Hey, guess what, it's morning in America for a bunch of crooks and liars:
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
[...]
I've cheerled for the Geithner Plan, and have done so in part out of what is apparently a doomed sense of hope for the patriotism of those still on Wall Street. This, however, is the Worst Case Scenario. Banks would get together, bid up prices, and buy each others' junk, recapitalizing their friends at the expense of the government. And, oh yeah, the head of the FDIC says this is just fine -- in fact, it sounds like maybe she's OK with banks buying up their own bad assets at inflated prices with a government subsidy, which comes dangerously close to the mountain-spring smell of money laundering.[...]
Wall Street executives argue that banks’ asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets.
But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.
Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity - such as pension funds - are the same entitites that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.
Steve Randy Waldman saw this coming: His hypothetical, where even the so-called "heroes" of the Geithner plan, Blackrock and PIMCO, are scheming to screw the taxpayers, is harrowing and utterly believable. Last week's conference call with FDIC chair Sheila Bair (left) convinced Clusterstock that she's incompetent. John Hempton at Bronte Capital thinks she should be indicted.I -- at the risk of putting on a hat built completely from tin-foil and naivete -- think Bair, and these bankers, and these investors, should be ashamed. I mean it. We're seven months into the really bad times, and there's just no shame on Wall Street. Sure, there were some nice shows of remorse in front of the various banking committees in Congress, but that these troubled banks are already so openly discussing a switch like this that it gets picked up in the Financial Times means either these folks are incredibly stupid or incredibly, almost unbelievably greedy.
It's not surprising -- or, I guess, it shouldn't be, but it still is. It doesn't surprise me that profit is still a motive. It surprises me that it is the primary motive, and the secondary motive, and the tertiary motive. It surprises me that the welfare of the whole system -- and I'm not talking about the country, the poor, the hungry, but the financial system itself -- doesn't even seem to make it onto these banks' lists of motives.
How short-sighted is this? How ridiculous? How... possible?
I've struggled to figure out why, exactly, I have such an attachment to the Geithner Plan. Logically, it's politically convincing and convenient. Beyond that, it's the optimism of the thing that I've found so admirable. The GP assumes not just that some investment firms will take on the risk of toxic asset investment, but that banks, relieved of these assets, will be stronger, better firms, able to again carry the economy on their shoulders. It assumes that we can heal ourselves, and that these firms can again ascend to trustworthiness.
The Geithner plan depends on patriotism, or at least some other emotional, necessary feeling by bankers and investors that now is the time to do what is good for everyone. Yes, there's a short-term killing to be made in gaming the system, but only at the expense of overall, global economic health.
That these plans to game the system are being covered in the Financial Times and Wall Street Journal gives me hope that they can still be stopped. According to a Treasury official in the FT story, "It is between a bank and their supervisor whether they are healthy enough to acquire assets," which the story's author seems to think implies that regulation could still halt these cross-polinating purchases.
I hope that's true. But I'm running out of confidence, and I feel like the government -- with its ghosts of adminsitrations past like Bair -- is running out of time to get this right.
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Catherine Forsythe
Writer to the Stars
Emily Holleman
Iron Skillet
Leslie Harpole
old new lefty
Salon.com
Comments
This needs to be stopped before it happens even in a small way.
The idea that perhaps people are on their way back to doing the same old things is certainly my default assumption, so these things you mention seem to confirm that as a likelihood in places where we don't make better safeguards.
naive to think that bankers would give a shit about anything
other than profits. A question, (and I'm not even sure it's relevant) don't bankers sit on each others Board of Directors? Also, do you
think the government really wants to get it right? I'm pretty cynical.
Excellent analysis according the gold standard of writing that you have established over time ;0)
i am sorry for the feeling you must have right now - i had it about 4 months ago, when obama said he would not be pursuing the windfall tax. that was my first inkling. it feels bad, to have trust broken, and to realize that your faith was perhaps not founded. it feels bad and yucky and sad and angering, to name a few emotions it brought out in me.
Of course the banks and other investment firms would be trading assets. That's what markets are: people with money believing that they can make more money with the asset than the next guy. Every stock trade has a seller and a buyer and both believe they did the right thing. Why? Because either they have different goals or because they have different models of what the asset is worth.
