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Geithner Plan Smackdown Wrap

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I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling. Paulson demanded $700 billion, nearly $200 billion bigger than the Department of Defense, via a three page draft bill, nothing more that a doodle on a napkin, save that it did bother to put the Treasury secretary above the law. But high-handedness was the hallmark of the Bush Administration; it was only the scale and audacity of the TARP that was the stunner.

And the TARP initially did have some supporters (perhaps most important, among the media, who trumpeted the “Something must be done” case). Fans are much harder to find for the latest iteration of the seemingly neverending “let’s throw more money at the banks” saga.

As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street’s interests as the Bushies were. The differences increasingly look stylistic, not substantive.

Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the “oh he has to work on the stimulus bill” is as close to “the dog ate my homework” as I have ever seen in adult life). What he served up as an initiative is weeks to months, depending on the item, away from being operational (if even then; the public-private asset purchase program will either not see the light of day, or be far narrower and smaller than what is needed).

And in case you think I am being unfair, yesterday I got an e-mail from a political consultant who got a report on the Senate Banking Committee briefing by the Treasury the night before the announcement. No briefing books, no documents. He deemed it to be no plan. That assessment was confirmed today by a participant at the session, who said that the details were so thin that one staffer asked, “So what, exactly, is the plan?” and repeated questions from one persistent Senator got “absolutely no answers”.

Thus Geither’s belief that government can’t manage assets is sheer projection of his own inability to deliver. The FDIC winds up banks all the time. During the S&L crisis, as William Black reminds us, FSLIC appointed receivership managers that later research determined did reduce losses. Sweden, Norway, and Chile all nationalized (and relatively quickly reprivatized) dud banks during their financial crises. This isn’t like trying to go the moon (which was a government initiative, lest we forget). There are plenty of models and lots of good proposals. What is lacking is will. History says that an aggressive, take-out-the-dead-banks program is the fastest and all-in cheapest way out of a financial crisis. But if you believe that something will not work, as Geithner does, it isn’t at all hard to produce that outcome.

For sake of completeness, let’s recap the four items Geithner presented.

First was the idea that they’d get to the bottom of the bank’s books, “stress testing” them, with an unspecified program of “capital support” for those that need it. What about putting them in receivership, as regulators normally do with dud banks?

The part that got me worried was the “stress test” bit. Geithner mentioned that he was using a medical analogy, but stress testing was what the big investment banks claimed to be doing to manage risk. The results showed that their approaches were not up to snuff.

The FDIC and OCC, with enough staffing (no acknowledgment that this will take a major ramp up in personnel and that takes time) can assess loan portfolios and various not-too-complicated asset backed securities.

But they do not have the ability to have much of an independent view of the risks in derivatives exposures, CDS, CDOs. These take a lot of specialized skills within the product area. People like that are now available, thanks to the downturn, but how long will it take to screen, hire them, design templates for consistent analysis and reporting?

And the investment bank models do not (to my knowledge) allow for the fact that in bad markets, previously uncorrelated assets move together, This is a massive source of risk, and if the bankers were behind the eight ball here, pray tell how is the Treasury going to contend with this one? (Separately, we have said, repeatedly, that the big investment banks should have been subject to this sort of scrutiny as soon as Bear went under. It was obvious others were at risk, but everyone in authority, including Geithner, adopted a “see no evil, hear no evil, speak no evil” stance.)

Second was the public private investment fund to buy bad assets. This is largely sui generis, with the intent of bringing a variety of investors in (by type, mind, you, for instance, hedge fund and private equity) and buy a lot of different types of bad assets. Presumably, the entity will need to hire (therefore select, negotiate with, and compensate) an asset manager to handle the day-to-day operations.

There are a ton of details to sort out, and Treasury appears only to have had a few high concept chats with a few folks. That is far short of designing a vehicle and figuring out what the gives and the gets are.

I can’t see this taking any less than months, and that even assumes there is a solution for the problem I keep harping on: the banks do not want to sell assets at anything like market price. Now the intent may simply be to obscure a very very large subsidy from the chump taxpayer. But if not, this component, if it ever sees the light of day, is likely to wind up buying only those assets where the gap between the bank’s offer and the market bid isn’t too great. That in turn is likely to be the best of the dreck. So a huge amount of effort, and a considerable amount of taxpayer money, could well be expended with the problem largely unresolved.

The third item is providing more financial firepower than initially planned, a trillion dollars, to the Term Asset Backed Securities Loan Facility, the program intended to help free up the markets for consumer, student, and auto loans. The SBA will also get larger guarantees on its loans and faster approval process.

Fourth is a promise to come back in a few weeks with a housing program.

Aside from the impressive thumb’s down from the stock market, the comments from economists and financial commentators are withering. From the Financial Times’ Martin Wolf:

Has Barack Obama’s presidency already failed?

From bank expert Chris Whalen of Institutional Risk Analytics (via e-mail):

Real disaster. I am very concerned that the Obama Admin is going pear shaped before the snow even melts.

Kevin Logan, senior US economist at Kleinwort Benson:

They have a plan for a plan but they don’t really have a plan. The whole proposal is so vague as to create new uncertainty, and maybe the problem is really so bad that they haven’t worked out how to solve it.

Roger Ehrenberg:

But on the day when the big news was finally expected to hit, Treasury Secretary Geithner’s release of his “comprehensive plan,” he said absolutely nothing. Weeks of planning. A day’s delay in making sure he was ready, really ready for his coming out party. Only problem was, those that came to the party left. Immediately and rapidly. Today’s market news was no better or worse than any other over the past week, but somehow equity traders proceeded to lop almost 5% off its value. Do you think investors, like the Treasury, might be just a little jittery, placing a little too much hope on the impact of a plan that few thinking rationally consider a panacea?

