Guest post: Can Geithner’s public-private partnership get it done?

Submitted by Edward Harrison of the site Credit Writedowns

Edward Harrison here. This is a post I published just last night over at Credit Writedowns with some minor edits.

Barack Obama’s presidency will likely be decided by one single issue – his ability to deal with this financial crisis. With the release of his Treasury Secretary Tim Geithner’s Public Private Partnership Investment Program two months into his administration, we now have a fairly comprehensive view of Obama’s strategic approach. Will it work?

To cut to the chase, I believe this strategy could be successful in rekindling some increasing credit liquidity and, therefore, some consumer demand. However, the strategy will not be successful in eliminating the underlying causes of our crisis – excessive leverage and insolvency — and therefore systemic risk will remain.

My baseline view is that an unresolved crisis could lead to a worsening economy. The loss of political capital and popular support that would result would cripple Obama’s administration. Nevertheless, President Obama may yet be successful in reinvigorating the economy due in part to economic and fiscal stimulus — and, thus, escape a worst-case outcome.

In looking forward, four critical factors will be determine Obama’s fate:

  1. Success of Geithner’s Plan: in my view, Barack Obama’s fortunes depend in the main on Geithner’s Public-Private Partnership Plan. If this plan is unsuccessful, Obama is sunk. The plan has merits, but many deficiencies as well.
  2. Efficacy of Economic Stimulus: I have said often that Obama’s stimulus will not be sufficient given the state of the economy. Recently revised budget projections from the Congressional Budget Office confirm this — the budget deficit, therefore, will be significantly worse than originally projected. Nevertheless, the Japanese experience in the 1990s demonstrates that even a depressionary economy can experience brief respites from economic turmoil. This could be Obama’s saving grace.
  3. Ability to connect with disenfranchised: Populist sentiment is running high because people have finally realized that the last quarter-century or more has seen a massive divergence of economic fortune between the wealthy and everyone else. In essence, while credit was flowing and asset prices rose, ordinary Americans appeared to prosper along with the wealthy. However, now that credit revulsion has replaced easy money, it is plain to all that standards of living will decrease. President Obama would be wise to use his inner Bill Clinton and demonstrate he can “feel your pain” or he risks being perceived as aloof.
  4. Will in setting political agenda: The Republican party was in tatters after the 2008 election, giving Barack Obama a free hand. In my view, Obama has grossly miscalculated politically on numerous occasions. This has cost him political capital. Whether he can reassert his agenda now — with Democrats in Congress responding to populist sentiment out of self-preservation and the Republican party newly reinvigorated — remains to be seen.

Economic Background
I think it is important to lay out the background before going into the specifics of this plan. Let me say upfront that this financial crisis — in term of scope and complexity — is as great as any the world has ever witnessed, including the Great Depression. Indeed, its complexity may make it even greater. However, it is the policy response that can alleviate or exacerbate the severity of such a crisis.

Leverage, in a nutshell, is what led us to this point. For a variety of reasons (which I don’t have space to review here), the leverage in our global financial system – as represented by credit outstanding and credit derivatives has mushroomed out of all proportion to the underlying economy. This was a credit bubble, plain and simple, and it was destined to pop.

When it did pop, it was manifest first in the U.S. subprime market as this was the weakest link in the chain. However, policy makers were unable to ring-fence the problem and the crisis crossed over into numerous related and unrelated markets which have become dependent on leverage or liquidity.

Eventually, this credit crisis became a full-blown banking crisis as the attendant de-leveraging created such tremendous asset price deflation that financial institutions were forced to write down their assets by hundreds of billions of dollars. Therefore, capital adequacy at many financial institutions reached a distressed level, triggering a crisis of confidence and the bankruptcy of major institutions like Lehman Brothers and Washington Mutual.

