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Bailout II: Bail Harder
Sal
Damnedest Little FellowRegistered User regular
Damnedest Little FellowRegistered User regular
I didn't see a thread for this, so here we go.
http://news.yahoo.com/s/ap/bailout_plan
What do you guys think of the revised plan? Will it work/fail/do nothing? Personally, I have been rather nervous about the whole plan ever since someone (enlightenedbum, maybe) linked this blog. Just read this:
How fucked are we?
http://news.yahoo.com/s/ap/bailout_plan
WASHINGTON – The Obama administration is promising an aggressive effort to combat the worst financial crisis in seven decades, unveiling a program that could mobilize well over $1 trillion in public and private support to get the frozen credit markets functioning again.
Treasury Secretary Timothy Geithner said Tuesday the new plan would bring the full force of the federal government to bear in a partnership with the private sector.
"Right now critical parts of our financial system are damaged," Geithner said in unveiling the new plan. "Instead of catalyzing recovery, the financial system is working against recovery and that's the dangerous dynamic we need to change."
The new plan would greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. Funding for this effort would see a huge increase from $20 billion up to $100 billion, according to administration officials.
If a total of $100 billion from the bailout fund was used, it would be enough to support an additional $1 trillion in lending support through a Federal Reserve program that was announced in November but has yet to begin operations.
The administration also announced that the program would be expanded beyond consumer and small business loans to provide aid to the troubled commercial real estate sector.
The administration also announced a program to create a partnership between the government and the private sector to get private investors to buy bad assets that are currently weighing down the balance sheets of banks. Congressional aides who were briefed on this plan said that Treasury officials said it could involve between $250 billion and $500 billion in government support.
What do you guys think of the revised plan? Will it work/fail/do nothing? Personally, I have been rather nervous about the whole plan ever since someone (enlightenedbum, maybe) linked this blog. Just read this:
That one word assessment of the Geithner plan, as previewed in the New York Times tonight, comes from reader Scott, and is good enough to print.
I am so disgusted with this entire proceeding that I am going to dispatch it quickly.
Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but a couple of years of not shooting themselves in the foot again would enable therm (via earnings) to rebuild their equity bases sufficiently to proceed more or less as normal.
The problem is that a significant portion of the very biggest banks are insolvent. And on top of that, most of them have very large capital markets operations which have bean the nexus of credit intermediation. The regulators spent the last decade plus being in studious ignorance of those businesses, at least the complicated ones where all the risk resided. The SEC never was very interested in bonds, and the Fed took a hands-off, "let a thousand flowers bloom" approach to risk management, derivatives and what was called innovation. Author and market observer Martin Mayer warned "a lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology."
But the history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.
But...here we have another scowling Treasury secretary, with a bit more hair than his predecessor, serving up the same fatally flawed approach as before: let's just throw money at the banks and hope they get better. This is tantamount to using antibiotics to treat gangrene. You waste good medicine and the progression of the rot threatens to kill the patient.
In fact, the state of affairs may be even worse that I thought. I had grumbled about the fact that the earlier leaks of this plan, like the MLEC and the TARP, seemed little more than a sketch, when its success or failure founder on key details.
The elephant in the room is how do we solve the heretofore insurmountable problem that the market price of the bad assets is well below what the banks are willing to sell them for? Paulson was unable to find a way to finesse the problem to get private investors to pick up even a cherry-picked portion of the junk in the MLEC incarnation; in TARP, he (presumably) planned to have Uncle Sam buy the paper at a price the banks would find acceptable but somehow camouflage the subsidy. He abandoned that course of action quickly, perhaps because the magnitude of the payment over market prices would be so large as to be politically explosive were the bagholder taxpayer ever to find out.
There is no evidence in the various elements leaked that this impediment has been overcome, which raises the real possibility of a Paulson-like seemingly bold advance followed by an equally hasty retreat. Inviting investors in with you on the buy side does not address the issue of the pricing gap, unless the deal with the investors is intended to help obfuscate the overpayment to the banks.
Note I have no objection to equity infusions if accompanied by sufficient ownership, controls, and a methodology for the goners, say taking over or putting into receivership. No private equity investor would put 20% into a company without getting lots of goodies, such as veto rights, antidilution provisions, a board seat, etc.
Now in fairness, Geithner may treat the banks more consistently than Paulson & Co. did. But that is cold cheer if the basic approach is still fatally flawed.
In fact, the present course is the worst of all possible worlds. AIG has demonstrated that a player deemed to by systemically important has a blank check. Not only did they get additional dough with few questions asked, they got improved terms on their initial loans. Let me stress, for those not familiar with the ways of deal-land: if you ask investors for money and maintain it is enough to achieve X (get you to break even, get your first product launched) and then come back not having done what you said you promised, the next round is on MUCH more punitive terms. Having a party that badly underestimated its needs come back, get more dough, and get relief on its inital loan is from an alternative reality.