James Galbraith:

…so long as you’re dealing with the old management and so long as you’re dealing with the old practices and so long as you don’t have a clean audit of the books, the chances are that the bank is going to behave in ways which are not constructive, which do not contribute to the growth of the economy, and which leave all kinds of suspicions present in the system about the integrity of the institution and of the regulatory process. And that’s the problem the Treasury Department seems to be determined not to face.

Jim Hamilton likes to stay measured, so on his disapproval scale, this is pretty serious:

We obviously don’t have clear details of the plan, only the concept, but it sounds to me like the wrong concept

Tony Crescenzi, an analyst at Miller Tabak:

It remains extremely uncertain how the Treasury will entice investors to do something they have been avoiding since the start of the crisis.

Paul Brodsky of QB Asset Management (via e-mail):

Is anyone else as stunned as I am?

The New York Times summed it up:

But the initial assessment of the plan from the markets, lawmakers and economists was brutally negative, in large part because they expected more details.

Paul Krugman hopes this Potemkin plan is actually a Trojan horse. If so, a lot of dollars are being deployed to mask the real aim, If Geithner weren’t so attached to the world view of the industry, I could see this as an effort to show, “Gee, we really did try a whole bunch of stuff, which by the way you bankster types said you liked, they didn’t work, so now we have no recourse but to take you over.”

As I too often say, it would be better if I were wrong, but this sure isn’t looking good.

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64 comments

  1. donna

    I think the problem with all these huge corporations is parts of them are functional and others are not, and the aim is to give them some chance to survive. But I think the dinosaurs just have to die, myself.Thanks for speaking out so firmly and clearly — I think Geithner just has to realize the banksters are NOT his buddies anymore. They need to suffer, and it’s sad to do that to former friends, but sometimes it’s what is needed.

  2. K T Cat

    Fortunately, Obama has a lifetime of managerial experience to fall back on now that he needs to rally his troops after this epic fail.

    Err, he does, doesn’t he? I mean, we didn’t just elect some egcentric novice, did we?

  3. Arnold T

    The market wanted a miracle and they got smacked with reality. The damage is done. There is no taking it back. You cannot go back in time.

    Eight years of bubbly will require nursing a hangover. We will need to drink lots of water,take some aspirin and wait for the body to heal.

    And promise yourself to never drink again.

    And for you idealogical nuts out there, The Garden of Economic Eden does not exist, it is a myth.

  4. bg

    I really think the government is left with Nationalization, and it finally sunk in this week. As Wolf said coherently on your video link yesterday, Nationalization needs to be a big bang event – even internationally. Nationalizing BofA and Citi will cause Wells Fargo and JPM stocks to tank, so we better have an answer first. The EU would be livid if we nationalized everyhing without consulting them first.

    Churchill said, “The Americans always do the right thing, but only after exhausting all the alternatives first.”

    My sense is they are completely flat footed and panicked today becuse there last other option evaporated under their noses.

    Felix Salman defends Obama’s take-down of Nationalization. However if you read Obama’s words closely, he places the blame elsewhere (hard and unpopular) but otherwise says it is good. That gives him some wiggle room. The problem is the world markets are going to panic, which won’t give him a lot of time to put plan B together.

    If you hold equity in any company that has ever recieved bail out money… run.

  5. Early Withdrawal

    Keep it up Yves!

    The only reason they could have possibly issued such an incoherent ill-conceived punt was that the other slightly less obfuscated versions (particularly the govt insured private bad bank plan) were still too politically unsavory. Could it be that American’s are catching on and speaking up? Hard to know until the administration breaks, but withering press like today is a very good development. The negative reaction was almost universal.

    Even more important is that the press keeps it up. And that readers who understand what is going on continue to hound their friends and family to both stop trusting Obama and get vocal about their objections.

  6. doc holiday

    I’ll be damned if I sit here and not respond (in some insane way) to this legal challenge before me, because I believe The Constitution of The United States of America should prevail over the lawless actions of all the parasitic thieves that are embedded in Washington DC and wall street.

    What we have here with TARP chaos and a lack of Congressional control is a matter of antitrust violation and what amounts to conscious parallelism. I mean to see all these Treasury Pirates either placed into tanks with sharks that have lasers on their heads or to have mocking birds peck them to death, and I would not rule out the possibility of experimental R&D biotech ideas that would also include proximal activities with The HLC (somewhere deep inside in Sweden, I think).

    The Constitution does not allow The Treasury to usurp power from Congress and even though we have the worst Congress in American history, the law of this land should be followed by ALL those that have sworn an oath! Here is an example of My American Truth:

    >> The United States Court of Appeals for the Fourth Circuit affirmed. Liggett Group, Inc. v. Brown & Williamson Tobacco Corp., 964 F. 2d 335 (1992). The Court of Appeals held that the dynamic of conscious parallelism among oligopolists could not produce competitive injury in a predatory pricing setting, which necessarily involves a price cut by one of the oligopolists. Id., at 342. In the Court of Appeals' view, "[t]o rely on the characteristics of an oligopoly to assure recoupment of losses from a predatory pricing scheme after one oligopolist has made a competitive move is . . . economically irrational." Ibid.

    >>> TARP violates The Spirit of The Constitution and Paulson, Bernanke and this new retarded slob should be tried for treason ASAP as a group!

  7. doc holiday

    I’ll be damned if I sit here and not respond (in some insane way) to this legal challenge before me, because I believe The Constitution of The United States of America should prevail over the lawless actions of all the parasitic thieves that are embedded in Washington DC and wall street.

    What we have here with TARP chaos and a lack of Congressional control is a matter of antitrust violation and what amounts to conscious parallelism. I mean to see all these Treasury Pirates either placed into tanks with sharks that have lasers on their heads or to have mocking birds peck them to death, and I would not rule out the possibility of experimental R&D biotech ideas that would also include proximal activities with The HLC (somewhere deep inside in Sweden, I think).