After this point, the main question for most policy makers was this:

Has the de-leveraging and asset price declines which triggered the banking crisis been excessive? If asset price declines have indeed been overdone, many troubled institutions are stressed more due to ‘irrational despondency’ than any inherent capital inadequacy. On the other hand, if asset price declines represent a reversion to the mean, large swathes of the banking sector are effectively insolvent.

In my view, the Geithner Public-Private Partnership plan implicitly takes the former view – that asset prices are artificially depressed, creating weakness that should not exist. Treasury’s press release yesterday says as much (note the sentence I have bolded):

The challenge posed by these legacy assets began with an initial shock due to the bursting of the housing bubble in 2007, which generated losses for investors and banks. Losses were compounded by the lax underwriting standards that had been used by some lenders and by the proliferation of complex securitization products, some of whose risks were not fully understood. The resulting need by investors and banks to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.

Success can still mean defeat
Unfortunately, Geithner’s view is not a correct interpretation of events. While prices have declined considerably in a number of markets, often to excessively low levels, there are many other assets which will become impaired going forward or have been impaired, but have yet to be written down. Commercial Real Estate, credit cards and prime mortgages are all distressed markets where one should anticipate further writedowns. So, even if the Treasury’s interpretation of events is correct — that many asset prices have fallen too far — it is irrelevant because there are so many more writedowns still to come.

Let’s assume the Geithner plan will be successful in increasing the prices of the assets it targets (even though this is far from a good assumption. See Yves Smith’s take on this). But, we have a workable plan here, and let’s assume it can get the job done to boot. Mark Thoma does a good job in presented a balanced picture.

I prefer nationalization because it provides a certainty in terms of what will happen that the other plans do not provide, the Geithner plan in particular, but it also appears to suffer from the political handicap of appearing (to some) to be “socialist,” and there are arguments that the Geithner plan provides better economic incentives than nationalization (though not everyone agrees with this assertion). The Geithner plan also has its political problems, problems that will get much worse if the loans that are part of the proposal turn out to be bad as some, but not all, fear…

So I am not wedded to a particular plan, I think they all have good and bad points, and that (with the proper tweaks) each could work. Sure, some seem better than others, but none – to me – is so off the mark that I am filled with despair because we are following a particular course of action…

What’s important to me is that we do something, that we adopt a reasonable plan that has a decent shot at working and that satisfies the political test it must pass (though the administration could certainly do more to sell the plan to the public and help with this part, so passing the test is partly a reflection of the effort that is put into selling it). We’ve been spinning our wheels for too long, and it’s time to get this done. We can’t wait any longer.

So I am willing to get behind this plan and to try to make it work. It wasn’t my first choice, I still think nationalization is better overall, but I am not one who believes the Geithner plan cannot possibly work. Trying to change it now would delay the plan for too long and more delay is absolutely the wrong step to take. There’s still time for minor changes to improve the program as we go along, and it will be important to implement mid course corrections, but like it or not this is the plan we are going with and the important thing now is to do the best that we can to try and make it work.

What’s more, we have the TALF (Term Asset-Backed Securities Facility) and other programs sponsored by the Federal Reserve as well. That’s a lot of firepower.

But, what happens then if economic weakness creates more losses on other asset prices? As an example, what if credit card charge-offs increase much more than is anticipated and prime mortgage defaults increase equally dramatically?

In that case, this program will be insufficient and another round of asset buying, bailouts or nationalization would be necessary. Given the bailout fatigue we are already seeing, I reckon it will be impossible to allocate more federal monies to bailouts or buying toxic assets.

I do anticipate many more writedowns irrespective of what happens with the TALF, TLGP , the Public-Private Partnership or any of the other plans. Therefore, the likely result of this program is the nationalization or bankruptcy of a more weakened banking system down the line. This will end up costing considerably more to fix than had the nationalization/ bankruptcy been achieved on the first go round.

So, to be clear, even if Geithner is successful here, I believe the plan will end costing more than had he bitten the bullet now. This will weaken the economy and cost Obama politicially.

