if they’re worthless, that’s why!
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If Brad DeLong actually believes that already or soon-to-be in default mortgages for properties in central Kentucky sold for $400,000 that are now worth $90,000 can somehow be put back to being worth $400,000 again in time for mostly 5-year securities to mature –just because we’re all going to hell if they don’t, then I’m not sure where he’s coming from at the moment.
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How can the stocks in pools of high-risk mortgages on wildly over-valued houses ever be worth again what the banks paid for them? This can’t really be what he’s saying, can it?

SG
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the toxic assets ARE fundamentally undervalued as is most anything at this point precisely because of the recession and the financial crisis
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No, the toxic assets were fundamentally overvalued.
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They were shares in pools of mortgages that were only low-risk if the option existed to sell houses for more money than their 2006 value. That option doesn’t exist anymore.
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Beyond the initial inclusion of sub-prime risky loans in the pools, even initially lower risk loans are now a much higher risk of default. The investment houses have software that they run to calculate these risks by plugging in current home values, and the software is telling them that these shares are higher risk, now that nobody can sell their houses for a profit if they bought before 2007.
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These shares are therefore fundamentally high-risk assets. That means that their value in an uncertain/recession economy is fundamentally low. That means the stocks can’t possibly be valuable –unless the housing boom returns.
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It’s not because of the financial crisis that the mortgage-based stocks are of low value, it’s because of the stocks’ initial high value that we’re in a financial crisis.
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You’re correct that being in a recession makes their value even lower, but there’s no way on earth that these things can be redeemed for anywhere near bubble-value ever again.
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They will always be fundamentally undervalued –because they’re toxic– unless we somehow turn back time to 2006.

SZ
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I don’t really understand where you keep getting the 100% of face value notion. I don’t think those mortgages have to return to 100% of face value in order for the toxic assets to make money if they are bought for a percentage of face value. If that same $400,000 that is now in foreclosure is resold for $200,000 you don’t think that will help the toxic asset that hold it appreciate? I do. You are going basically from something that is not making any money right now to something making 50% of face value. Again this is coming from a common sense point of view that may very well be wrong, but it makes a lot of sense to me.
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Now Dr Krugman has responded to Brad DeLong and as I suspected his big thing is whether or not the nonrecourse loans will be defaulted on. Thats his biggest worry but DeLong actually DID address that (even though Dr Krugman says he didnt) in his post.
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Q: Why then should hedge and pension fund managers agree to run this?

A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested–which is leveraged up to $1 trillion with government money.

Q: Why isn’t this just a massive giveaway to yet another set of financiers?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion–and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?

A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.

You know it seems like we all have opinions, we all have critiques, and we can all find at least one outrageous thing to rail against. But here’s the thing, none of it is helping and few are willing to say so.
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The eight year old in my household watched c-span with me (I know but she loves me and I’m willing to watch Hannah Montana with her) and asked why these people were having a tantrum and my answer had to be, “honey it’s because most people tend to have the maturity of kid in middle-school.”
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If there were ever a time for adult supervision it is now and the baby boomers in Congress, the media, and the financial industry are pretty much engaged in a full scale food fight. Warren Buffet says we are in a global economic war — well the last time we were in a world wide war some serious players stepped up to the plate. So can somebody tell me where the heck did all the statesman go and who thought it was a good idea to replace them with Eric Cantor, John Boehner, and Gary Ackerman?

But this whole thing makes me very, very thankful that the physics of space flight was never up for public debate. Imagine Wernher Von Braun answering David Gregory’s questions on Meet the Press…

There is one more point I would like to make. Just because a subprime mortgage defaulted on a loan for a house doesn’t necessarily mean that particular house was overvalued. About the only thing it means is that the person who bought the house wasn’t able financially to actually keep up the payments on the house especially when subprime mortgages are damn near set up to cause people to default on the loan unless their income adjusts upward substantially before or when the interest rates on the loan explode upward. Now the home MIGHT have been overvalued but there is no way to know that just based on a subprime mortgage defaulting.

Dee: were are in this place because more people are able to get into the debate. The pols have an election in 2010. Wall Street, for all its tough talk, is also living in hell. The White House is being battered by too much advice and criticism. And we now know that greed is not good.

Fact free commentary and politicised point scoring is the fuel that is fanning these flames.

What I find , especially with SZ and SGW, among others, is a genuine desire to understand how we got here and how we get there: there being solvency.

It seems that we are getting down to HOPE!

SG:
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I don’t think those mortgages have to return to 100% of face value in order for the toxic assets to make money if they are bought for a percentage of face value.
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Remember, the things the banks own are not mortgages.
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They are complex financial instruments that are essentially stock in pools of more pools of mortgages. They are shares in mortgages-backed securities.
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If that same $400,000 that is now in foreclosure is resold for $200,000 you don’t think that will help the toxic asset that hold it appreciate? I do. You are going basically from something that is not making any money right now to something making 50% of face value.
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Because these aren’t actually directly related to houses, they aren’t valued like houses or mortgages.

In fact, their current values are actually set by investment houses which:
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1) determines for how much the stocks can be resold
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2) determines the risk of the stock being resold for under initial offering values
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3) determines the risk of the stock being worthless or sold for its lowest possibly price
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4) calculates a price based on risk and current market conditions that allows a re-sell to make the firm a crapload of money
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The mortgage stocks owned by the banks are all about whether or not they can be sold for a higher value tomorrow…they’re like stocks.
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Remember, it’s not the value of the properties, it’s the value of the mortgages in the pools. There’s no such thing as a mortgage that’s on a home valued at $400,000 purchase price that suddenly becomes a mortgage on a $200,000 home…except in bankruptcy, that is. Even if the homes can be sold after foreclosure for the exact same amount as their bubble value, that doesn’t mean that the current mortgagees can make payments on their $400,000 mortgage when their ARMs reset.
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So if the risk of default stays the same –which would be high, given a $400,000 mortgage on a home worth $200,000– that means that the whole pool is risky, which means that it’s worth next to nothing. Even if the home is worth half, the shares are worth zero.
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Unless the homes’ values all become higher than 2006 values, in which case ALL homes can be sold for a profit again, which changes the risk calculations on these securities, they will be worth very, very little because of their inherent risk being higher then when they were bought.
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It’s a big pile of sh*t, not houses.

I try, difficult as it is, to follow the various arguments about what benefit if any may accure fron the government’s effort to free up stagnant assets. An aside…I keep thinking of rainey days as a kid playing Monopoly. There seems to be so much emphasis on the stocks that represent ownership in the housing assents, and little note that real assets, the houses, do exist, whether overvalued or not. Long before this crash I had noted that real estate values in California were so high that as pleasant a place as it seemed, I would never consider living there because I could live in a comfortable house elsewhere for less than what a dump of a house in a slum in California would cost.
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The great unknown is what the effect of this program will have on the overall economy. If the financial markets don’t correct, if we reamin in a static state, then it won’t matter. But the paper stocks are backed by assets, whatever the value; we know that the value is much less than what it was before the crash. We also know that if the economy and trailing housing market doesn’t recover, over time the assests will be worth less and less. I hope that this program will help recovery, but the total economic effect is the target, not an isolated real estate market.
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sz, to me, your analysis does seem to focus too much on that paper, and I hope you are wrong.

formerlyjames:
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that paper is what Treasury’s asking the banks to auction off, unfortunately.

Having put in my 2 cents, I have to go. I am not running and hiding, I will check back later.

sz, but the paper represents ownership in real assets…houses. Later.

formerlyjames:
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the paper represents ownership in real assets…houses.
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No, no it represents debt.

SZ says
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Because these aren’t actually directly related to houses, they aren’t valued like houses or mortgages.
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In fact, their current values are actually set by investment houses which:
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1) determines for how much the stocks can be resold
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2) determines the risk of the stock being resold for under initial offering values
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3) determines the risk of the stock being worthless or sold for its lowest possibly price
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4) calculates a price based on risk and current market conditions that allows a re-sell to make the firm a crapload of money
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The mortgage stocks owned by the banks are all about whether or not they can be sold for a higher value tomorrow…they’re like stocks.
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Remember, it’s not the value of the properties, it’s the value of the mortgages in the pools. There’s no such thing as a mortgage that’s on a home valued at $400,000 purchase price that suddenly becomes a mortgage on a $200,000 home…except in bankruptcy, that is. Even if the homes can be sold after foreclosure for the exact same amount as their bubble value, that doesn’t mean that the current mortgagees can make payments on their $400,000 mortgage when their ARMs reset.