For example in this toxic asset case, one firm may have determined that mortgages of a certain nature may payback better than others. They decide they want more of those loans. The action they would take is to not offer the ones they already own like this up for auction and then bid on any others that other banks do offer up for auction. They would end up paying more for the asset than the original owner thought it was worth so both believe they are getting a good deal.
The problem with the Geithner plan (as I posted about HERE is precisely that it continues the problem of loaning people money to buy things that may not be as valuable as the loan. In effect, it is a meta-bet by the taxpayer that the assets are more valuable than currently believed. Given the lack of staff at Treasury, I find it hard to believe that Geithner actually has any independent analysis to back this up.
Now, in defense of Geithner's plan, the one advantage it attempts to have is that it does use some sort of auction process to get a price on the asset. So, yes, the bank owning the asset would auction it to other investors which would include other banks, or at least the investment arms of those banks. In fact, it likely is better to include them or you will not get a valid auction because key players will have been shut out of bidding. Of course, this does not provide the emotional/"moral" satisfaction of government barking orders at the banks telling them what they can and cannot buy.
At some point, it should become apparent that using taxpaper dollars for this stuff is not going to really help and therefore is the bigger immorality.
The only thing I would suggest is making more banks part of the program, and re-writing regulations on orignators of securitization have to hold on to a significant fraction of the original issue in order to avoid bad incentives.
As to patriotism from the Street, they are whores, and always have been; the question is how to make them more functional, not to count on anything but greed from those characters. They have always been that way, and always will be, and you just have to try to channel their activities through the regulatory process to minimize the harm their greed and stupiditiy can cause. rated.
The plan has always rested on other banks' willingness to take some risk. But it was supposed to rest on private money being at risk.
the hyenas you have elected do not work for you. you work for them.
It always seemed pointless to shift around the securities based on these loans because the basic problem remains--people can't pay their loans. Besides, some of these properties were not all that bad (they're getting dilapidated now, of course) and as loan collateral, they are not valueless. Not only is this auction plan equivalent to rearranging deck chairs, there doesn't seem to be much analysis of the toxic asset problem as one of housing stock and home buying.
The rather limited plan to prop up home buyers who are in over their heads seems to have no relationship to the plan to deal with the toxic assets. They are the same problem. They should be connected.
As I said elsewhere, all these scheme is going to do is add another layer to the pyramid scheme -- us. Everybody wants to make this sound complicated so they can pull the wool over our eyes. But it's not complicated; it's quite simple actually. I gave a simple real world explanation on your last post, one I witnessed up close and personal, one where a piece of property was sold for $400,000 with a 100% mortgage and a year later the adjoining property sold for $200,000.
There is simply no way a piece of property purchased with a 100% loan for $400,000 at the height of the RE boom that is now worth less than $200,000 is going to recover its loan value in the short term or even the near term -- say 5-10 years -- and if it ever does, it will be with highly inflated dollars. That mortgage is going back to the lender for the duration, unless they find a greater fool -- not likely. That means the securitization associated with that mortgage is all but worthless.
That sort of a disaster has been repeated many times around this country. Home values doubled between 2000-2005, and during that bubble, some lenders and homeowners went nuts. So did the investment banks that securitized those loans by leveraging their assets 50 to1.
The real bottom line is somebody's got to take a really big bath for all the corrupt lending and securitization practices that have been going on for at least a decade. The only question is who gets drowned in the bathtub.
It also can't be any clearer whose to blame for this ultimately -- the voters who dreamed of returning to a time that never was and set foxes to guard the hen house for the last thirty years because they were more concerned about eight-celled zygotes than real live breathing human beings, and about marriage between gays than marriage between corporate conglomerates.
As ever, be careful what you wish -- and vote -- for.
Now they want to buy and sell the same toxic assets that are on their books? Uh, if you wanted to sell them, why not just do that on your own?
No, I'd limit the buying and selling of the toxic assets to only companies that don't have any of them. The idea is to get them off the books of the companies. Getting rid of some of them and then buying back some others does nothing to accomplish that.
Let me make it clear.
IF YOU DON'T UNDERSTAND A CONTRACT, DON'T SIGN THE GODDAMN THING!
And if you do sign a contract without reading it and understanding what you are getting into, you will get no sympathy from me. You did something stupid. Now own up to it, learn from your mistake, and deal with the consequences.
I was, sort of, a banker, depending on your definition. I wasn't a financial adviser, though I would go over a client's accounts with them and sometimes consider them to a financial adviser. I didn't set-up home loans, but I dealt with equity loans and various other loans. Did I mention that I had absolutely no idea what I was doing?