    The Constitution does not allow The Treasury to usurp power from Congress and even though we have the worst Congress in American history, the law of this land should be followed by ALL those that have sworn an oath! Here is an example of My American Truth:

    >> The United States Court of Appeals for the Fourth Circuit affirmed. Liggett Group, Inc. v. Brown & Williamson Tobacco Corp., 964 F. 2d 335 (1992). The Court of Appeals held that the dynamic of conscious parallelism among oligopolists could not produce competitive injury in a predatory pricing setting, which necessarily involves a price cut by one of the oligopolists. Id., at 342. In the Court of Appeals' view, "[t]o rely on the characteristics of an oligopoly to assure recoupment of losses from a predatory pricing scheme after one oligopolist has made a competitive move is . . . economically irrational." Ibid.

    >>> TARP violates The Spirit of The Constitution and Paulson, Bernanke and this new retarded slob should be tried for treason ASAP as a group!

  8. ndk

    The worst part: it’s still a total waste of time and a huge disaster. The fundamental issue has nothing to do with bad assets in the banks. If that were the problem, the Fed’s incredible liquidity offers and the huge excess deposits would have done the trick. It hasn’t.

    Nobody wants to borrow, and nobody wants to lend, because at current interest rates and default rates, extending new loans makes no sense. Nationalization doesn’t cure this either. Bankruptcy does.

  9. doc holiday

    Oh crap, I should include this (probably); but will this piss off Yves?

    FYI: Price discrimination is made unlawful by § 2(a) of the Clayton Act, 38 Stat. 730, as amended by the Robinson Patman Act, which provides:

    “It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality . . . where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them.” 15 U.S.C. § 13(a).

    OK?? Think mark-to-market and price discovery, etc and TARP valuations..

  10. Anonymous

    Pretty soon, everyone who wants money is going to have to declare “Hail Geithner” with an outstretched arm.

    A one-man band who could care less about laws and is so self-absorbed he honestly believes he can fix everything. I’d hate to be his wife!

    If China is now what the United States was during the Great Depression, then is there an analogue today of Germany’s leader during the Great Depression?

    All I could hear during Geithner’s speech was a scary echo from the past.

  11. Anonymous

    Is it really that complicated?
    Wall Street (and wealthy interests) dominate American Government.

    Say what? you exclaim. How can that be, what with Obama the anointed one coming to power.

    Face it folks, you've heard the saying, tweedle dee & tweedle dum, that is what has happened. There was this appearance of change, but in reality nothing of substance has.

    One step on the road to real change would be new faces in Congress (via term limits). Some young (untainted) guns in Congress forcing Obama to do the right thing is what we need.

  12. Steve

    While Geithner and Summers dither, they risk some slip or unexpected event causing a run on a systemically important bank. Perhaps on a bank’s foreign deposits. They will then have a crisis that will make Lehman look like a picnic.

    Yeah, they can continue the Bush regulatory forebearance indefinitely, while they work on how to slip the cost past the taxpayer, but events can easily get away from them. The trigger doesn’t need to be a major happening — Lehman was finished after it became clear that they were marking certain loans 50% – 60% higher than anyone else. Some of the major banks’ closets look like Halloween.

  13. Anonymous

    ALERT!!!!!!!! Small dog warning, all creatures small and fragile get inside now and hang on to something heavy, the resulting vacuum created by Investment Banks and their offspring departing this dimension and back to their dimension of origin aka the Black Hole at the center of this Galaxy, will suck many poor souls in with them.

    P.S. there are a lot of people with SKILLS coming back or back from the sand box and when they find out it was a profit exercise by the usual suspects at the cost of lives, will not behave as well as the last lot to show their feelings. The Backwater/Pinkerton Boyz will not protect you, too many friends on the other side.

    Skippy….who used to play with SWAPO in the old days and with said International friends. What the general public does not know shezzz.

  14. alexblack

    C’mon guys, give Team Obama some slack. They’re really busy redecorating the offices they just moved into. Hard to put together complicated financial rescues when you have to check Craigslist every 5 minutes to see if John Thain has put any of his office furniture up for sale.

    They’ll get a plan together by June or so….

  15. Anonymous

    And from across the pond… the guy who wrote the paper advising the govt to look at intervention in mortgage wholesale market amongst other things…unmasked!?

    http://www.timesonline.co.uk/tol/news/politics/article5705212.ece

    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5701380.ece

    http://www.telegraph.co.uk/finance/4582535/Senior-HBOS-executive-sacked-for-warning-of-banking-crisis.html

    http://www.guardian.co.uk/business/2009/feb/11/hbos-banking

  16. Dave

    @alexblack .. hilarious! For the sake of the nation, I can only hope that Geithner gets the 18th century commode and has it installed in his office at US Treasury. Then perhaps he can sh*t out a new “plan” which would probably be better received than his latest effort!

    At least it would be a plan.

  17. alexblack

    to Dave – I’d be even happier if the antique collection extended to 18th Century French guillotines. Those would be great to bring along when they’re “stress testing” the banks.

    “Um, Ken Lewis? Anyone seen Ken around? We’d like to see him for just a minute…..”

    If it’s any consolation to Ken, I ran across old experiments conducted by medical students during the French Revolution while I was doing research in the main Parisian medical library. They were measuring how long consciousness lasts in severed heads. About three seconds. I won’t post how they discovered this, unless someone insists on asking…

  18. DanyBoy

    Thanks for the great posts, Yves

    2 Trillion + 750B (TARP) + 875B (Stimulus) + Miscellanea: 40B Autos, 200B FRE/FNM (projected), Fed slush funds etc…

    We’ve spent close to 1/3 of GDP (in a good year).

    Translated = All Americans will be working for the Failed Financial Firms 2 days out of each week For Free! No other jobs or eating allowed during that time. Staggering!

    At what point do you say CUT YOUR LOSSES. Most sensible people would at this threshold.