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First I will say that a house in foreclosure can be resold. Sometimes on the steps of the courthouse but sometimes when the bank so chooses they can try to sell them just like a private owner would. Now here is my thing, you say that the investment houses determine the price at which these toxic assets can be sold. Well isn’t part of that valuation based on whether or not the mortgages themselves have value? And if a bank forecloses on a house and then resells it doesn’t that affect the value of the bundled mortgages? Many times a bank will do what is called a short sell on a foreclosed property where basically someone else comes in and pays for the house based on what is left unpaid of the mortgage or a number close to that. All of these many options to me would affect the valuation of said bundled mortgages.
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Now again I go back to the fact of whether or not you need 100% of face value in order for this program to work. If your argument is that if we could get 100% of face value it would be likely that we would recoup our money but just that you don’t think we could ever get 100% of face value again then to me I see a contradiction. If you are saying that 100% of face value will make a difference then I don’t see how 50% of face value won’t also make a difference. Especially if they are valued now at 30% of face value. And again you say that if houses go back to pre 2006 levels then it will make a difference but on the other hand you say it doesn’t matter what happens to the houses that the mortgages are written on unless you get back all of THEIR face value. Maybe I am missing something here and that is a possibility but isn’t all of that a contradiction. Hey I realize there is a lot I don’t know about CDSs and CDOs but here is the one last point I would make. If the mortgages are truly worthless as you contend, why are the toxic assets still valued at 30% of face value at least by hedgefunds and the like? Shouldn’t their assessed value be even lower than 30% if thats the case?

SG:
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I’ll try to keep this short.
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First, watch this interview of Stiglitz done by TPM back in February, and think about how what he says matches up to what Treasury may (or may not, if the Times is back to sh*tty reporting again) is proposing.
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Well isn’t part of that valuation based on whether or not the mortgages themselves have value? And if a bank forecloses on a house and then resells it doesn’t that affect the value of the bundled mortgages?
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Second, I really think it would be great if I reminded both of us what “foreclosure” means:
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Foreclosure is the legal and professional proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court ordered termination of a mortgagor’s equitable right of redemption
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When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien”.

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Once the mortgage is in default, SG, there is no more mortgage.
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So if the bank forecloses, and sells off the house for even ten-times higher value than the mortgage was worth, it doesn’t matter, because the stocks up for auction are shares in mortgages that don’t exist, i.e. shares in a movie house that burned down to the ground.
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What’s a share in a mortgage that doesn’t exist worth?
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0.
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Why are the toxic assets still valued at 30% of face value at least by hedgefunds and the like? Shouldn’t their assessed value be even lower than 30% if thats the case?
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Because the investment houses are betting that only 30 percent of the mortgages in a given pool are going to exist, i.e. stay out of foreclosure, default or some other radical devaluation, therefore the shares in a pool of mortgages should only be worth 30 percent of their last purchase price. More accurately, they’re factoring the high risk of non-existence into the value of stock in these pools.
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you say that if houses go back to pre 2006 levels then it will make a difference but on the other hand you say it doesn’t matter what happens to the houses that the mortgages are written on unless you get back all of THEIR face value
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Of course, 70 percent of mortgages probably aren’t going to fail. Unfortunately, since we’re talking about shares of stock in pools of pools of pools of debt, the investment houses don’t care if 3 out of four homes don’t end up in foreclosure, they care about the risk of foreclosure. Housing prices going back to 2006 levels is the only way for the risk of foreclosure to dramatically be reduced enough to make a difference in their calculations, because selling at a profit would then be an option –like it was for the past five years.
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Final point: if you’ve watched the Stiglitz interview, you’ll notice that he touches on “Cramdown” (Congress legislating the renegotiation of the principle of people’s mortgages down from bubble levels) failing to go anywhere. Do you see why attempts to help homeowners renegotiate their home values to current market levels have stalled, SG? Do you see the conflict with Treasury’s plan?

(It’s also good to remember that those assets–the homes in foreclosure–will eventually be resold for a percentage of their previously inflated worth, perhaps a significant percentage of it. Our population is continuing to grow. People need homes. And, as Tom Friedman has suggested, with tongue only slightly in cheek, there are scads of entrepreneurial high-skilled immigrants whom we could welcome to provide the same sort of booster to the U.S economy as they did for New York City when it was slammed in the late 1970s.)
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Aside from the fact that these assets are not actually homes, as stuart has pointed out, there is no reason to be confident that the demand for energy-inefficient mediocre exurban homes will expand. I know it’s easy to lose track of things in this crisis environment, but remember that whole Global Warming thing? And the end of oil? Those Manhattan condos will eventually recover their value, but we need to accept that exurban Florida communities may have been as irrationally valued as certain websites were during the dot com boom.

On a wholly different topic, Glenzilla points us to this column in the NYTimes about anonymous sources and the Times’ abuse of their own policy. Everyone including Joe Klein should probably give it a gander.
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http://www.nytimes.com/2009/03/22/opinion/22pubed.html

Great link, SG.

Seriously, there is no going back. Your entire adult lives were lived in a bubble and your expectations of what can be salvaged are wildly out of sync w/ reality. New social and economic systems will be required but it will probably take a full on collapse before the proles wise up, or another cracker President to tell us it’s ‘morning in America’ and not dusk.
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YAHOO!(Its a Celebration)
Celebrate good times
come on ! – Let’s celebrate
Celebrate good times
come on ! – Let’s celebrate!
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More evidence that CNN is going to have to find a new strategy fast or risk becoming a cable news also-ran: In the month of March so far, the Time Warner-owned network has come in fourth place in prime time among adults 25 to 54, the key demographic for advertisers
http://www.portfolio.com/views/blogs/mixed-media/2009/03/20/cnns-march-ratings-so-far-more-lamb-than-lion

All right, so let’s talk worst case scenarios here. I see a lot of “well maybe things won’t be as bad as possible if (for example) the toxic assets are being artificially depressed,” but I don’t think I can trust that.
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What if they are worth nothing? What if everyone’s most dire predictions come true?
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Will our society collapse? Will we get turned into an oligarchy? Will Glenn Beck rise up as a populist leader and spark off a second Civil War?
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I want to get an idea of how much sh!t is going to be hitting the fan.

Cliff, interesting questions. Any chance this “worst case scenario” thinking is behind the Obamas’ emphasis on growing our own food?
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But seriously, I’m not actually that worried. I think things will just shift quite significantly to the left, like in the last serious economic crisis. Do I expect to see fuel rations and nationalized major industries in my lifetime? Yes. But that’s not a nightmare second Civil War/societal collapse scenario.

“Will our society collapse? ”
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Yes.
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“Will Glenn Beck rise up as a populist leader and spark off a second Civil War?”
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Not Beck, he’s a pencil neck geek who’ll p!ss his pants and run at the first hint of violence, but someone will.
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Once government checks stop showing up(soc sec, welfare, pensions etc, etc) violence increases especially in the urban centers of the country and spreads out, local police forces become overwhelmed. Government cracks down, martial law, seizure of private reserves of gold and the new US government issues a new currency and institutes strict price controls. Army moves in to control the population and begins to round up certain segments of society. This will require large numbers of unemployed men to join the new domestic army, the success of this will depend on the stability of the new currency. From there I’m not sure what happens, everything else seem like the obvious actions of a government trying to hold together a collapsing empire. Or everything will be just hunky dory and we’ll all have pie!

Did everybody notice Jay Ackroyd’s important role in blog commentary shows up today properly acknowledged in Glenn Greenwald’s current Salon piece about crappy anonymous source-based reporting in the Times?
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What makes the NYT’s constant, reckless violation of its own anonymity policy most notable is that the policy was promulgated in 2004 as a response to two NYT scandals: the Judy Miller/Michael Gordon Iraq “reporting” and the Jayson Blair fabrications. The more stringent anonymity policy was ostensibly designed to assure the public that the NYT was committed to avoiding a future repeat of those debacles. So what message would a rational person infer from the fact that the NYT now routinely violates and ignores that policy?
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One other point to note: complaints to the Public Editor from bloggers and blog readers definitely have the potential to spawn columns such as Hoyt’s today. A reader of this blog who has been regularly bombarding the Public Editor over these anonymity issues emailed me this week to say that Hoyt had notified him that he intended to address these issues in his next column. A 2005 column from Calame criticizing the NYT’s use of anonymity cited a complaint about anonymity from blog reader (and sometimes blogger) Jay Ackroyd. Blog criticisms about Michael Gordon’s ongoing use of baseless anonymity led to a 2007 chiding of Gordon by the Public Editor. None of this seems to have had much of an effect on the NYT’s reckless grants of anonymity to political officials, but the more the issue is discussed — especially in the NYT itself — the more awareness there will be of how credibility-imparing this practice is.