Stimulus too small
Meanwhile, I also have lingering doubts about President Obama’s stimulus package. The Obama Administration based its stimulus on projections for unemployment and economic growth which have proved optimistic. The loss in spending from consumers and local and state governments will be too great for the stimulus to have an overriding influence on the near-term economy. (See my posts “Obama takes middle road on stimulus and taxes that leads nowhere” and “Will federal largesse be countered by state and local cutbacks?” for a fuller analysis). If you believe fiscal stimulus is the correct way to combat this crisis, then you are likely to be disappointed by the outcome.

But, does that mean Obama is sunk here? No. If one considers the Japanese experience, it is obvious that even in the face of a weak banking sector, asset price and retail price deflation, and depression that cyclical rebounds are the norm. If you recall, Japan had several upswings during its lost decade. Events could turn out similarly in the United States.

Nevertheless, the underlying leverage would still remain even if we were to experience an upswing due to monetary easing and/or fiscal stimulus; the financial system would still be in a state of stress. As in Japan, the systemic weakness — and with it asset price weakness –would reassert itself when the economy turned down until the leverage was worked away.

Therefore, I strongly suggest that we are on course for a Japanese outcome at best here.

Tone Deafness
Where I am most worried going forward — as it relates to a positive outcome for the economy and confidence in our system — is in regards to the Obama Administration’s inability to stay on the right side of the rising tide of populism. Arianna Huffington says this well:

On February 10th, the New York Times reported that there had been a “spirited” battle within the Obama administration over restrictions on executive pay and bonuses, and over attaching stringent conditions to any bailout money given to banks.

The clash pitted Tim Geithner, who opposed the restrictions and conditions, against David Axelrod, who favored them. According to the Times, Geithner had “largely prevailed.”

In light of what has happened since then, that outcome must now be viewed as a tragic surrender to Geithner, Summers, and the political/Wall Street class — a “victory” that could lead to the unraveling of the president’s entire economic policy.

Maintaining the public trust is always important for a leader, but especially so during hard times. There is a fascinating chapter on Nelson Mandela in Stan Greenberg’s new book, Dispatches from the War Room, in which Greenberg writes about how even the revered Mandela suffered a loss of public confidence when change did not come fast enough after he took office. “Don’t assume the current euphoria, even with your high approval rating will carry you through,” Greenberg counsels Obama, stressing the need to try to build up enough trust so that the public will stay with the president until they can actually experience change.

The Axelrod camp understood this and, according to the TimesFebruary story, argued that “rising joblessness, populist outrage over Wall Street bonuses and expensive perks, and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.”

Axelrod was right. And his loss has already cost the young Obama administration a lot.

In my view, the Obama Administration, through its actions to date, has already politically cast its lot with the monied class. On Obama’s watch, we have the Citigroup situation, the Bank of America bailout, the Merrill Lynch bonus scandal, the AIG bailout and bonus scandal, the furore over golf tournaments and the backdoor bailouts under TALF and the Public-Private Partnership. All of these events demonstrate a transfer of wealth from taxpayers to the monied interests of the financial sector. Yes, none of these events individually is a fatal problem. However, taken as a collective, the preponderance of evidence points toward an Administration which will increasingly be seen as more aligned with Wall Street than Main Street. This is a catastrophe for a man who campaigned on “Change you can believe in.”

And, what’s more, with the die now cast on most of the major financial crisis efforts, Obama has no obvious opportunity to win back all of his credentials as a man of the people. I see this as a ‘Katrina’ event, which changes the perception of the public inexorably. Therefore, the Administration will come under greater scrutiny by the media and the public going forward. New York Times columnist Frank Rich wrote an excellent article detailing this:

To get ahead of the anger, Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable. His administration must start actually answering the questions that officials like Geithner and Summers routinely duck.