    Spending One trillion dollars requires spending a million bucks every day for nearly 3,000 years.

  19. doc holiday

    I know this doesn't seem original, after already having posted some of this a few days ago, but it is worth re-pondering that Obama, is held hostage by the administration that he apparently brought together, for the purpose of creating change in America. From all the pre-designed fanfare, this Obama change was to spread worldwide like a tsunami of generational evolution for the better — but this current TARP stupidity and the retarded rush to compound chaos with a lack of well thought out planning by his administration is inchoate, i.e, these people are furthering the reckless actions of The Bush Coup and compounding the negligent activity which has undermined America for at least the last 8 years. It's time for change, in the form of clarity versus creating a time in which people fear the darkness of uncertainty, which is made darker by taking away truth and honesty!

    Geithner is currently a meaningless joke, with his tax evasion — and now with his clear lack of trustworthy leadership. He has lost every shred of effectiveness and has lost the credibility which is desperately needed at this point — credibility, to help restore confidence in this systemic failure. What purpose will it serve America to have a lame-duck-like person as this in charge of this problem at this time? Is he really the best person for the job, or is this obviously just another example of political nepotism, which is being exposed for what it is (and who he is) at the worst possible moment, a moment not unlike that where Brown of FEMA interacted with Katrina.

    Geithner needs to be replaced immediately as does Bernanke, as does the entire Obama Economic Dream Team which is made up of idiots. The American People are going to demand greater and greater transparency in a matter which has been nothing short of an out-of-control criminal conspiracy which seems to be expanding at an accelerated rate. IMHO, we don't have time to play good ol friends and good ol buddies and hope these folks get blessed my some new vision, because we've just been down that path with Bush and we need a direction that is a realistic CHANGE!

    As for the look back at history and symbolism of Obama and Lincoln, Geithner is certainly playing his part as General McClellan, and Obama is certainly buying into the bullshit of inaction and ineffectiveness from a Treasury Secretary that needs replaced this week!

    FYI (from Wiki): McClellan's Peninsula Campaign in 1862 ended in failure, with retreats from attacks by General Robert E. Lee's smaller army and an unfulfilled plan to seize the Confederate capital of Richmond. His performance at the bloody Battle of Antietam blunted Lee's invasion of Maryland, but allowed Lee to eke out a precarious tactical draw and avoid destruction, despite being outnumbered. As a result, McClellan's leadership skills during battles were questioned by U.S. President Abraham Lincoln, who eventually removed him from command, first as general-in-chief, then from the Army of the Potomac. Lincoln was famously quoted as saying, "If General McClellan does not want to use the army, I would like to borrow it for a time." Despite this, he was the most popular of that army's commanders with its soldiers, who felt that he had their morale and well-being as paramount concerns.
    General McClellan also failed to maintain the trust of Lincoln, and proved to be frustratingly insubordinate to the commander-in-chief. After he was relieved of command, McClellan became the unsuccessful Democratic nominee opposing Lincoln in the 1864 presidential election.

    >> I feel better…

  20. purple

    The problem with those early generals is that they were soft on the Confederacy. Lincoln had a real problem with pro-Confederate sympathy in the military leadership which took him a while to purge. Like him, or not, Sherman was effective and hated the Southern aristocracy.

  21. Richard Kline

    The Summers-Geithner Method: Stink and Ugh.

    Regarding that ‘stress test,’ we already have such a thing, and the legal authority to perform it for banks holding Federally guaranteed deposits; it’s called a
    ‘bank examination.’ The real problem for Geithner, see, is that not only are most of the money center banks totally insolvent zombies but the public is getting wind of this and is deeply opposed to more public funds being funneled into the pockets of the banksters behind them. The public and at this point even a few Congressfolks are going to want some certification that the bank is going to survived if funded, howsoever it is funded. Any real examination would show these banks as, well, _undead_. So Timmy G. has to come up with a faux certification; that’s going to be called a ‘stress test’ but it’s meaningless. The sham is insulting, but perhaps one reason there are no details, here, is that the fakery would be pitifully obvious if subjected to actual description.

    Then there are broad hints of ‘quantitative easing,’ i.e. the Fed simply inflating fast quantities of Troublebucks, and handing them over cravenly to the zombie banks to appease their appetite for phony profits and real bonuses. This, it seems to me, is the real substance of the Summers-Geither approach: have the US government simply print as much money as necessary to pay off or foam away the huge private losses of the Wall Street money fraudsters. That’s it; that’s all of it. Small wonder, then, that Geithner is reticent on the fine points. If he puts on paper that the public is going to be billed for however many trillions it will take to keep the gold collar class in this country rich, he might not make it home safely an night. To his well-earned sleep. Better to say, “Just give me funding authority, and I’ll handle it,” which is what this plan amounts to.

    We now know a, and perhaps the, major reason that the BSC crash was so ill-handled by the public authorities; why they weren’t looking when Lehman’s collapsed into the $100B hole in its basement no one was sufficiently informed to see was there; why AIG slumped into a critical mass and all the financial servants of the NYFRB could think to do was heave in bails of bonds to tamp down the radioactive cloud leaking out. Geithner was point man on each of these operations, and it is clear that he is sitting in a chair now about ten paygrades higher than his courage, competence, or conviction would ever qualify him for without Friends in High Places like, say, Larry Summers. Geithner has been in office for what, three weeks, and it already would appear that his oath to serve the people of the United States is a dead letter: He works for the banksters, all day and every night; it’s a shame we have to pay his salary for the privilege of him trying to rob us to pay them. He’s the banksters’ secretary: they dictate, he transcribes; that’s it.