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Blog commentary getting its due acknowledgment…what’s next, Joe Klein responding to commentary challenging his notions of what mortgage-backed securities are (“It’s also good to remember that those assets–the homes in foreclosure–will eventually be resold” No, Joe –those assets are only shares in pools of mortgages with high risk of foreclosure, not actual homes)?

Rose – I sincerely hope you’re right. I just don’t have a good feeling about all these crises coming together.
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You mentioned global warming – it’s here and we need to deal with it, but we don’t have the money (because of the oligarchy’s mistakes) or the attention span (because of the decay of our media and education system). We’re in hoc to foreign interests and to corporations that drive our policies to flagrantly harmful ends. The protections we’ve been given by the Constitution are being abrogated and the public does not seem to care.
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I’m not afraid of states seceding and a war being fought over that. I’m afraid of degenerating into a South American clusterf–k of a nation, with decades of Dirty Wars and military juntas.
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How do we avoid that?

Thanks cinci – you always know how to cheer me up.

Speaking of the value of commentary, a commenter at economist Yves Smith’s brings up a way for the taxpayer to get f*cked in this deal that hadn’t occurred to me: More Credit Default Swaps.
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Remember those “insurance” (not really, but that’s a matter of regulation) policies on those mortgage pool stocks the banks bought up from AIG –Credit Default Swaps? You know, the policies that pay out when a share in a credit stock (mortgage pool) is in default (huge foreclosure risk so no dividends) as kind of a swap (I’ll take your bad paper and give you this sack of cash)?
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Remember how those are still totally in effect without regulation, thanks to Joes Klein and Nocera agreeing with Alabama Republican Shelby that we need a commission to “study the problem”?
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What if the hedge funds that participate in the fake auctions also buy credit default swaps?
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Hoisted from comments:
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I am SAC Capital. I get to be one of the bidders on bank assets covered by the program
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Citi holds $100mm of face-value securities, carried at $80mm.
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The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.
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I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.
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I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.
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In the fullness of time, we get the final outcome, the bonds are worth $50mm
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SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm
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Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)
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U.S. Treasury loses $22.75mm
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Great program.
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It’s just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.
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You’ve also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.
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How did fraud and money laundering become the national economic policy of the US?
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One would have to be a criminal to participate in this.

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Ingenious, isn’t it?
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See how Joe Klein’s inability or refusal to call stocks in pools of mortgage debt “stocks in mortgage debt”, and instead call these stocks “homes in foreclosure” really distorts the picture of what’s actually going to take place?
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Is that lazy writing (or genuine confusion, take your pick) what Treasury is depending on to get this by the American people? Are they betting on writers like Joe being able to fake their way through a Serious discussion of what’s going on –even though they can’t actually tell the difference (in public) between a mortgage and a stock?

“How did fraud and money laundering become the national economic policy of the US?”
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I wonder if anyone in the mainstream nooooze will be able to understand what’s being explained to them and, if they can, actually cover this? I’m guessing that, after the bonus dust-up, our elite class could be pretty nervous about what would happen if average Americans learn what’s being done to them. Again.

I have done some thinking on this subject just driving around running errands and I had a kinda “aha” moment. Now bear with me on this because its still kinda phucked up in the end if the worst case scenario happens but I still see an upside.
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What was TARP supposed to do in the first place? It was supposed to unfreeze the credit markets. Now how it was supposed to do it? Initially the money was supposed to be used to buy up the troubled assets off the books of the banks that were in crisis thereby cleaning up their balance sheets, recapitalizing their coffers and opening up the credit market again. Now there are competing theories about why Paulson didn’t end up using the money in that way. But instead they just gave all of the big banks infusions of cash instead. Now the problem with this is of course that the troubled assets are still bringing their bottom line down. No matter how much cash we handed them they still had to account for the losses in their troubled assets. And therefore the credit market still hasn’t opened up sufficiently which is helping to keep the economy from bouncing back.
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Now this plan should alleviate that problem for the banks. No matter at what level these troubled assets get bought at, if they get bought then they are off of the banks balance sheets and they are golden to start back lending. So basically Geitners plan will actually do, at least in theory, what the TARP funds were allocated for in the first place and we should probably see several big banks get turned around pretty fast. And it will do it with less than the total of the second tranche of TARP money which means there will be some money left over to do other things with.
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Now here is where the potentially sh*tty part comes in. There is the chance that the nonrecourse loans we offer to private entities to buy up these assets will default. Especially if the troubled assets are worse than we suspect right now. But here is the deal. The government, as much as it sucks to say this, has a better ability to carry that debt forward to maturity and deal with the consequences then than the banks do. The government also can not fill the roll of lender in the way that the banks can. So its almost like its better for the burden to get switched to the government instead of the banks. The problem is at some point if enough of those deals go belly up the tax payers are probably going to have to pay for that whether it be in taxes or in losing funding in some critical area. But that is a more long term view in my opinion. A sh*tty long term view true enough but for right now we have to deal with this recession today. This plan might do more to help lift us out of the recession than any other move because with the opened up credit market businesses will be able to expand and float their payroll which will probably create and save a hell of a lot of jobs.
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Is it the perfect plan? Hell I don’t even know at this point if its is an accurate reflection of the official plan. But I do believe that if it is then in the short term its an almost definite win for the economy. The real concern I believe is long term will we get our money back which is valid but when you think about it to be able to substantially reduce these troubled assets without having to go back to Congress for more money is a win.
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One other thing, I would bet that sometime this week we will also hear about a new regulatory frame work for the derivatives market in conjunction with the banking plan.

SZ
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I guess my question would be who would be selling a CDS at this point on one of those troubled assets. That to me would make no sense. At least when AIG was doing it they could claim they didn’t think the market would ever crater. But the fact is the market already HAS cratered so it would be like handing over money to do a CDS on those deals. Im not saying it couldn’t happen but I would love to see who in their right mind would do it or at this point even could do it. For instance why in the world would Citi want to incur another 9mm in losses when they just solved their problem by getting the assets off their books with only a 5mm loss?

Well, Cliff, I did post the good news about CNN…so you’ve got that working for you, which is good.

I guess there is a press conference scheduled for Tuesday now.

Not to be a downer but take it from me, this plan will not work. They are talking mostly about realestate and the leveraging of it. To take that volume of housing off the market would eccentially be putting all the money invested out of the economy to stagnate along with the properties attached. The government would also then be left on the hook to pay all of the related property taxes at the local levels and the price paid out in those taxes would not only errode what profit there is to be had but would actually be more then the future hedged price. This will coost more money in the long run.

As for creating jobs, again i hate to say it but stagnating that vast ammount of properties, and taking them off the market long enough to drive competing property prices up, would also cut into jobs across a lot of sectors.

EG: there would be no maintenance…because thats not in the budget.

The properties to be left in stagnation would then cause a housing shortage, we have a surplus not but that,minus the houses in question, would run out in 2-3 years, then to make up for this there would have to be new building,(maybe eveb a small construction boom as result)but by the time housing is in shortages very few people would buy one of the unmaintained,possible tax leined,deffinitly a lot of red taped attached houses that the federal government would be holding. Not to mention they are not taking the private sector and even foreign investors that they are romancing into consideration in this new plan. If they did they would relaise that as the demand grows the private investment sector is there to fill it and at a much reduced rate in comparision to this highly leveraged(97%taxpaid),buyout-on-pure-speculation plan. Private sector of cours will pay thier taxes,maintain their properties,and hire labor,professional,and contractors to increase their investment properties.That could cause some positive finance and jobs but with very limited effects on the economy due to the fact most of the people effected are small business and would then pay more in taxes after 2010 and therefor could not pass those profits back into the economy at large.