Inquiring Americans have the right to know why it took six months for us to learn (some of) what A.I.G. did with our money. We need to understand why some of that money was used to bail out foreign banks. And why Goldman, which declared that its potential losses with A.I.G. were “immaterial,” nonetheless got the largest-known A.I.G. handout of taxpayers’ cash ($12.9 billion) while also receiving a TARP bailout. We need to be told why retention bonuses went to some 50 bankers who not only were in the toxic A.I.G. unit but who left despite the “retention” jackpots. We must be told why taxpayers have so little control of the bailed-out financial institutions that we now own some or most of. And where are the M.R.I.’s from those “stress tests” the Treasury Department is giving those banks?

That’s just a short list. In general, it’s hard to imagine taxpayers shelling out billions for a second bank bailout unless there’s a full accounting of every dime of the first, and true transparency for the new plan whose rollout is becoming the most attenuated striptease since the heyday of Gypsy Rose Lee.

Another compelling question connects all of the above: why has there been so little transparency and so much evasiveness so far? The answer, I fear, is that too many of the administration’s officials are too marinated in the insiders’ culture to police it, reform it or own up to their own past complicity with it.

The “dirty little secret,” Obama told Leno on Thursday, is that “most of the stuff that got us into trouble was perfectly legal.” An even dirtier secret is that a prime mover in keeping that stuff legal was Summers, who helped torpedo the regulation of derivatives while in the Clinton administration. His mentor Robert Rubin, no less, wrote in his 2003 memoir that Summers underestimated how the risk of derivatives might multiply “under extraordinary circumstances.”

Given that Summers worked for a secretive hedge fund, D. E. Shaw, after he was pushed out of Harvard’s presidency at the bubble’s height, you have to wonder how he can now sell the administration’s plan for buying up toxic assets with the help of hedge funds. It will look like another giveaway to his own insiders’ club. As for Geithner, people might take him more seriously if he gave a credible account of why, while at the New York Fed, he and the Goldman alumnus Hank Paulson let Lehman Brothers fail but saved the Goldman-trading ally A.I.G.

As the nation’s anger rose last week, the president took responsibility for what’s happening on his watch — more than he needed to, given the disaster he inherited. But in the credit mess, action must match words. To fall short would be to deliver us into the catastrophic hands of a Republican opposition whose only known economic program is to reject job-creating stimulus spending and root for Obama and, by extension, the country to fail. With all due deference to Ponzi schemers from Madoff to A.I.G., this would be the biggest outrage of them all.

Obama is weakened politically (not unlike George W. Bush after Katrina). He is not perceived as the change agent he has claimed he would be. The media are certain to pick up on this and start asking difficult questions. Congress will be emboldened to go against his counsel as well. All of this will make his job as President considerably more difficult.

There is no second go round
As a result, I do not believe that Barack Obama will get another chance at stimulus or at bailouts if the economy sinks. He has expended too much political capital in achieving what he has achieved thus far.

This is why I have decided to get onboard with this package. Honestly, I do not think it will be entirely successful – the writedowns in commercial real estate for one are too many. But, too much time has passed and there is zero opportunity for another solution at this point. The Geithner plan is all that we are going to get for the majority of 2009. So we better hope it works.

Has a ‘Katrina Moment’ Arrived? – Frank Rich, NY Times
Take the Steering Wheel out of Geithner’s Hands – Arianna Huffington
Which Bailout Plan is Best? – Mark Thoma

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. For Fairness

    One thing that would add to Obama’s populist creds would be that if the Public Private Partnership purchases a loan at 30 cents on the dollar, they enabled the borrower to buy out the loan for say 50 cents on the dollar if the borrower has the financial wherewithal, or allow the borrower to designate a friend/ relative who could buy back the loan for that amount. Also, the President should stop using the term “toxic assets” when talking about mortgages that borrowers can’t repay in full because they have fallen on hard times. Let’s remember that 4 million net jobs have been lost in the past year. The President should be most aware of this.