In addition, AIG had given large numbers of staff very large retention bonuses. This is when the loans per employee are $1.4 million. Now the retention bonuses may very selectively be warranted, but they have been handed out like candy, and AIG is know for generous pay, so even if extra comp might have been necessary, query whether at this level. Given the less than rosy hiring conditions in the insurance industry, a lot of these payments appear flat out unnecessary and were thus effectively looting right under the government's nose.
Thus, the banks get funding on an open-ended basis, with no requirement to write down or sell the dreck. And even if some miraculously does get unloaded via this process, we wonder how far it will get to really cleaning up the banks. Ken Rogoff estimates US credit losses at $2.0 trillion; this plan appears likely to fall far short of that, which means we still have a lot of sick banks, just somewhat less so. (We'll need to wait to see how this unfolds, but since the banks have no reason to part with bad assets and take a writedown, this is the scenario they are trying to avoid, we still have crappy assets being funded at fictive prices, but this time by you and me rather than by Citigroup). The failure to clean up the banks and write down bad assets was a big contributor to Japan's lost decade.
Now to get to the punch line, let us turn to the New York Times. The headline "Geithner Said to Have Prevailed on Bailout," is already bad news, since as we have discussed, Geithner is a living, breathing example of cognitive regulatory capture. But here is the troubling bit:
In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.
Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.
He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.
Because of the internal debate, some of the most contentious issues remain unresolved.
In other words, Geithner followed the Paulson script of pushing hard to make the bailout industry friendly, to the extent of compromising the effort to get the plan fleshed out in adequate detail.
We'll see if the notion of a $500,000 salary cap survived. Lucien Bebcuck, Harvard Law professor and corporate governance expert, pointed out that in fact, that provision is not terribly restrictive. There are no limits on deferred pay, pensions, or incentive compensation in the form of equity. And executives have often taken non-recourse loans secured by shares.
The plan is terribly sketchy. Even the numbers have not been nailed down:
It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.
The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors who participate in the program, which some people might call a “bad bank.â€
A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans. A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.
The capital injections would come out of the remaining $350 billion in the Troubled Asset Relief Program, or TARP.
A separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages is to be announced next week.
And my sense that Team Obama is making this up as they go was confirmed by an e-mail from Robert Radano:
Treasury briefed the Senate Banking Committee tonight regarding Geithner’s plan to be announced, tomorrow…Tuesday.
There is no plan.
The Senate received no briefing, no documents. Press reports, leaks mostly, are as accurate as anything the Admin. has discussed with the Hill.
There are only two conclusions to draw from this. Either Treasury has not yet decided on a plan. Or for some unknown reason has decided not to confide in the Senate Banking Committee.
The markets have anticipated both a stimulus bill and a comprehensive TARP 2. Instead, markets will get a stimulus bill with marginal value and a muddled TARP.
As one astute reader commented yesterday:
At least Paulson announced his plans. Not that he ever did anything he announced, but that's a small technicality. These guys can't even make an announcement.
Let us not forget that Paulson did manage to dispense the better part of $350 billion in a blinding show of Mussolini-styled corporatism. The new Treasury secretary exhibits similar Italian fascist tendencies, with even less ability to make the trains run on time.
How fucked are we?
Sal on
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Rock Band DLC | GW:OttW - arrcd | WLD - Thortar
It's sad that I can't tell if you're joking.
Disappointing. A lot of broad strokes about what we're going to do, but little in the way of specifics on how we're going to do it. I guess I was hoping for something more concrete.
I don't think all the details are worked out yet. At any rate, a speech probably isn't the best place to get into the nitty-gritty of complex programs like this promises to be.
A nice, big, informal, metaphor-laced FAQ on whitehouse.gov, explaining exactly what the hell is going on. Ideally with pictures.
I feel like a lot of the problem with the bailout and the stimulus is not necessarily a lack of transparency—but rather, the public completely failing to understand what the hell is going on, what the purpose of these programs are, how the economy works. I don't even know what the hell is going on, honestly, and I like to think that I'm kind of smart.
Obama and his peeps should spend more energy educating the public. With more than speeches.
Partially. We all know what followed the Great Depression so who knows what kind of chaos this economic madness will spawn.
Oh man, they're gonna clone Hitler?!
Rock Band DLC | GW:OttW - arrcd | WLD - Thortar
Make no mistake, there will be war.
We're already in war in two different countries and at war against countless words, i.e. Drugs, Terror, etc...