WOW…actually now that i really think about it, this is probably actually going to drain the jobs market overall more then any jobs the private sector(which is what this plan is actually dependent upon)could create with the ammount of realestate that will be left for them to work with after this ‘plan’ goes into effect.

Hmmm…i was trying to think of the positive point about job creation that this might create in the markets…but i guess i will cut this short, and give it a lot more thought because at this point even the jobs that will be created wont have any real effect on the economy…short or long term, if the actual creation is based on hedging such vast amounts. It would be like hedging apples and expecting that a person would pay more for it after thye sit there for 2-3 years. They need someone who knows everythign about property investments to come up with a plan to hedge realestate, because just as a farmer would know you dont sit on apples for 2-3 years anyone involved with realestate could tell them you dont sit on property for that long either…cause someones going to come along and offer gigger,better,cheaper and the whole plan would be out the window.

Sorry for being a downer, will try to come up with something more positive to say…saw there was some article on Julia Roberts, maybe i should go read that.

SG:
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Is it the perfect plan?
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I hear you.
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What was TARP supposed to do in the first place? It was supposed to unfreeze the credit markets. Now how it was supposed to do it? Initially the money was supposed to be used to buy up the troubled assets off the books of the banks that were in crisis thereby cleaning up their balance sheets, recapitalizing their coffers and opening up the credit market again.
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So why aren’t they doing that?
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Why aren’t they just taking the TARP money, buying enough crap assets from each bank at just enough price to get reserves up to FDIC fractional reserve standard so that they can loan again, and thereby getting the stupid things off of the books, and taking the hit? Why don’t they get equity in the banks for doing so?
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Why don’t we get anything out of it except the huge bill? Why do they have to go through the costly and inefficient motions of “auctioning” this crap to hedge funds, since it’s majority our money that’s doing the bidding anyway?
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The government, as much as it sucks to say this, has a better ability to carry that debt forward to maturity and deal with the consequences then than the banks do. The government also can not fill the roll of lender in the way that the banks can.
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Everybody knows this, it’s no secret –except to the elite banks and Geithnerm, Summers, Paulson, etc– that the government is the last resort entity that can deal with this. Everybody also knows that the Federal Reserve banking system isn’t meant to hand out mortgages.
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The question that keeps coming up is why doesn’t Treasury just put up the money that the banks need to keep solvent, and then own some f*cking part of the banks that’s commensurate with bailing their insanely incompetent asses out? Why can’t we sell our interest in these banks later for mucho cash down the line when we’re in deficit hell and the government really needs it –like, when the CBO Report says we need it– in 2010-12?
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The problem seems to be compounded by the efforts of Treasury to do everything except own huge chunks of banks until they can buy those parts back.
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These are not my ideas, btw. I’ve just been following this for a while.
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I haven’t been able to understand why Geithner didn’t do the simplest thing with the TARP money –buy bad crap, own big shares in the banks for doing so– for a long time. Now this plan, with its insistence on getting investment houses into the mix, seems to indicate something’s disturbingly wrong with Treasury’s thinking.
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We thought we knew what was wrong with their thinking when Paulson was there. We said “Oooh, big bad Republican Bush oligarchy authoritarian right, we hate them!“.
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Now what’s wrong with Treasury’s thinking?

SG, it would be cheaper to just directly lend the money to consumers.
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Plus – and this my biggest problem with the plan, although I know it’s difficult to choose just one – it’s not correcting the underlying cause of the financial crisis, which is private greed creating unsustainable bubbles that ordinary people have to pay for. The bidders have little incentive to price the assets correctly, because it’s not their money on the line. If you just take a step back and use your common sense, you can see that’s a terrible idea. The economy doesn’t need another bubble. It needs to become more reality-based.

The undrlying problem is actually the fact the greedy had and still have the legal ability to get away with it. Actually this plan would open the market for the same greedy speculators to do it all again…what the government should be doing is passing laws to prevent it from happening again and those should have been put in place befor any plan revolving around money was publicly announced…because i know for a fact plenty of those type of investors are putting their lawyers,accountants,and teams of ‘think tanks’ on coming up with the best plans of action to manipulate this new system of asset leveraging. Dollars to donuts that in 2-3 years the only ones that will be profitting will be the same ones who caused this mess.

SZ
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I would guess its because to buy the toxic assets outright would have taken more than the 350 billion that they have with the second tranche of the TARP bill. Remember that allegedly they will be able to leverage about 150-200 billion to buy up 1 trillion dollars worth of toxic assets. Again to reiterate thats allegedly.
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rose83
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Maybe, but I don’t think the government would do well in such an intensive role. Geitner still doesn’t even have a full compliment of players in Treasury right now so how could he set up a system by which the govt judges credit worthiness, loans out the money and services the loans?

rose
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And to your second point, again I believe that they will be announcing some financial system reforms to go along with the banking program. At least I hope so.

Maybe, but I don’t think the government would do well in such an intensive role. Geitner still doesn’t even have a full compliment of players in Treasury right now so how could he set up a system by which the govt judges credit worthiness, loans out the money and services the loans?
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SG, I’m not suggesting the Treasury Department take on that kind of role. I was just pointing out that there are literally cheaper ways to fuel consumer credit.
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And to your second point, again I believe that they will be announcing some financial system reforms to go along with the banking program. At least I hope so.
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What would those reforms be? I honestly can’t imagine any “reform” capable of counterbalancing the private bidders’ lack of incentive to price the assets correctly. If you were bidding on Ebay, wouldn’t you be smarter with your own money than someone else’s?

SG:
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I would guess its because to buy the toxic assets outright would have taken more than the 350 billion that they have with the second tranche of the TARP bill.
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But…but…but how will they get the money if they decide to pay more than the 20 or 30 billion dollars the banks would get on the open market, and recapitalize the rest with Federal Reserve loans?
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allegedly they will be able to leverage about 150-200 billion to buy up 1 trillion dollars worth of toxic assets

Leverage?
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Oh, Right! That plan that DeLong knows about mentions:
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Q: Where does the trillion dollars come from?
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A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program’s operations.

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Right.
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It’s still Federal Reserve loans. The vast f*cking majority of it.
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Does this make any sense?

Am I the only one who is disappointed with Obama? As you all know, I was not an early supporter of his. And I never had particularly high expectations for any of the mainstream candidates. But still I’m disappointed. The whole thing seems like an underhanded way to give billions of dollars to financial elites.
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Cynicism should be a protection against this kind of disappointment, but it wasn’t in my case…

“Am I the only one who is disappointed with Obama? As you all know, I was not an early supporter of his.”
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I wasn’t. But I have a hard time seeing why Obama would want to disappoint in this way (FISA I could understand), he’s not part of the big money boyz club and is clearly playing with political fire. I still think he’s got a gun to his head. You just don’t know what we don’t know. But we do know who runs the world and how they play that game.

rose, please, your disappointment comes very fast and easy. How long has he been president?
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I am growing as tired of the term “toxic assets” as I am of “outrage”.
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sz, I read your interpretation of “toxic assets” as the end of the line, fini, kaput, gone. I don’t see it that way. Those toxic assets, I believe, could just possibly, be the ugly duckling turn into a beautiful swan given time.
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There is just too much hysteria afoot. I tuned into Faux Knews to see what the clucking ducks are saying. Time poorly spent, as I only saw more handwringing and clucking not only about this, but about war on the Mexican border. Give me a break.

rose83
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I think I am going to wait more than 2 months to decide if I am dissappointed in Obama. So far he has done close to everything he said he would. Nobody had anything good to say about the first tranche of TARP yet Citi and BoA claim they are profitable or at least they were the first two months of the year. Put it to you this way and this stings me also, most of us were against a surge of troops in Iraq but even taking into account the Anbar Awakening the surge defintely helped to quell a lot of the violence over there. So even when this banking plan gets panned I still intend on at least trying to give it a chance to work.
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SZ
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Remember though that the Fed doesn’t answer to us so perhaps this was the only way they were willing to subsidize these toxic assets.
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Now there seems to be an assumption that hedgefund managers won’t mind putting up 30 billion and just wasting it simply because the govt is putting up much more as well as the Fed. But I don’t know how realistic it is to think that hedgefund managers are going to just throwaway some money especially when they have the potential to make truckloads of money off of their initial investment. Now here is what I don’t understand, if the thought is the govt should just buy up all the toxic assets themselves and then try to resell them which I don’t think the govt would be especially good at how is it worse to buy it and then let the hedgefunds or whoever in at a small percentage but let them manage the toxic assets? Honestly at this point my biggest worry is about whether or not the hedgefunders et all will default on the nonrecourse loans. I don’t see how its worth my time to get outraged over whether they will actually make money or not. Hell I WANT them to make money, because if THEY make money that means WE will be making money off those same toxic assets. But hey thats me. I am not saying anybody else’s outrage is wrong. I just think maybe we are focusing on that part of it a little too much and whether or not it will open up the credit lines and encourage job creation a little too little.