    Geithner is easily the worst of Barack Obama’s many weak or bad appointments; he shouldn’t have been chosen, his past failures disqualified him on grounds of nonperformance. As a tax cheat, he shouldn’t have passed muster. With each Great Stinker of a ‘plan’ like this one he does BO untold collateral damage. I wouldn’t go so far as to say that the Admin of Bo Prez has already failed as of 10 Feb 09. I do think that if Geithner remains in his chair, acting like this, through, say, June, the political damage to Obama will be mortal. Want some advice, Barack: To address the financial crisis, strike at the root, starting with the potato-head you eased into the Office of the Secretary of the Treasury. And nationalize failed banks already; you could do a lot worse, and are making great strides in that last direction as of now.

  22. Donlast

    Righting the banks is really the keystone to righting the American economy, not the stimulus package. For how can debt be piled on debt on top of a dysfunctional banking system? There is a spectre out there called sovereign risk.

  23. Bendal

    With all the dollar numbers being thrown around (and down various endless rabbit holes), couldn’t the US government simply set up a “US Bank” with, say, a trillion dollar’s worth of capital, and say “if you need a loan, come to us” and also purchase mortgages, CC and student loans, etc, from other banks with that money?

    Wouldn’t that start the economy faster than dumping the same money into the vaults of these banks, and might it not spur those banks to start lending themselves in the name of competition?

    It certainly seems to be a better use of this money than what Geithner may (or may not, who knows?) be proposing with it.

  24. patrick neid

    As a biased fan of no plan is the best plan because there is no plan, I’m still surprised that the folks who want massive intervention could not come up with something.

    If as suggested, whatever is ultimately fashioned takes months or longer to implement, that may just be enough time for the marketplace to start resolving the bulk of the problem banks and corporations.

  25. Anonymous

    There’ll be no Nationalization as long as Our Government still has plenty of extra trillions laying around to pass out. The stress test is for their vaults to see if they can withstand being stuffed with more money.

  26. Anonymous

    Everything could be solved quickly if the respective industries ( banking, Mortgage,insurance,)would come up with a comprehensive plan to present to Congress of how they would replace all of the lobbying money that will be lost when BAC,Freddie,Aig go belly up.

  27. Richard

    My one hope is that Obama has shown a very ruthless ability to drop someone once he determines someone is liability and is not working out. I think Rubin and Summers convinced him that he needed to put someone in Treasury who had “crebibility” on Wall Street and their friend Geithner fit the bill perfectly. Well, first it was not being competent enough to pay one own taxes thing and now this dud of a plan and I think Obama is likely to be disenthralled with Mr. Geithner, and perhaps with Mr. Rubin and Mr. Summers as well. Although I don’t think Summers any longer shares this views, based on the columns he wrote in the FT last summer, underlying it all is my suspicion that Geithner and Rubin are still in denial about what is happening to asset values and somehow hope that the bets Rubin’s bank and the others made that “U.S. Housing Prices never fall” will somehow still come through (hence their talk about the real value of the so called “toxic assets.”)

    There is an interesting interview Obama has given on ABC with Terry Moran, where he seems to acknowledge the ultimate necessity of putting major money center banks in receivership, but hints that the political and economic elite are just not able yet to wrap their minds around this concept yet. Roubini, while pointing out that he believes the major money center and regional banks are or soon will be insovlent, also opined that doing it now is politically difficult, especially since he suspects that right now only CITIBANK and BOA would be found insolvent, but that JP Morgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo, although still probably solvent now, will become insolvent over the next 12 months as the depression (might as well call it that) deepens and widens.

    I hope that within a few months that we see Sheila Bair or Meredith Whtitney as our new Treasury Secretary and I expect either of those two will be able to put together a plan with briefing books in about 72 hours.

  28. Anonymous

    Enjoyable summary.

    I am skeptical about attributing Geithner’s vagueness to incompetence or bad judgment. It appears more likely to be strategic evasiveness. My question is: what’s the real plan behind the baloney? Is something being concealed by the fog?

  29. DoctoRx

    One the best posts ever on this site. Love both the primary commentary and the quotes from others.

    Even as a physician who truly hated the Hillarycare plan (and quite a specific one), I preferred her to Obama because he had no executive experience. As a teacher of law in Chicago, he was known for seeing both sides of an issue. (Yves has recounted his Harvard Law days with similar tendencies.)

    IMHO Martin Wolf is sadly onto something. If Mr. Obama is going to fiddle, he should simply say so.
    To have hyped the Geithner talk so much is incompetent.

  30. Dan Duncan

    All the criticisms of the Obama-Geithner Plan-Plan are premature.

    Personally, I plan on criticizing the Obama-Geithner Plan-Plan at a later date.

    My plan on exactly how I plan on criticizing the Obama-Geithner Plan-Plan, however, will be unveiled at a later date.

    Thank you for your time.

  31. Will Mitchell

    Hello to all.

    Yves, thank you for this wrap. Quite a global bitch-slap, I must say.

    It is a dangerous time, and I cannot imagine being one of the hundreds of millions of people who receive their daily market rule change information from TV.

  32. Anonymous

    CHANGE…
    POLICY CHANGE..?
    CLOTHES CHANGE..?
    NEW CLOTHES..?
    THE EMPEROR’S NEW CLOTHES..?
    NO CLOTHES…
    NAKED…

    This is a new angle on Warren Buffet’s line about how you see who’s swimming naked, when the tide goes out. You DO see it – if your faculties of observation are still intact and not obfuscated by blind belief in the efficacy of ritual incantations about “CHANGE WE CAN BELIEVE IN” and so on. But no, the Great American Majority still wants to believe they’ve got their pants on.

  33. Anonymous

    “If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost.”

    Don’t you think Wolf is being a bit bombastic here? This doesn’t fall just to Obama and the world will go on in any case. Wolf seems to be buying the notion that the government can ‘fix’ this… and, if so, he is completely wrong about that.

  34. Anonymous

    Yves said; “There are plenty of models and lots of good proposals. What is lacking is will.”