How much more war do we need? You''d think everything would be perfect with all the money we are taking from the army and giving to Haliburton and Blackwater. They are private companies so they must be better at fighting wars then the government.
"Read twice, post once. It's almost like 'measure twice, cut once' only with reading." - MetaverseNomad
The other side isn't that happy, either.
I think it's all over my head anyway.
Strike while the iron is hot! Strike with a hammer ... and sickle.
Well, actually, it wouldn't be awful if they only controlled some of the banks, with there still being competition from non-controlled banks. But it's still a stupid amount of responsibility to indefinitely put on government's doorstep.
Well, their main issue is that the banks are effectively insolvent but the government and the banks refuse to admit this.
http://zerohedge.blogspot.com/2009/02/how-world-almost-came-to-end-at-2pm-on.html
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All in all, if you are making a long term recovery plan, you want the dow to go down because of it, since it will represent investment and government competition in the construction sector. In the long term however the dow will go up.
This is true, but I think the current plan has problems in it that the low Dow reflects. It is vague and seems to be a continuation of the flailing around we have been doing for the past few months. A good plan may lead to a fall in the stock market, but that doesn't mean a bad plan can't either.
The Dow is really just an indicator of consumer confidence. The only thing that makes it go up is the faith people have that a number of companies will prosper. A consequence of this is the negative feedback loop that happens when regular people see these losses blasted on the tele and think 'oh god everything is going to shit better not spend money' which later on the companies release numbers that people arent buying which makes shares go down and so on and so forth.
im of the opinion that a large part of this clusterfuck is caused by popular ignorance. I really wish the Obamanaughts would take out another 30 minute or so 'ad' in primetime on all major networks and sit and explain exactly whats going on in an incredibly simplistic way that people can understand. people might criticize it for oversimplification, but the people able to understand that it has been dumbed down could probably already understand the concepts being put out now.
Man what? No seriously, what the fuck?
GM: Rusty Chains (DH Ongoing)
:^:
Eh, a direct,simple explanation of what's going on would probably cause a panic.
"Our major banks and the major banks of the other major economic nations owe more money than the entire world GDP" is not really a good thing to get on tv and say.
A big thing in it is that it looks like it contains plans to dig up the skeletons in the closets of the banks, and run them through "stress tests." The trillion dollar question is this: what do you do if you if you don't like what you find, and that the banks are insolvent? The details on that seem to be conspicuously absent. Do you freak out and bury the skeletons again, do you nationalize? Do you give handouts to the banks at the expense of the public to keep them partially afloat? From what I've been hearing about some of the internal White House dynamics so far, I'm not sure they've come to a consensus yet on such matters.
It does look like they are doing what they can to avoid asking Congress for more money in the short term, probably for understandable reasons. And the executive pay cap is still in there.
The main reason the books haven't been thrown open so far is exactly because no one really knows what the hell to do. Estimates of the size of the derivative markets range from 600 trillion to 1 quadrillion dollars worldwide.
Now, certainly not all of that is in high-risk derivatives, and certainly not all of it is payable. The metaphor often used is gambling, if I'm taking bets on horses, and paying 2:1, and overall 50 people have bet $1000 each, my potential risk is $100,000. It's extremely unlikely if not impossible that all that money will have to be paid, as presumably that's spread over several horses.
Now, the thing is, all those derivatives (which are essentially insurance policies, or bets over whether or not debt will be paid or not) were made based on certain assumptions, which have turned out to be completely wrong, like that X% of mortgages (or corporate debt, etc) are going to fail in a certain year. If you make a set of insurance policies based on making a profit if no more than 2% of mortgages fail, and all of the sudden 10% fail, you're frankly pretty fucked. It's as if 5 horses were in a race and I set odds to pay at 4:1, then all the sudden 3 of those horses dropped out of the race.
That's the situation we're in now, and the question is exactly how much of that 1 quadrillion the banks are in the hole for. And honestly only the banks really know, but the back of the envelope math isn't good. As in the banks end up owing on paper not only more money than the banks can pay out, but more money than anyone can pay out. The GDP of the entire world is only $50 trillion give or take, after all.
Pretty well fucked. I opposed the first bailout (to which I recall someone saying I should kill myself and give them my stuff because obviously I was in the wrong then) because the economics were so fundamentally flawed that I knew it'd be a waste of money.