sg, of course I agree with your line of reasoning, but your mention of Citi and BoA jarred thoughts relevant to the financial crisis that I think many people don’t understand.
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Citi is such a giant organization, like GE, that I doubt that even the current head of it doesn’t know of all the divisions, operations, and do-dads that make it up. Remember the old commerical..”We earn money the old fashioned way…earn it”…Smith Barney. They are bought and owned by Citi now. I don’t think Smith Barney is part of the den of thieves that seem to prevail now, but who knows.
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The grandaughter of the founder of BoA tonight on the news described the current gang at the company as idiots who cause her grandfather to spin in his grave. She is still a stockholder in the company but wouldn’t say how much the idiots have cost her in losses.
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Clearing out the “toxic assets” to me is just secondary to clearing out the incredible thieves, manipulators, and con artists that are stinking up the world.

SG and formerlyjames, I guess the difference is that I think this plan is obviously a horrible idea and fundamentally dishonest. This reminds me a little of the buildup to the Iraq war; some people were giving Bush et al. the benefit of the doubt, while others were already sure it wasn’t going to work out. And no, I’m not comparing Obama to Bush! I’m just comparing the discussions surrounding Iraq and now Geithner’s plan…
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I’m not impatient – I’m not expecting him to change everything in 2 months – but I am disappointed that he is actually moving things in the wrong direction.
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shepherdwong, maybe you’re right. But I’m a little skeptical that he can’t do better… I think in some ways Obama is fundamentally very conservative (which is not necessarily a bad thing) and his instincts are more to repair than to reinvent. And maybe this is a time for reinvention, unlike 1993 for example.

rose, to be honest, I don’t really know if this is a good idea or a horrible one. Guess I am too stupid to grasp it, although I keep trying. I only wish it were as simple as the Iraq invation. That was easy to decide. Horrible. Stupid. The attempt at economic recovery, I am still trying to get a hold on it. I do know that there remain snakes slithering about throughout the economy. I only know them when I see them flicking their tongues on Fox News. I hope for the best, and I know you do too.

I hope for the best, and I know you do too.
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Very true. On a personal level, I’m sure we’re both at some risk (student loans in my case…). Everyone who is part of the real world economy is hoping for the best. That’s the silver lining of this crisis. It doesn’t lend itself to “us vs. them” thinking.

formerlyjames:
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Those toxic assets, I believe, could just possibly, be the ugly duckling turn into a beautiful swan given time.
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Fine. Then let’s take these future beauty pageant contestants into our own hands, and do it now with TARP and FDIC funds –just like Geithner’s plan– except we buy the sh*t at sh*t prices, and loan them the rest at rates they won’t like.
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Let’s buy them in return for equity in the banks, and if they don’t want to sell, then let’s put the FDIC up their asses. Make deals with a few to get the rest to cooperate, make an example of one or two to show who’s f*cking in charge. Talk about prosecutions –the country’s behind Obama, they’d see him as the cavalry. Do whatever it takes to break up the cartel that’s threatening Treasury with armageddon.
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Let’s take one of the banks that we’ve made an example of, and hire a bunch of the newly unemployed unlucky duckies to run it. Let’s have the Fed give them a little preferential treatment at first, just to get them in the game, and then let them loose. A bank with a kick-ass money supply from the Fed with no sh*t assets to weigh it down? A bank that show the others how much money they can make if they’d only play ball with the guys in the white hats? Let’s see how long the Pottersville-types hold out.
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Who the f*ck do these people think they are? Do you think that FDR (or TR for that matter) would take this sh*t from bankers? Are these people really kamikaze artists? Are they really willing to explode the bombs strapped to their bodies? These people don’t even drive themselves to work. These people aren’t Genghis F*cking Khan, they’re the Keystone Kops. There are no robber barons anymore, just lobbyists.
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We’ve done this before, about a hundred years ago. We faced down the railroads, we trust-busted the trusts, we told Standard Oil and US Steel to go f*ck themselves or they’d be staring at the inside of a 4X5 cell. You know who founded US Steel? A name you’ll recognize: J.P Morgan himself.
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F*ck these guys. Seriously. These are not people who deal well with adversity. They have problems if the wrong kind of juice is handed to them. They’re aristocratic gamblers. They’re degenerate versions of their ancestors. The real Morgan would be pissing himself laughing right now. “Oh, they’re going to hold an auction? Really?“, he’d be chuckling. “Oh, how nice. I guess we’d better get to work on our starting bids.” Joseph Cassano is not J.P. Morgan. He’s a reality show star, not Mao.
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The country is behind this President. This is an extraordinary moment for us, where we’re not disillusioned yet, we’re not completely cynical yet, we’re desperate and we’re angry. It’s the time for Obama to get f*cking serious about the consequence for slapping around his Treasury Secretary in public.
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Obama is making nice with these people –he’s making deals with them. He’s telling us to calm down, take a deep breath, etc.
He’s talking about the bankers as if we’re the hostages in a hostage situation, and we just have to slowly hand our wallets over…very slowly, and everything will be OK.
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I don’t think that’s the way to handle it. I think that we have all the cards. Whose money is it that’s going to keep these f*ckers in their positions? Whose 820 billion dollars in FDIC loans are going into their rotten system? Who the f*ck can put these people and their heirs back to picking vegetables for the next century? Who can send uniformed men with automatic weapons into their offices to recover hard drives? Are we really sure that there wasn’t the tiniest bit of RICO-like activity going on for the past eight years? Nothing illegal in the slightest happened?
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I guess I just don’t buy that we’re in this situation again, where the people who think that they have the biggest balls get to shove everyone around, and nobody in Washington says a goddamn thing about it. What we need is an FDR moment, where the guy in charge packs the f*cking courts, tells the financier class what they can do with themselves, and asserts that the government really is in charge –not private capital. How does anybody think that we got the FDIC in the first place? How does anybody think that the Federal Reserve got the power to give out nearly a trillion dollars without Congress’s or anybody’s say so in the first place?
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Imagine if FDR hadn’t done whatever it took to get the New Deal through…What would this country be like if he had tried to keep the old system going, like Geithner’s trying to do? What would have happened to us? What would capitalism have looked like? What kind of standard of living would we have been left with? What would people have done next? What did they do in Germany?
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This is a huge teaching moment for our country. Think about how big oil might be persuaded to behave, if we can impose our will on the banks and investment houses. Think about how health insurers might be a little more willing to see it our way. We might be able to turn this sorry state of affairs into a big win for the majority of our citizens, just the way we did last time this happened. We might not just have to settle for getting f*cked and then living with the way things are, we might be able to take the power of “too big to fail” away again for another five or six decades. We might be able to change the way things are.
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That’s the beautiful swan that this ugly duckling might turn into, formerlyjames. That’s the change I can believe in. That’s what we elected Barack Obama to do –not just be a symbol of change, but to actually change things like the ability of bankers to hold fake guns to our heads, and shout “Give me all of your money, or else!”. We don’t have that many chances in a decade to get this right –to make that change– so we’d better do the right thing while we still can.
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Thanks for reading and considering this, formerlyjames.

rose83
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I disagree about the analogy with the Iraq War. I personally don’t know of many people who thought we wouldn’t go in and win as far as the initial armed conflict. For me and a few others I know of personally the argument wasn’t about how effective we would be, the argument was that there wasn’t enough evidence to go into Iraq to begin with. That to me is a fundamental difference here. Everybody acknowledges that there IS a big problem. The only difference in opinion now is how we solve it. Again I refer you to the Surge strategy where I myself was VERY against it as was most of the people on the left. But for one single time we were probably wrong at least to the extent of it helping to quell violence.
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Now back to the reason I actually came back to post. Brad DeLong posted a response to Dr Krugman but its short and he says he will have more later but the beginning of it is quite hilarious and I think we all understand where he is coming from.
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http://delong.typepad.com/sdj/2009/03/i-think-paul-krugman-is-wrong.html
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I Think Paul Krugman Is Wrong
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I find that a scary sentence to write. If the past decade has taught me anything, it has taught me that mistakes are avoided if you follow two rules:
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Remember that Paul Krugman is right.
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If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.