    Will for substantive positive change is always lacking in those who intentionally deceive because they have another agenda.
    But what is really lacking is a more comprehensive connecting of dots that goes well beyond just finance and the present day ‘crisis’. A connecting of dots that will reveal the hidden agenda.

    Just as corruption in the financial world has caused easy credit and over leveraged derivatives to outpace the money supply turning the financial world upside down, so too has corruption in the culture caused value development to be similarly reversed. The corrupt corporate controlled culture now produces values in the people rather the people creating their own values. This is a well orchestrated and comprehensive plan. You must see the poisonous snake before you can kill or sidestep it …

    Ronnie Reagan was a puppet,
    And Jimmy Carter was too,
    And George W. and Obama,
    Are fake through and through …

    Scamerica is an infomercial,
    From sea to shining sea,
    It is no longer the land,
    Of the brave and the free …

    Its tough to admit that,
    Your heroes are zeroes,
    Made by the master,
    Who tied on their strings …

    And that same craven master,
    Is a corporate vulture,
    Who has shaped you and formed you,
    In his self serving culture …

    But deep down inside,
    You know that its true,
    When you add it all up,
    You are what you’ve been through …

    And the illusion that formed you,
    Is really a chain,
    That imprisons your spirit,
    In a very real pain …

    The scam ‘rule of law’,
    Favors the rich elite few,
    It gives freedom to them,
    And enslavement to you …

    It is made by their puppets,
    It is what makes them rich,
    There lives are quite cozy,
    While yours is a bitch …

    But it was made in the past,
    And we live in the now,
    The challenge before us ,
    Is to change it somehow …

    To shatter the illusion,
    And break out of its chains,
    To face up to reality,
    What ever the pains …

    The corporate vulture,
    Must be shot through the heart,
    The puppets he’s made,
    Must be all torn apart …

    The way to achieve this,
    Is so simple to see,
    Purge the scam ‘rule of law’,
    And we all will be free …

    So take to the streets,
    And take aim at the vulture,
    Protest loudly and scream,
    To create a fair culture …

    Shake off your illusions,
    And when you are through,
    The rule of law will serve all,
    And not just the few …

    And remember past patriots,
    That were just like you,
    That “rose like lions from slumber”,
    And “shook off their dew” …

    They knew that their numbers,
    Would make them reign supreme,
    For the rich were few,
    And could not stop their dream …

    And so too your dream of freedom will prevail!

    —————

    No balls! No brains! No freedom!

    Deception is the strongest political force on the planet.

    i on the ball patriot

  35. Anonymous

    I should feel sorry for the suckers who despised Bush’s faith-based economic policy but adored Obama’s hope-based economic policy. They’re logically equivalent.

  36. Anonymous

    So the Obama administration hasn’t yet found the moral and political courage to wipe out the insolvent banks so we can move forward with institutions that are smaller but stronger. A lot of rice bowls of very powerful, very connected people are going to need to be broken in this process.

    The only thing that keeps me from abject despair is the knowledge that, throughout our history, we always get around eventually to doing the right thing. The question is just how much will be irretrievably lost before we get there?

  37. Anonymous

    “Where did the money go? Who took it? And what’s the broader indication?”

    Regarding the money market withdrawals – if you’ll remember, two (I believe) funds had just broken the buck. There was no insurance of deposits in money market funds, so participants in those funds lost their money causing other investors to pull their money out.

    We pulled our money out, too, and transferred the cash to our (insured) credit union accounts. It seemed the only safe thing to do at the time.

  38. Anonymous

    “Now the intent may simply be to obscure a very very large subsidy from the chump taxpayer”

    lets focus on this shall we not

    Two problems facing administration/establishment party

    1. people are growing more skeptical of the have intentions toward the have not’s

    2. The need for a bailout to move liabilities from bank balance sheets to gov’t/taxpayers is the most politically acceptable maneuver, and it needs to be done soon.

    Geithner had to be obscure when describing the plan (and even if the mkt dropped do to the necessary uncertainty….that was a acceptable risk).

    Many have heard that private capital is lining up for this “bank program” which try’s to get the shadow banking system going again thu securitization and gov’t backed leverage. sure this could be some crack for the credit economy for a little while…but it’s not the remedy for anything sustainable more than a year or two (what needs to be done is balance laws and debt writedowns equally toward debtors and creditors and not just pay the former lip service!)

    This is potentially a huge transfer of risk….and this should be the focus…at least until it can be looked at and hopefully dismissed

  39. bobn

    But they do not have the ability to have much of an independent view of the risks in derivatives exposures, CDS, CDOs. These take a lot of specialized skills within the product area.

    How much does it take to say that all CDOs = 0? The only reason to make a CDO is to phony up some of the non-AAA parts of ABS to AAA. These are purest crap.

    CDS: Declare them null and void as of yesterday.

    Those should push enough of the big Banks over the edge that nationalization is the obvious solution.

    Also: prosecutions! I want heads on pikes.

  40. Aaron Krowne

    It is very difficult to come up with an explanation for this kind of behavior from the authorities — that is, failure to implement the obvious solutions, and yet, failure to really propose anything else — unless the real problem is THEY DON’T WANT TO OPEN THE BOOKS ON THE BAD ASSETS.

    Think about it… all the “solutions” proposed and tried so far center on supporting the toxic asset bundles and securitizations en toto… or supporting the troubled institutions (but leaving them managerially in charge). But what is obviously needed urgently is to go through the toxic waste with a fine-toothed comb, diagnose everything, and pick out the gems, so that pricing can happen and a reasonable amount of value can be extracted.

    What if, with that done, it would become obvious that crimes had been widely committed by Wall Street and government types who were in charge? In other words, the plausible deniability of “oh, we didn’t see this coming” might quickly evaporate.

    Think about it.

  41. Anon1

    My question is: what’s the real plan behind the baloney? Is something being concealed by the fog?