Seriously, there are two things that everyone should finally understand:
1. I am never wrong.
2. I hate being right all of the time.
I guess part of this is based on the fact that I never drank the Obama Kool-Aid, and that I didn't expect him to be the anti-Bush or Hillary or anything else simply by virtue of not actually being them (and reading his policy positions didn't hurt my expectations of how middling, mediocre and center-right he has shown himself to be when he actually governs), so while I have been sucked into the hope every now and then of him doing something quite intelligible now that reality has set in I am unfortunately disappointed in that what we are getting is a sack of shit while handing Wall Street another couple of hundred billion dollars the government still does not actually have.
This is my favorite part. Because it's throwing $50 billion into the dumpster. Why? Well, having been involved in fighting foreclosures recently there is still one problem that is so fundamental and pervasive that makes this nearly impossible: no one really knows who owns these mortgages anymore. Between the mortgage servicing companies, the original lending bank, the banks that invest in the lender, other players like Fannie and Freddie, and of course my favorite--the fact that these mortgages were bundled, sliced up and securitized means that it is nearly impossible to actually renegotiate a foreclosed mortgage because no one knows who all of the parties are, determining which is an incredibly complicated legal process most families facing foreclosure cannot afford to initiate (because the foreclosing banks don't give a fuck), and in the end it simply produces a situation where all of the parties are neck deep in mud while underwater but no one wants to acknowledge it because it may reflect that the entire industry has been built on lies that cannot and could never be repaid. I have no love for the banks or the mortgage servicers--especially formerly and still criminal corps like Select Portfolio Servicing--but they are financially crippled and I will never accept that they or the predatory lenders which knowingly hire such firms are ever given a dime from my taxes, or rather my grandkids' taxes, so that they can go back to collecting on predatory, subprime and even regular mortgages held by people who are in all likelihood going to lose their houses no matter what happens.
The Obama-Geithner Plan sucks because it's virtually indistinguishable from the Paulson-Bush Plan in the overview and in the fact that at the end of the day it completely misses the point and fails to account for the fact that a lot of people are going to have to pay dearly for this situation (aside from homeowners and taxpayers), some firms will have to go away, and that the United States government is still bearing the burdens of private losses without any public gains or guarantees of its own. The government is the largest and most powerful organization that can manage and operate ALL of these assets and assign assets, debts and even possibly gains in a relatively short time. But if it continues to act like it is the biblical black sheep taking in all problems to be slaughtered for the personal benefit of the wealthy few then not only is it making itself a part of the problem but it will eventually explode the problem into something far worse.
That fact sheet is a useless collection of meaningless jargon that does not actually say anything about how this is better than Paulson.
Or it creates a corrupt system of ratings and repeated trading of financial assets which are in fact collections of debt, thus repeating the same system that just crippled the economy in the first place.
This is precious, because it assumes rational actors operating in the interests of preventing foreclosures.
Congress will never allow them to force lenders to participate in the mitigation program, and even if they are somehow it will be such a weak program that merely picking up the phone from a distressed homeowner will count as compliance.
There is a 1:1 correlation between this kind of attitude and a person being a complete prick.
And he has been acting in line with his campaign positions, which aren't as liberal as the many deluded progressives who backed him thought he was--in most cases simply because he was not Bush or Hillary. He sold people on why he wanted to be President, which neither Hillary nor McCain did. But he was never the Great Liberal Hope of America and I am shocked to find out this is the case as he is governing.
I agree that parts of the first bailout were poorly implemented but absent some intervention we probably would be dealing with the collapse of Citigroup (almost assuredly), Bank of America (most likely), JPM (quite possible), and maybe some of the larger regionals (think US Bank and Wells Fargo). As it is, even with the bailout we basically saw the implosion of Merrill Lynch, Morgan Stanley, Wachovia, and Washington Mutual. If you think the financial system could have survived the implosion of all those institutions I think you are sadly mistaken.
Anyone who thought $350 billion was going to solve a multi-trillion problem was being incredibly naive. It was a short term fix to prevent a financial armageddon until someone (see new administration) could come in and plan something more comprehensive. In that sense I believe it has "succeeded" despite peripheral screw-ups.
You can read Krugman or any other informed source and I don't think many of them were framing the initial bailout in the terms you are. So I will agree that you were "right" in the context of people on these boards who were proclaiming the first bailout was a pancea to fix all our problems. Most informed people on the subject viewed the first round as a desperate, necessary move to bring some stability to the system, but certainly didn't think it was the final "fix" for the system. So vis-a-vis these people I am not sure you are the font of knowledge you proclaim (and you are probably being a bit tongue-in-cheek but hard to read context).
How do you deal with credit default swaps, which are essentially financial insurance, when the value they insure may be more than the total amount of money in existence, and they threaten to set off a chain reaction when you let institutions go under?
There have been some plans to tackle these things that have been proposed, but I want to know if Your Royal Rightness has some masterful solution to it that no one has come up with yet.