  2. Anonymous

    The most revealing evidence of a failure of leadership character in this fiasco is the steadfast refusal to examine the “assets” in question. The government has the authority and the means to rapidly evaluate the quality of the suspect assets and to fashion policy based on accurate information, rather than wishful thinking. The avoidance of this critical analytical step shows that the policy is to further conceal and to socialize the losses of the Wall Street plutocracy. The class war is over, and the monied class has won.

  3. DownSouth


    Thanks for a great post.

    It seems like a lot of economic experts believe the nation’s economic life somehow operates independent of its social and political life. Maybe they fall into this trap because such a belief is part and parcel of the regnant neoclassical paradigm taught in most university economics departments.

    You, however, do a wonderful job of pulling it all together and integrating the economic with the social and the political.

    Kudos on a job well done.

  4. Anonymous

    Nationalization would not account for future writedowns either, would it?

    There is no way to take them into account beforehand. The banks will not allow their legal marks to be manipulated. Perhaps the best thing to do is to stall until those writedowns are actually taken, then do a nationalization.

    It’s a horrible outcome but the alternative, attaching a true taxpayers’ stamp of approval before the writedowns are taken, is maybe worse.

    But while stalling there is no reason for the banks to receive all these treats.

  5. DownSouth

    Edward Harrison said: “The media are certain to pick up on this and start asking difficult questions.”

    That prediction appears to be coming true sooner than later. From the NY Times lead editorial this morning:

    A better way would be to base the rescue on current reality, not assumptions about the future. What would an examination of the banks’ assets reveal about their value? What is the size of the hole in the banking system? In the absence of good-faith measurement, taxpayer-financed purchases of bad assets could court huge unnecessary risks.

    In other banking crises, both in this country and abroad, resolution of a systemwide problem has sooner or later involved separating solvent banks from insolvent banks. In the end, there is no getting around firing the executives at failing banks, acknowledging the losses, wiping out the shareholders and then deciding how the government can best restructure the institutions. The Obama administration has yet to explain why its approach is better than that.

  6. Anonymous

    I find it odd that no one addresses the fundamental issues of (a) why the central government is involved, and (b) how it justifies intervention.

    Understanding the motivations behind (a) reveals that regardless of whether of not the FIRE economic model is the "best" system for future growth & productivity, the government is absolutely committed to its preservation simply because its entire basis is dependent on:
    (1) maintaining the ability to incur debts/issue currency;
    (2) the tax receipts generated from income, property, sales & capital gains taxes.

    When goals are subverted from achieving what is "best" to that which is expedient in preserving the existing status quo, one really need not analyze the problem any further: the proposed solutions are simply doomed to failure. End of story.

    Now as to (b). This is actually part & parcel of (a) – it's justified by the governed who are in turn absolutely dependent upon system entitlements, so any extra-Constitutional actions are rationalized as being in the best interest of "the People".

    Like (a) above, when governments reach the point of corruption by justifying practically any means possible, one really need not look much further to determine that the model will fail. End of story.

    The US economy will never recover until a complete system reset is achieved. Everything else is just noise.

  7. Anonymous

    The press is going to start asking tough questions of the O? He’s black. He’s a leftist. Game over. That assertion alone throws much of your analysis into serious question. If you can’t even understand and predict the behavior of the press corps, what chance have you to get the economy right?

  8. Anonymous

    Great Post! Still think we would save a ton of money by nationalizing now. Why go thru the Geithner Plan failure first? The public is already onboard for nationalization but Wallstreet isn’t. Sell your bank stocks.

  9. Anonymous

    I’m not sure why Geithner won’t get another shot if this falls short. Don’t forget stress-testing is also underway. If a bank fails the stress-test, particularly if it still has a lot of toxic assets on its book, Geithner will be in a better position to put it under receivership, etc.

  10. Anonymous

    Obama is no leftist.

    A respectable leftist would do something like Galbraith is suggesting: raise Social Security payments, and eliminate the Social Security payroll tax.

    Over some reasonable time period that would cost a trillion dollars taht would go straight into the pockets of those who need and deserve it most: those who work but are still sinking.