I disagree about the analogy with the Iraq War. I personally don’t know of many people who thought we wouldn’t go in and win as far as the initial armed conflict. For me and a few others I know of personally the argument wasn’t about how effective we would be, the argument was that there wasn’t enough evidence to go into Iraq to begin with.
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I actually expected the problems with insurgents and internal violence. I didn’t buy the evidence either, but I was also very skeptical of the tactics.
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That to me is a fundamental difference here. Everybody acknowledges that there IS a big problem. The only difference in opinion now is how we solve it. Again I refer you to the Surge strategy where I myself was VERY against it as was most of the people on the left. But for one single time we were probably wrong at least to the extent of it helping to quell violence.
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I actually don’t feel I was wrong about the surge. Obviously sending in tens of thousands of troops will have an impact, but to be honest that paled in contrast to the ethnic cleansing and paying off insurgents.
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But my point isn’t “I was right about Iraq.” My point is that the core difference here is how much we are willing to give the government the benefit of the doubt. I’m looking at the plan and deciding that no, it’s not going to work. Obviously you and others feel differently. I suspect that fairly soon we will all be in agreement here.
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Hell I WANT them to make money, because if THEY make money that means WE will be making money off those same toxic assets.
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Needless to say, I don’t agree with that premise. If I did I would be thinking completely differently about the plan.

A lot of good points on both sides being made on this post. But I feel I must remind everyone that life is a series of gambles. Which job to take?, Do I marry her?, Should I take this route or that route?, Do I present the contract at the beginning or wait until near the end? Do I wear on condom or not?, and on and on and on. Nothing is ever clear cut and we can never know the right answer unless we try the potential solution. That is why it is called LIFE! Or have we forgotten? We got ourselves in this fix because of lax finanical policies set up to enrich a few at the expense of many. Was that something new in society? No!

For the doomsayers worried about Glenn Beck and the dissolution of society.. Glenn Beck was here in Tampa for a few years.. he’s an idiot who couldn’t lead himself much further than the control room at WFLA radio. His claim to fame was Terri Schiavo. It led him to TV where he appeals to Joe sixpack and not many others. He is not the new Hitler, nor consistantly lucid enough to gather a group followers. With his leadership skills he’d probably find the pitchforks and torches turned against him quite quickly.

Gathering up the so called toxic assets which are probably much more valuable than their current mark to market valuations makes sense. The easy way to get us partly out of this mess is to restore the uptick rule in trading and relax mark to market accounting rules. The banks automatically gain assets if their so called toxic assets are actually valued at somewhere where they are worth and the short sellers are no longer selling phantom shares allowing the market to restore some order and pricing. But hey let’s try the Obama approach it’s the same 50 50 chance we get when we wonder,Do I ask her to marry me? Nothing is for sure,except of course death and taxes and taxes can be evaded if you are rich.

Anyone notice that some of the banks stocks fluctuate 10 to 25% in a day? People are making money on this daily stock manipulation. I’m buying low and selling on the up made $8,000 last month and so far $4,600 this month on BAC, State Street and Sun Trust. There is a upside to everything in life, even when things appear darkest, if you just are willing to take the risk and run counter to the current. Recognize opportunity.

Just remember in these times to try and help your fellow human beings. Try to make everyone around you successful, stop and think .. How can I help them be successful, find work, or put food on their table. Spend that dollar at local businesses. Present a positive encouraging face to everyone you meet, lift spirits, ask how you cna help them or encourage them with kind words. It doesn’t
mean you will be ultimately able to help or even save them, but can extend kindness and hope and sometimes that creates the environment and leads to success.

rose83
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So ok I will bite. Do you want the taxpayers to lose money if this is in fact the plan? Because of the hedgefund people lose money so will we. If they default we are screwed. Pretty much the only way the plan works if it resembles a melding of what DeLong says it is and what the NYTimes says it is, is if these people make the toxic assets profitable. Would I rather it not be the people who made money off derivates trading, yeah in a perfect world. But in the end whomever it ends up being needs to make money so we can recoup tax payer dollars.

SG:
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Because of the hedgefund people lose money so will we.
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No, because they’ll do what they did before AIG failed: buy credit default swaps –insurance policies– to cover their losses.
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They win either way. We lose either way.
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Since the banks still sell credit default swaps –and have every incentive to do so, since its guaranteed premium income– they’ll sell the bad paper to the hedge funds, and sell them credit default swaps on the bad paper (just like it was 2007).
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Then the hedge funds will either make money on the bad paper (not very likely, but it’s not their money, it’s our money), or they will make money from the insurance payouts from the credit default swaps (very likely, and it’s the banks’ money from the auction, which means it’s still our money).
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Now it does mean that the toxic assets are off of the banks’ books, but they’re replaced with credit default swaps. The banks lose less money than if they sold the crap at current prices, but the taxpayer loses even more than if we had just bought the damn things ourselves.
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That’s the problem, SG. Not that the hedge funds make money, but that the taxpayer loses more money than if we had just bought the bad paper ourselves.
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if these people make the toxic assets profitable
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They can make toxic assets profitable, SG! They can do it the way that hedge funds do it all the time! They can sell the toxic assets short by buying credit default swaps from the banks. There’s no regulation that says that they can’t. That’s what they do.
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Making an investment in toxic securities profitable by selling them short means that somebody is left holding the bag. Who do you think that might be? Why do you think that there are noises about “having to do this again”?
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The Costs of Bailout Rage
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By Ruth Marcus
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Wednesday, March 18, 2009; Page A13 washingtonpost.com
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The administration argues that anger over the bonuses, among the public and members of Congress, was at such a level that the president needed to say something to show that he understood the fury. Perhaps, but there is a countervailing risk in stoking this populist rage — especially if the administration needs to come back to Congress for more money for the banks.
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Once the pitchforks are out, it’s awfully hard to convince the mob to put them down.

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That’s the WaPo’s advice, and it’s Joe Klein’s advice, too.
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Keep the mob –us– from getting too involved, because we’re going to have to do this all over again when the next bill is due. The next bill will be due when they’re forced to admit that we were left holding the bag again, SG.

sz, I understand what you are saying, but would disagree to the extent that in previous administrations, you refer to TR and FDR, most of the citizens were just riding the wagon driven by the oligarcs. That is not the case now. Many of the taxpayers have an interest on both sides of this deal. The fat pig manipulators wern’t the only ones who have a stake. Pension plans, and individual investors (who are subject to the whims of vast institutional manipulators), bring a large part into the mix beside the thieves who caused it all. The rosey scenario I hope for, where the toxic assets turn around does not exclude a loss to some. That is the nature of economics. When some people gain, some people lose.
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I agree with much of what you say, sz, and much of what I say is just thinking out loud and trying to decipher it all. Thanks.

SG:
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["]Because of the hedgefund people lose money so will we.["]
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No, because they’ll do what they did before AIG failed: buy credit default swaps –insurance policies– to cover their losses.
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SG, Yes, that’s what I was referring to. It’s possible – likely, I’d say – that they will make money and taxpayers will lose money.

OK, I’m going to shut up and read what other people have to say.
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I think that I’ve made a few points clear, so I’ll be happy to read others’ thoughts on the matter.

The only thing you have to loose is more tax money and decreases in your assets, unless you are an investor or a private sector investor, such as a small business that has income pending on these toxic assets. Worst case senerio is that taxes will have to be raised acording to the GDP at a rate of 80% to compensate this new plan.