    The plan, my dear sir, is to pay homage to FDR and then totally dismantle everything he did for the little people. The plan is to take money (via taxes) from you, me, teachers, barbers, firefighters, mechanics, etc, and pass all that money UPWARDS into the accounts of the gilded Robber Barons of Wall Street and the big banks.

    The plan is to use this debacle as an excuse to eliminate social security (rather than fix it for perpetuity by simply eliminating the cap on income subject to SSI tax) and medicare (and with the latter, any and all hope of there EVER being universal healthcare).

    The plan is Shock Doctrine.

  42. Stephen

    I suspect the stress test idea is siilar to the one that has been used in canada….it was mentioned at the G20, but it was a preventative thing.

    We are in an enviable position, for the moment, in this country regarding our banks but it is a long term process. I wouldnt make it the high point of the plan.

    Yes lending demand and opportunities are an issue right now. But those toxic assets need to be written off as fast as they can responsibly be written off. It is an important breakpoint, enables proper recap, share appreciation and value creation in banking.

    The longer Geithner takes the worse it will get because I can guarantee you that whatever plan he comes up with wont be perfect, get it out there as near to the mark as possible and then make one or two adjustements.

    This is ridiculous and the biggest disappointment of Obama admin so far. Well that and O saying that the Catpilalr CEO told him some workers would get hired back if the bill passed. O isnt being a president he is being a community organizer. He needs to be a President and fast.

  43. Anon1

    olf seems to be buying the notion that the government can ‘fix’ this… and, if so, he is completely wrong about that.

    What the government can do (and must do) is lesson the shock and pain for the real human beings in the country (anyone not a mover/shaker on Wall Street or in banking). What the government can do is ensure that those responsible for this do NOT get away with a tidy profit. What the government can do is provide a safety net for the real people who get screwed by this entire debacle.

  44. doc holiday

    TARP Drama in a nutshell:

    The witches’ lines in the first act: “Fair is foul, and foul is fair: Hover through the fog and filthy air” are often said to set the tone for the remainder of the play by establishing a sense of confusion. Indeed, the play is filled with situations in which evil is depicted as good, while good is rendered evil. The line “Double, double toil and trouble,” (often sensationalized to a point that it loses meaning), communicates the witches’ intent clearly: they seek to only trouble for the mortals around them.
    Even though the witches do not deliberately tell Macbeth to kill King Duncan, they use a subtle form of temptation when they inform Macbeth that he is destined to be king. By placing this thought in his mind, they effectively guide him on the path to his own destruction. This follows the pattern of temptation many believed the Devil used at the time of Shakespeare. First, they argued, a thought is put in a man’s mind, then the person may either indulge it or reject it. Macbeth indulges it, while Banquo rejects…

    get out, yah damn spots, duh yah hear me, huh, huh, do you punks

  45. Eric L. Prentis

    President Obama, “What are you going to do about the Geithner/Summers/Bernanke cabal who play the same old tired song”? The way we are going, it will be ten years before we get out of this GREAT RECESSION.

  46. Anonymous

    The levee has busted. I’m going to go climb thru my attic and wait on the roof for the helicopters.

  47. Anonymous Monetarist

    Yves,

    I think most everyone is wrong on this one. Perhaps it is because we are an instant gratification society. Personally my compass said if the markets drop, the plan was good … and vice-versa.

    (On January 25th I suggested:

    There is a level of hopefulness in the prognostication that I’m about to put forth. My suspicion and expectation is that Obama is a pragmatic liberal intellectual.

    The part of the bailout exercise that folks are drawing a blank on is how do you value the ‘toxic assets’. I’ve stated that a private-public partnership that balances investors’ interest with taxpayers’ interest is the way to go.

    How do you get there? The answer is simple … time and price.

    Set up a ‘data swat team’ to analyze the ‘reports’ coming back on January 31st.

    Set up a bad bank, issue FDIC bonds out the back end to finance purchases and then … just wait.

    State that the government would be willing to entertain offers from folks that want to sell assets, each offer will be reviewed by the ‘data swat team’ to review whether the terms are satisfactory and then … just wait.

    And then pick the weakest sister that the Federales are pulling the strings on, say Citigroup, and purchase (Citigroup presents assets to the Federales at the price they choose) a batch of assets on a dollar-matched basis with pirate equity. You don’t have to buy much … set a price and let the markets take it from there.)

    SO FAR, SO GOOD!

    GEITHER:”I understand the desire for details, and I understand the disappointment about the lack of details today.But part of the disappointment is because people were hoping that we do things that, in my judgment, would have been too generous and not responsible for the taxpayers’ money.I do not want to compound the mistakes of the last 12 months, when things were rushed out before they were ready, and strategy had to be adapted because of that. If that means that there is going to be disappointment with the level of details until we get it right, I will live with that disappointment because it is better than the alternative.”

    OBAMA: Well, you know, Wall Street I think is hoping for an easy out on this thing and there is no easy out. Essentially what you’ve got are a set a banks that have not been as transparent as we need to be in terms of what their books look like. And we’re gonna have to hold out the Band-aid a little bit and go ahead and just be clear about some of the losses that have been made because until we do that, we’re not going to be able to attract private capital into the marketplace. And so, you know, I think that you have two choices in this situation: you can prolong the agony and shareholders will be happy until they’re not happy, and that could be a year from now or two years from now, or in the case of Japan, eight years later. Or you can just go ahead and acknowledge that yeah, there’s, there’s a lot of work that has to be done to put these banks back on a firmer footing.

    As the Nancy Capitalists blather on about how they need clarity so that they can have confidence- translation: gimme a freebie or give me death- here’s hoping that Barry and the boys hang tough.

    To paraphrase Citizen Harrison of Minyanville : to get through this we have to go through this and the only solution to our troubles is time and price.

    Mr Dunham has suggested he understands the first concept … let’s hope he doesn’t get wobbly on the second and continues to ignore the bray of pigs.