  11. Ellen1912

    Reference to Japan and the Japanese experience may not be apposite. Japan’s lost decade coexisted with global growth into which Japan sold its exports.

    Nothing comparable here.

  12. Anonymous

    From the article ; “To cut to the chase, I believe this strategy could be successful in rekindling some increasing credit liquidity and, therefore, some consumer demand. However, the strategy will not be successful in eliminating the underlying causes of our crisis – excessive leverage and insolvency — and therefore systemic risk will remain.”

    To cut to the chase this strategy is just more of the same old shit in a brand new suit! You have to step out of the financial incest pit to really see the underlying causes of our ‘crisis’.

    The finance industry has become an incredibly incestuous parasitic drag on world society. It, along with the scam ‘rule of law’ in scamerica, needs to be totally reset. anon 11:06 has it right …

    Investment banking, corporate finance, financial planning, money management, commercial banking, real estate, insurance (especially insurance), etc., are all staffed with many good and well meaning people (and some not so well meaning vile no good bastards) who have been sucked into careers and made complicit in an industry that is at its base premised on exorbitant fees and enslaving usurious interest scams that go far beyond the utility function of money. The underlying laws that support this enslaving, exploitive, scam industry, have been purchased by the wealthy elite using pac money, hard money, soft money, etc. — read graft and corruption!

    We have now reached the point where we are so sucked in that we argue the details of the incest and even promote it! We are so caught up in this crap that we fail to see the big picture; our own unwitting complicity and the machinations of the masters at the top who are fast ending that middle class complicity by eliminating the middle class.

    This is an intentional financial coup meant to; consolidate world power, tank the middle class, reduce world population, and lessen the consumption of fast disappearing global resources. Plain old vanilla greed for profit has been replaced by a newer elite greed for control. Profit is not the game — control is!

    They will pump you and dump right into poverty if you don’t wake up to the bigger picture. Focus on what is, not what is promised in the incestuous schemes where uncle Goldman will screw sister Lehman while brother Timmy and cousin Obama approve. The rich haves are disingenuously screwing you and eliminating you while you give them your unwarranted civil and respectful attention. This is rope time.

    And there is NO left representing the people in scamerica. Any left is a co-opted illusion. If you read it in the Wall Street Urinal, New York Post, Financial Times, Bloomberg, etc., it is slanted propagandistic bullshit!

    Deception is the strongest political force on the planet.

    i on the ball patriot

  13. Timo

    The American elite just made a fatal choice (that was totally expected from them anyway): save Wall Street and the rest of economy and those little annoying people can go to hell.

    Meanwhile, Obama administration and Congress continue their very costly imperial games around the world like everything is normal! Just another day at the office…

    Economic collapse is coming sooner rather than later with this stuff.

  14. Neal

    Why couldn’t BOA (or their sub-rosa agent) set up a hedge fund to buy up the BOA “toxic” assets at 98cents on the dollar? The loss is then transferred to the taxpayer and BOA is refilled with cash.

    There is no way of ensuring a clean and honest auction in the connected world of fianance.

    Perhaps this should be considered a feature and not a fault.

  15. Anonymous

    Anon @ 11:36am said
    “I’m not sure why Geithner won’t get another shot if this falls short. Don’t forget stress-testing is also underway. If a bank fails the stress-test, particularly if it still has a lot of toxic assets on its book, Geithner will be in a better position to put it under receivership, etc.”

    This is correct I fear. It is indeed the problem. There is no stopping these guys, to reengineer the society to help the banks.

    Some intervention outside the system is needed, as people are starting to realize.

  16. dearieme

    “A respectable leftist would …. raise Social Security payments, and eliminate the Social Security payroll tax.” A respectable rightist would do the second of those and might consider the first as a fallback. So where does that leave O?

  17. Anonymous

    Anon @ 10:01… “The most revealing evidence of a failure of leadership character in this fiasco is the steadfast refusal to examine the “assets” in question.”