I’ve been staying out of this discussion because I have learned more by reading this thread than I’d ever learn from the media. As bad as things are, I have a sinking suspicion that they’re actually much worse than we know. I also think things are much worse than even Obama knew before he took office. I keep wondering if anyone knew the extent of the problems two months ago or even if anyone knows NOW. I’m not talking about just Swampcritters, I’m talking about the people in the government. With the incredible amount of money being thrown around, I wonder if they just have to do it to keep the whole thing from collapsing right now while they try to figure out if there is anything they can do. It keeps coming back to me that they’re coming up with plans that even they don’t have much faith in. I’m as worried as everyone else, but it sure seems like they’re not worried about the deficits because if they don’t throw the kitchen sink at the problem now, there won’t be anything to salvage later.

sacred you have no idea. My phone,fax and email have all been flooded for the last two days, and may i remind you that it’s the weekend and i was already working 12-16 hour weekdays. Everybody, their brother, and even long lost cousins are all chomping at the bit to get in as many last minute assets befor this this plan goes into effect.Everyone i talk to seems to anticipateing(for lots of different,but valid reasons),the problems that are going to arise from this. One major problem is that it will do exactly what they are planning it to do…which is drive the price of the(now deflated)asssets back up.It is not the way they are stating it to the public though…inflation of over 400% is what the result will be…and thus those assets are going to go up, at taxpayers expense for the next 10 years.

K…and there seems to be one ongoing misconception…a toxic asset is an asset that is held that is essentially a liability,meaning that it is going to cost you more then it will garnish.Toxic in this case basicly means ‘unknown’ because no one at this point knows how much these ‘toxics’ are going to cost in dispursements befor they are marketable again. EG: if you buy an asset cheap at 10K but it costs you 1K a year to keep it…in 10 years it will cost you 20K…now if you have to factor in inflation(a variable)and to predict how much you have to sell that asset for, and the inflation is so highly unpredictable that you can not possible do more then speculate either a loss or profit…that is then considered a toxic asset. I am putting it simply, because they are then ammased into portfolios that also contain ‘toxics’ that will actually never attain tangable values…those were abstract based assets and not actual value based assets at all. Meaning they were the insured losses based not on realestate but on personal,business debts and even on ideas..kind of like the .com specualation of the 90s. I guess you could say there are various types of toxic assets but the way they are grouping them they really should be considered as toxic holdings because the word asset should only truely be associated tangable properties. It leads me to specualate why they keep grouping the realestate in with these other truely valueless ‘entities’ becasue as we all know land and realestate always have some value no matter what, a defaulted loan that was to make thimbles in the shape of the empire state building for tourists..well i dont think that defaulted loan, or actually the % hedged to take on that loan, will ever show any fruition…unless of course Rusty is right and the future economy eventually turns to guns,ammo,needles,and home grown foood…then there might be some income from thess that happens the hedged money against that loan is what i would call a toxic entity,because it will never be an asset to anyone.
BTW rusty you want to by native and heirloom seeds…stay away from the hybrids as they will not germinate more then a 1 year crop.

Commenters:
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OK, I said I would stay out of it, but Lovely Bride has read my commentary and has an opinion.
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She says that if the Obama Administration followed Krugman’s advice that Americans (she mentioned Kentucky) would be “so freaked out” (her words) at the word “Nationalization” that they would start bank runs in five minutes.
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She said that the people who would start withdrawing their money first would be the ones that predicted that their neighbors would be freaking out, so they’d better get their money out before that happened.
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Basically, she said that it didn’t matter whether Americans really are concerned about the failure of banks, they would be concerned that other Americans besides themselves believed that “Nationalization” meant “take your money out now”. Get that? It’s not what they themselves believe, it’s what they think their neighbors believe that determines whether or not they run to the bank to withdraw upon hearing of a plan to “Nationalize”.
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She said that in her country (Slovakia), people would just accept it, because they had been through worse. She said that Americans are so wrapped up in pride, and have such a colossal belief in their own superiority, that hearing of a plan that did the opposite of what they were told for so many years was the greatest system on the planet would deflate confidence to suicidal levels.
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The main thing, though, would be that there are a whole bunch of Americans who don’t trust a whole bunch of other Americans not to freak out about anything they hear about, and so would want to get the jump on the people who they imagined would start to stock up on duct tape.
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That’s her take. That we’re very scared of ourselves, and so a plan that smells the least bit like nationalization will send us into a self-fulfilling prophecy of panic-driven rampage.
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That’s Lovely Bride’s take on my commentary. I’m completely wrong.

SZ says: “I don’t think that’s the way to handle it. I think that we have all the cards. Whose money is it that’s going to keep these f*ckers in their positions? Whose 820 billion dollars in FDIC loans are going into their rotten system? Who the f*ck can put these people and their heirs back to picking vegetables for the next century? Who can send uniformed men with automatic weapons into their offices to recover hard drives? Are we really sure that there wasn’t the tiniest bit of RICO-like activity going on for the past eight years? Nothing illegal in the slightest happened?”
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Well, yes and well, mostly no. It’s true that, in theory, we could do those things. It would be a slow, bloody and disastrous endeavour, but we could. And the hint of paranoia doesn’t help much either. No democracy could withstand this sort of populist tyranny without serious damage to its institutions. Somehow, I doubt that would benefit anyone much. Of course, there is also the problem that if it comes to a Mexican standoff, the banks do have a fairly powerful weapon – they can essentially close down crucial areas of the economy, such as.. well, credit. Tempting as it is to talk like Genghis Khan contemplating the ravaging of the bankers, we can’t just whistle up magical “good” bankers to replace the ones we put to the sword. Like it or not, we have to live with what we have for now, pending some serious reform and a burning of the corporate vanities from within the system. Whether that can really be achieved without major social change, I tend to doubt.

She says that if the Obama Administration followed Krugman’s advice that Americans (she mentioned Kentucky) would be “so freaked out” (her words) at the word “Nationalization” that they would start bank runs in five minutes.
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It’s a good point. I agree that if Obama suddenly announced on Tuesday that he was nationalizing banks, there would be bank runs. But public opinion can be managed/manipulated. For a hundred and fifty years, Americans were isolationist. Wilson and FDR had to work desperately to overcome massive media, business, political and public opposition to entering the world wars. But they did it. Gradually, with speeches (something Obama is pretty good at), pleas to self-interest and moral callings, and some (usually honest) fear mongering.
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Obama and his team are supposed to be great communicators who are comfortable with every facet of the media and connected to the grass-roots. It’s time to use all these skills! Can’t Will.i.am make another video or something? Obama is not completely at the mercy of public opinion. He can change it.
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If public opinion polls show comfort with nationalization, there will be no bank runs.

My take on LBs commentary…shes completely wrong and she is of course seeing it from an outsiders perspective. Any financial historian worth their salt would tell you we have had natonalization in this country since FDR…remember ‘the plan’? What the avarage US cit. is thinking at his point in time is how to hold onto what we got, hedge ourselves against a possible economic slide, and then on the very cusp of our minds after that how to possibly increase what we’ve got in a way we wont be penalized(by way of higher taxes etc;) for to the point of actualy losing in the long run. Did your friend also say that we were going to start stuffing our mattresses with cash and buying needles,seed,guns&ammo as was rusty’s take? I would say in compare rusty has the better historicaly backed view. Pre ‘the new deal’ ppl did do runs on banks…since then not so much. No offence to your friend but i think she should go stand in grand central station,or on wall street for an hour or so befor she judged all americans on by that standard, just to give her a perspective of an ‘avarage’ american in compare to one you will fine there.

I’m very late to the party. I mostly agree with what SZ has said. Just a few observations.
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1. Lay people really need to understand that the value of a derivative may bear little to no (or an inverse) relation to the value of the underlying asset. I read comments by people saying that they believe some of these toxic assets are not worthless. Clearly, they don’t understand that it is IMPOSSIBLE to value any of these assets AT ALL unless you know exactly what the asset’s terms are. Just as it is possible for an option to purchase in a company to be completely worthless even if the underlying stock still has value, it is quite easy for many of the mortgage-backed securities to be worthless even if the value of the underlying properties has not dropped at all…if the default rate has increased.
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2. The term “toxic asset” has undergone an interesting redefinition in a short period of time. It used to refer to securities that were so risky that they were considered “toxic”. That is, when the banks would chop up the mortgage-backed securities into different tranches, the most risky tranches were the “toxic waste”. Bear in mind, this term was applied even back before the real estate marked began to decline and before anyone claimed that there was any difficulty valuing the asset. Suddenly, when it was announced (in various iterations) that the taxpayer was, at the end of the day, going to be buying these assets up, the banks (and the Treasury Dept. and Fed) found it very useful to act as if buying “toxic assets” was buying uncertainty rather than buying crap. Funny that.
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3. I totally agree with SZ that WE are holding the cards here. A TR-style President with serious balls could dictate terms to the bankers and, yes, make money for the taxpayers in short order. That Obama won’t be that type of leader will likely prevent historians from regarding him as a great President on the merits (of course his place in history as a racial trailblazer will never be erased).