I later figured out that I got the job because the bank I was working for was desperate for "bodies," they had expanded so much that there was no way they could fill all of the open positions with qualified people. I didn't have any degrees or experience in the field. In fact, my previous job was as a sales associate at a downtown gift shop.
I think they just liked that I knew what a "Windsor Knot" was, which I mentioned in my interview. Seriously.
This was about four years ago. Our "sales" goals were absurdly high across the board, but we managed to make them most months. To give an example of my ineptitude and the sheer oddness of the whole situation:
My first loan signing was horrible. I came into the office early and my manager was there. She had something to do and couldn't stay for this loan signing. She quickly grabbed me (not literally) and showed me where this couple had to sign, it was like seven or eight different spots in this 30+ page document. I asked her, "What if they have any questions?" She replied, "They won't." Mmm-hmm. I persisted and she eventually conceded a few choice bits of information that were most important and to just mention those repeatedly no matter what the question was... and she was off, annoyed with me and headed to who knows where. The couple came in about 30 minutes later. It was fine until they started asking questions, naturally. I did what I was told until there was this long silence. The couple looked at each other, oh so skeptically, but there was this apparent, quiet exchange of, "We need this."
So they signed. I took the bank check in the amount of the loan to a teller, it was processed, and presto. The tentative amount of $30,000 was in a new account in their name all of five minutes later. They left.
I found out soon enough that I had done about a dozen things wrong, including breaking a federal law or two, but hey... we got it through eventually, and we made our goal that month. This, of course, didn't reflect at all on my own goal, no, and I was written up, of course, but hey... that's business.
So those bankers may not all be so savvy as everyone seems to think. Some of them might just be scared idiots in way over their heads who are doing what they're told by their superiors. Hmm...
In business, I was fired. In war, I would have been killed. In politics, I would have been president (just kidding).
No one wants to buy them, so the par value is well below what happens to be fair and reasonable. Banks with that liquidity, picking up something at a better price than less savvy investors, thereby reflating these asset prices of these things and elevating the "mark to market" is a good thing.
Cost of that money to the government to borrow? 0.25 on a 1 year T-bill.
So the government loans money at 0.25% and gets a repayment of 5% in "below the line" money.
Many of these small to medium-sized banks got caught in the cross hairs as well. They invested in what they thought were conservative instruments, FOR WHICH THERE IS NOW NO MARKET, they have to mark them to market, they have to keep certain lending ratios, they have to borrow at usurous rates from the TARP pool, and they really have not done anything wrong.
But populist rhetoric bellyaches about how banks are greedy fucks.
Right, people, just like all welfare recipients are frauds and cheats.
Throttle back the rhetoric...
However, I am an expert on politics and bureaucracy, and there are indications to me that President Obama may have made a bad mistake when he appointed Tim Geithner to head the Treasury Department.
Critics of Geithner will be only too happy to tell you that as head of the New York Fed, Geithner was the big cheese that decided it was jake to let Lehman Brothers fall. And Lehman Brothers was the big domino that made all the other dominos fall. Geithner was also the #2 man under Bernacke, who along with Hammerin' Hank Paulson agreed that $700B was needed yesterday for Paulson's personal slush fund, or else all economic chaos would ensue. Remember that three page travesty of a bill that Paulson submitted to Congress?
President elect Obama felt that it was absolutely necessary to get some control of the rogue Bush regime before he took office, which is one of the reasons why his first two appointments were Geithner and Robert Gates of the Defense Department. I thought that move pretty smart at the time. Unfortunately, in the case of Geithner, it was analogous to a blue bird letting a cowbird share its nest. Or perhaps think of that great movie, The Night of the Living Dead.
The Bush zombies have obviously taken over. The pod people are in charge, and bureaucratic inertia allows Hammerin' Hank's original plan of buying up toxic assets to rear its ugly head one more time with a few touches of window dressing.
I've said it before, and I'll say it again. To quote Robert Reich:
"Arrangements that confer all upside benefit on private investors and all downside risk on the public are bound to stimulate great feats of entrepreneurial daring."
And speculation, I might add. The bottom line is, because of the Geithner Plan, this depression will be longer and deeper than necessary. Ultimately, President Obama will discover that Geithner is dispensible, and he will be dropped like a hot potato. Unfortunately, the damage will have been done.