    It’s doubtful that any meaningful examination of the MBS assets is possible. From Yve’s article William Black: “There Are No Real Stress Tests Going On” (as quoted from Black):

    “My nightmare scenario which I fear is often true is that A) because the biggest originators of nonprime loans were mortgage bankers, B) because every large mortgage banker that specialized in nonprime loans went bankrups, C) because many of them went into Chapter 7 liquidations and even those that went into Chapter 11’s had little incentive to hang on to files on mortgage loans they had sold to other entities — the loan files on many nonprime loans may no longer exist. (My fervent prayer is that the loan servicers have tapes with copies of the underlying loan files, but I fear that this prayer will not be answered.) Under this nightmare scenario it will be extraordinarily hard to determine loan quality and losses and very hard to foreclose against borrowers that can afford attorneys (admittedly a minority) and that claim fraud in the inducement.”

    Add to this, an examination of assets would most likely reveal that the holders are insolvent. Geithner et. al. can’t have that!

  18. Cathryn Mataga

    Seems to me, if we want to stimulate lending, we should find healthy banks, even if they’re small, and inject capital there. If we pour money into insolvent banks that money just goes to fill up the hole. As is, we’ll be selling bonds, taking dollars out of the world’s economy, and then putting money into balance sheets where it just props up old lending — no benefit until the books go positive. So right now, I’m kind of on the forbearance side for the big banks — combined with a process of slowly disassembling them.

    Anyway, what irks me about the Giethner plan is that it reeks of more obfuscation that seems to hide more than clarify. It’s just another complicated, overly clever and opaque scheme, similar to all the crap that caused this disaster in the first place. It’s as if Obama hired Wall Street geniuses and they’re playing the same game, only now at Treasury — trying to scheme a way to hide losses.

    If Obama really wants to recapitalize banks, and for all I know maybe this is the right solution, he should mark down the assets and then hand banks a giant bag of cash and accept the political hit for this.

  19. David A. Burack

    Anonymous (March 24, 2009 10:01 AM) said what I have been thinking: what the heck ARE these “assets” really worth? I imagine it is hard work to unslice things like CDOs and analyze the underlying (lying?) loans, but isn’t that exactly the due diligence that should already have been done? Otherwise, they are asking the taxpayers to finance yet another trillion dollar blind bet, heads the bankers win, tails the taxpayers lose.

  20. Michael Fiorillo

    I think the nexus between the politics and economics of the situation is:

    1. Rather than taking office when the country hit bottom, as Roosevelt did, Obama was inaugurated at a much earlier stage of the crisis. Thus, he owns it in a way that Roosevelt never did. For this he is relatively blameless, and it is part of the political danger for him.

    2. Obama is primarily a cautious moderate who, willingly or not, is and has been throughout his career totally captive to FIRE. Yes, he raised campaign money from many small contributors, but most of the money came from the finance industry, and especially hedge funds and private equity. Small wonder that they are the one’s who stand to benefit from their lapdog Geithner’s plan.

    I don’t usually like to spend too much too much time psychoanalyzing politicians. However, Roosevelt had the personal advantage, in addition to courage and a willingness to question his class predispositions, of actually being a member of the ruling class. I think this gave him a certain level of self-confidence in taking on the excesses of capital – always, of course, in the interest of saving it from itself – that Obama will never have.

    I think that if Barack Obama ever had any radical inclinations, they have long since been submerged by the accomodations needed for approval and acceptance. Aside from his obvious intelligence and charm, this is what has smoothed the way for his success. Big Men long ago saw in him a potential broker for their interests. Thus the path from community organizer to Harvard Law, and onward.

    Sad to say, he seems meant to signify change, while preventing all but the most toothless forms of it from occurring. He will make some efforts to temper the worst and most vicious excesses of the class war (which is a good thing), but on the deepest levels- as we are seeing with this massive public giveaway to private interests – he has shown everyone for whom he really works.