GOP’s constant anger and critical rhetoric is dangerous for this country! The Weimar Republic (1918-1933) shows, relentless, virulent critique from both ends of the political spectrum weakens the spirit of democracy, a spirit that can only thrive in an atmosphere of tolerance and compromise. By destroying the very relationships that are a thriving polity’s engine, excessive critique exhausts the collective will to good. Democracy and human rights rely in part upon vigilance; they also rest upon an ability to perceive and foster the good that already exists in the human family. Yet what we are good at is criticism; we are quick to perceive failure. We are much less skilled in the art of collective strengthening. Therefore, I want to try to use the historical record, particularly the record relating to democracy and human rights, to suggest some direction for that process.

http://www.lucistrust.org/en/service_activities/world_goodwill__1/newsletter/recent_issues/2009_1_human_rights_and_spiritual_responsibilities

We in the American society are critical but it is especially true in the Republican Party.. Rush Limbaugh, Ann Coulter, Hannity and others. One must ask why are the Republicans so critical? Why are they so angry? Why are they so divisive? And, is this what we want of our society, a group of angry, bitter people to run this country? Because I think we know by now that negativity attracts negativity to us, …., and nothing from nothing leaves nothing, and that is precisely why they are the Party of “No”!

It is surely disconcerting and hypocritical to see Republicans and Joe Scarborough daily do everything they can to try to disparage President Obama and his teams’ goals and positive endeavors and to falsely link him to George Bush and his failed years (who did not have an economic policy at all or a Home agenda policy at all). What was really “unsustainable” was the money George Bush spent digging us into a huge hole, a mess, and now Pres. Obama is spending money getting us out of this hole, that is the difference. One is a “destroyer” the other is a “savior”.

And, for the GOP to begin this this doom and gloom scenario, is to work counter-intuitive to the good energy we are trying to bring in to fix America, to restore her. The GOP are like a doctor telling a patient wrongly “you have cancer and you only have 6 months to live”, when in fact the patient does not have cancer, and is only sick, but with the right treatment gets healthy again. Their energy is ugly, angry, and it is down right embarrassing, and it is also Dangerous for us as a country. Because the GOP are devoid of hope and goodwill, there is no hope in their scenarios at all or good will. They are on the wrong side of history and what is right and good. We must recall that all the doom and gloom predicted for Y2k, was just that, doom and gloom with no basis in reality and that is what the GOP are offering now, a false basis in reality. Where were they a few years ago? Huh, when we Really, really needed them?

“Very true. On a personal level, I’m sure we’re both at some risk (student loans in my case…).
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OT: With the ecomony the way it is and most of us not sure if we will have a job tomorrow, I want take this opportunity to remind everyone with federally backed student loans that there are serious consequences if you allow your student loans to default and take no action to protect yourself.
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Everyone should know the federal government can take your income tax return until the loan is paid. That you generally can’t discharge student loans in Chapter 7 bankruptcy.
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But what a lot of people are not aware of or take into consideration is the federal government can and is with increasing frequency (without a court order) seizing the money in your bank accounts. All of it. People unaware of this are finding out when they attempt to withdraw or check their bank accounts and the balances are zero. You know what happens if you have already written checks or debts on those accounts and now they are frozen don’t you?
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There are things you can do to protect yourself, but you have to be as proactive as with any other debt. Contact the Department of Education and if you can prove a hardship it may be willing to help.
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There are funds that are exempt and vary by state, but often times us regular people don’t know to set up special purpose accounts so the banks know where the funds are coming from or set their accounts up in such a way they are more difficult to seize:
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Most government benefits, including Social Security, unemployment insurance, veterans’ benefits and public assistance
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A percentage of your earned wages, which varies by state
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Alimony or child support payments, and other payments for the support of a dependent
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Proceeds of the sale of property which is exempt from collection, such as a homestead exemption
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Disability or unemployment benefits from your employer
Workers’ compensation
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Retirement benefits, such as pension or annuity payments
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Life insurance benefits due to the death of an insured or for wrongful death claims.
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Payments due to personal bodily injury, in an amount that varies by state
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Proceeds of guaranteed student loans
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Don’t allow yourself to be blind sided like a friend of mine did recently.

New social and economic systems will be required but it will probably take a full on collapse before the proles wise up, or another cracker President to tell us it’s ‘morning in America’ and not dusk.
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Cincy,
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Wish I could find something to disagree with here but I can’t. It’s going to have to be clearly proven that the unfettered/unregulated free market doesn’t work before a number of us will seriously open our minds to alternatives.
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It may have to get so bad though that anyone who TRIES to tell us that it’s “morning in America” will be laughed off of the stage or have something thrown at them.
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Optimism has its place but it can’t replace the truth when that’s what is needed.

That’s her take. That we’re very scared of ourselves, and so a plan that smells the least bit like nationalization will send us into a self-fulfilling prophecy of panic-driven rampage.
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stuart,
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I’m from Ky and agree with a lot of what LovelyBride says. We have a thoroughly corrupt congresscritter (McConnell & Whitfield) and our local newspaper is about as conservative as they get (no such thing as a good Democrat,as far as they are concerned). This area of the state was very receptive to the fearmongering after 9/11 and I listen as they describe pretty much anyone not from here as a “foreigner”. (Yes, ppl in CA and NJ are as foreign to them as India and Japan.)
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The frustrating thing is that many of them won’t read and form opinions for themselves. If their congressman says something is bad, they believe it. Nationalization of banks would be a slap in the face to them, even though the existing structure has failed. They simply cannot admit that there is any alternative to the way things have ALWAYS been done. My mom is gone but she remembered the Depression. Many of the very old ones do but they are getting fewer and age has caught up with them.
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What is worrying me is that the younger ones have no memory of such a time and are becoming more and more isolated from each other because of the polarization. The mutual support that will be needed if the situation detreiorates is not something they are very good at.
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They have been following the capitalist’s philosophy of taking advantage of your neighbor to make a buck for too long to realize that it’s hard to ask for someone’s help and support right after you’ve ridiculed their beliefs and screwed them over in a business deal to enrich yourself.

sacredh,
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I think Washington is clueless because they KNOW the normal rules don’t apply (the classical oversight and accounting requirements have been so disabled and “gamed” that they don’t know what applies any more and don’t know what anything is really worth).
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I think they are just throwing money at the situation and HOPE that some part of all of this starts to improve in a way that looks familiar to them.
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Some of these vultures, unfortunately, are just hoping to get “theirs” before it all starts to collapse. Then they’ll move somewhere else (after all, we’re in a GLOBAL economy).

afguy:
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Lovely Bride and I spent almost two weeks in KY vacationing there in August/September 2005.
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We were there to see the caves, but since Katrina came through, we had to figure out what else to do.
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We ended up doing what we insane people do, which is research. We bought books about the situation in KY and read them, drove around and spent a lot of time talking to folks. We really tried to understand the people and the situation, even the geology of the central-western part of the state (sink-holes!), and had a lot of cross-cultural dialog, from university people to part-time ministers to mall shoppers to book-store clerks –everybody we could talk to. We saw a lot of washed out tobacco farms. We basically drove from Cinci to the far western TN border and back, taking little roads. Our maps got confusing, so we stopped to talk to folks in gas stations with funny brand names we’d never heard of.
We saw a crapload of construction and advertising for huge homes for “as little as $290,000″ in bizarre, isolated places (like 15 miles outside of Bowling Green, for example). We saw everyone driving the largest vehicles we’d ever seen consumers drive. We saw those vehicles (parked next to lines of old cars from the little 1985 hatchbacks all the way up to the huge double-wheeled pickups from 2001) sitting on people’s land.
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That’s why KY came up for Lovely Bride, because she has some experience trying to figure out the people where you live.
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Thanks for your thoughts, afguy.

stuart,
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I was born here; I joined the AF and lived elsewhere for 20 years, then got my degree in CS and came back, hoping I could help make things better.
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Coming back was a real eye-opener. The middle of the state is another world from the extremities. There are parts of the eastern part of state that are really Appalachia. Having been away, I can say that the western part has some of those characteristics too (at least in their openness to those they consider outsiders).
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I’m worried that a generation of fear promotion is giving the whole state that mindset. They ARE frightened of the change that appears on the horizon – and it shows.