    Undoubtedly it is tempting to repeal mark-to market but in this humble blogger’s opinion doing so would greatly lengthen our ‘under-construction’ demand recovery project.

    We need to bring private investors in, and that is not going to happen until the banksters are willing to take the nickel for the nickel.

    Do you suppose that the vultures and the pirates will pay more just because the squints pull a rabbit out of the ‘fair value’ hat? Of course not.

    As long as Barry stays true to protecting the taxpayer, the only way to transform the ‘hard to sell’ assets into ‘priced to sell’ assets is to sweat the banksters out.

    They’ll take the nickel, when it is an offer they can’t refuse.

  48. Anonymous

    Forget faith and hope-based leadership. We need an anger-based leadership. Specifically, Angry-Old-Person leadership. I nominate economist Peter Morici of U Maryland. Other suggestions welcome.

    ignorantmike

  49. i like tuesday

    Geithner’s plan is obviously to take 6 months and “let’s see if we luck out and TARP will work before we have to do something drastic” like nationalizing banks controlling half of all banking assets (the top 4 have 6.3 trillion of 13.6 at the close of Q3).

    After all, Geithner was in on the development of TARP and probably thought it might work. We forget it’s only been three months. In 6 months, if there’s no improvement, I suspect we’ll see more radical action.

  50. M.G.

    I still contend that the Plan is a cut and paste over internet. If you just put sentences and paragraphs in Google you will find a lot of references…From emerging markets literature to IMF language to blog sphere thoughts, etc. A nice patchwork. As you maybe know I hope just for the big announcement: we are going to create “good banks”… not continuing with “lemons”

  51. i like tuesday

    As for relaxing mark-to-market. Banks that charge losses over time can pay for them out of current earnings whereas charging a loss all at once eviscerates capital. Relaxing mark to market means banks can sell some “hard-to-value” assets without having to mark all such assets down at once rendering them unable to maintain the pretense of solvency. Banks are unwilling to sell any hard-to-value assets for fear that subsequent mark-to-market losses will destroy their balance sheet.

    The problem is that you have to trust banks to shed the assets over time and eventually value all such assets correctly, rather than paying out bonuses and dividends as if the problem didn’t exist.

  52. Anonymous

    Great, fantastic, Roman citizens of the Financial and the Three Branches of the the Uberment and their minions have their rule of law, and those of us on the out side have the salt mines and domestic law. Its about time they just said so, after all the fog about it.

    I prefer the domestic position over the salt mines, if I can’t be one at least I can live in their opulent shadow as a modern day Antoninus (Tony Curtis/Spartacus). I will do a runner though, if they start the seafood talk during bath time. Then off to the hills for a bit of carnage, until ultimate retribution is metered out by the Uber Citizens and status quo is reestablished again.

    Sippy… getting fit for toga time.

  53. Anonymous

    Over at DeLong’s site, the host seems to be having some severe cognitive dissonance. He put up a post that went something like, “I know, Geithner, I like Geithner, I trust Geithner, but, erm…” Whereupon a number of his commentators pointed out — correctly — that he’s said the same thing about folks like Greenspan and Rubin. But now the thread is deep-sixed. Evidently there’s a limit to how much “reality” he really wants to grasp.

    And that, in a nutshell, is the “profession” of economics.: Never mind that the single greatest crisis in recent economic history caught the “profession” entirely flat-footed. Calling them out on it is gauche, not fit for polite company.

  54. doc holiday

    Someday, I will return to conscious parallelism and mark-to-market TARP valuation, financial oligopolists, parasites, predatory pricing schemes, Timmy at The Treasury, the Paulson money laundry operation and things that I can’t fit into my head just yet, but, know this America Ich bin ein Berliner!

    Also see: Jelly doughnut urban legend

    According to an urban legend, Kennedy allegedly made an embarrassing grammatical error by saying “Ich bin ein Berliner,” referring to himself not as a citizen of Berlin, but as a common pastry[2]:
    Kennedy should have said “Ich bin Berliner” to mean “I am a person from Berlin.” By adding the indefinite article ein, his statement implied he was a non-human Berliner, thus “I am a jelly doughnut”.

    The legend seems to stem from a play on words with Berliner, the name of a doughnut variant filled with jam or plum sauce that is thought to have originated in Berlin.
    In fact, Kennedy’s statement is both grammatically correct[3] and perfectly idiomatic, and would not be misunderstood in context. The urban legend is not widely known within Germany, where Kennedy’s speech is considered a landmark in the country’s postwar history.[4] The indefinite article ein can be and often is omitted when speaking of an individual’s profession or residence but is necessary when speaking in a figurative sense as Kennedy did. Since the president was not literally from Berlin but only declaring his solidarity with its citizens, “Ich bin Berliner” would not have been correct.

  55. Anonymous

    @ doc,
    Man I’m so short I can’t see out of my shoes anymore, the riskiest gamble is now the safest, and who stole the horizon while were at it.

    Skippy, with his best friend Mr. Gurkha knife or lets settle this like gentlemen of the past with duels, done and over with, pack of cowards I think or lets send the entire uberment to the sand box with a few rounds and new clothes, and if they live let them make some rules about how we should live.

  56. Anonymous

    They still haven’t addressed the real issue which is housing. THis looks like bad news to me and it still isn’t going to be enough.

    Very troubling

  57. Waldo

    i on the patriot – great poem, again. Always important to create. Underpinning of capitalism.

    Yves, erudite content. I find it hard to read “Free to Choose” – by Friedman and “Evolution of Physics” by Einstein because of your blog. Damn good stuff.

    If the proper course of action is eventually chosen would it be best to “unwind” medium banks first (slow process) and slowly work towards the larger banking firms moving at a constant rate to allow the markets to jirate as needed? I cannot imagine doing the unwinding all at once.

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