Treasury Secretary Geithner’s bad assets buy-up plan is, as I blogged earlier today, possibly the biggest government charity to rich financiers and speculators since Alexander Hamilton’s “assumption” move at the start of the United States.
Except that it is both more deceitful, by far, and more incompetent, also by far, in its conception. Details, details.
Here’s the details of Geithner’s “assumption”:
The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.
The third prong has already, in an earlier form, drawn drools from hedge funds and the like, meaning we should be suspicious.
The FDIC partnerships in leg one will also have these types of folks drooling.
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
That leaves the second leg, and given both Geithner’s and Ben Bernanke’s lack of forthrightness on TARP and TARP 2.0 issues, what sort of guarantee will he have about any clarity re these investment management firms?
Answer: None.
Answer No. 2: Don’t be surprise if an investment bank whose initials are Goldman Sachs finds itself just “happening” to be hired.
Anyway, better economic minds than mine in the blogosphere are giving this the smackdown it royally deserves.
Elsewhere, Krugman, Calculated Risk and John Cole weigh in.
Krugman says it is an issue of pretending bad banks aren’t really bad and that we just have cash flow issue. Calculated Risk calls it a direct subsidy to speculators.
Cole goes in more depth:
If this were a medical emergency, it appears it would look something like this:
The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.
We are; Geithner buddies, not so much. Only part of the analysis I disagree with is I don’t see any “house guarantee” limiting us to $1 trillion on our stack of chips.
Naked Capitalism points out the shell game angle:
Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.
But warns, a la Lincoln, you can get some of the people’s eyes to glaze over all of the time, and all of the people’s eyes to glaze over some of the time, but you can’t get all of the people’s eyes to glaze over all of the time:
Regardless, the equity comes from TARP, and Elizabeth Warren of the Congressional Oversight Panel is no slouch. What will happen when she asks for reports of how the actions have gone (for instance, how many failed because the reserve was not met?) The mechanics will become more apparent to the public over time and may yet come back to haunt Team Obama.
Haunt... around 2012?
Oh, and now add James Galbraith. to the list of the undeceived, who identifies Geithner’s “Rube Goldberg” schemes:
If I’m right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn’t participate in the garbage-loan frenzy.
You’re right as rain, James.
So, is anybody contacting Vegas betting houses on one-term presidency odds? Seriously.
Between this and the CBO’s massive new deficit estimates — which Team Obama, typical of Democratic administrations, is ignoring/dissing since they can’t be used to beat up a Republican president these days, is it too early to ask that question?
I say not.
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