  21. Cathryn Mataga

    My conspiracy theory, with no evidence, is that these assets only have value as long as AIG survives. That they have built-in insurance or something like this, and the whole scheme is a way to get the AIG exposure out of bank balance sheets.

    Suppose the total AIG black hole is so big that it will eat the entire USA. That means it will have to go down, but before they sink the ship, the rats have to leap off first.

  22. David A. Burack

    Oh, I see that another Anonymous said (March 24, 2009 12:19 PM) responded pretty well to my question.

  23. Anonymous

    The political angles of this analysis should be ignored.

    First, Geithner *will* get another shot. That shot will be full nationalization. This whole dance is a slow-climb to this position, which is not easily swallowed. If the plan works, that’s a bonus.

    Second, asserting that the Republican party is “reinvigorated” is totally unsupportable by any sustained public opinion polling. Were any of these assertions true, we’d see an erosion of Obama’s approval. New poll out today and he’s at 64.

    The Republican partisanship of this post bleeds through, despite the attempt at masking.

    Obama can probably do a B- job on the economy and cruise to reelection; the broader public no longer sees Republicans as credible economic stewards. This IS supportable with voluminous data.

  24. Anonymous

    Quit with the comparisons to the Katrina Moment. Dude just completed his *second* month! Katrina was on top of all the other stench of BushCo.

    Comment to do with the article…
    Japan’s Bright Depression was mitigated by wholesale looting of public pensions via japan postal service. We do not have comparable public savings to match growth in public debt.

    Also, the cycles up are a *bad* indication, not a good one. The issue has to do with the weak political process and constantly changing factional leadership. Those up pushes are more like a straight up acceleration, where change in velocity in *any* direction counts as an increase.

    The central crisis here isn’t economic, not really, but political. There are too many people in the upper and upper middle classes with outsized political and economic perogatives.


  25. purple

    Not enough productive industries are profitable and there is massive excess capacity. This is also the reason for a turn to speculation and financialization, which are immensely profitable.

  26. DownSouth

    @Michael Fiorillo,

    Great insight and analysis.

    @Anonymous at 12:57 PM said…

    Obama can probably do a B- job on the economy and cruise to reelection; the broader public no longer sees Republicans as credible economic stewards. This IS supportable with voluminous data.

    Maybe so, but if a sincerely populist Republican candidate emerged, a la Abe Lincoln or Teddy Roosevelt, they might give Obama a run for his money.

    If Obama doesn’t stop stumbling, he also creates circumstances under which a third-party candidate might flourish.

    These are uncommon times and uncommon things can happen.

  27. Anonymous

    Absolutely nothing new in this longwinded post with way to many I’s and My’s for someone named Edmund Harriman (?).

    Please Yves, get your blog on track or put it on hold but stop this mediocrity.

  28. Cat

    I remain under the impression that the basis for all the secrecy is not because Mr. O is playing at Banker, but because our financial systems are both 100% insolvent at the top, and there is likely vast criminal behavior in most banking investment units.

    Both of those taken together, if fully revealed in a bold stroke, would destroy most of our financial system overnight.

    I also think that Mr. O and his Boyz will only forestall the day of reckoning, rather than avert it entirely. In the meantime they must fritter away both our financial and good-will resources, the global economy, and precious time. But given that they probably see the outcome as inevitable, pushing back the fateful day is what anyone would rationally do when faced with a kind of certain death.

    I don’t know what a “dead” economy would look like, but I have an active imagination; I can imagine it being mighty grim. And I bet Mr. O has actually seen the projected numbers. Might not equate to “medieval” but “mighty grim” can encompass a lot of hurt that spans most of the planet for a significant part of the remaining century.

    Top that with “peak oil” and other realistic resource destruction scenarios and “mighty grim” quickly starts to look like “medieval”.

  29. Stevie b.

    anonymous 1.38 – why are you anonymous, smart-ass? You’ve joined the mediocrity with your mediocre comment. If this is all below you, start your own blog for clever-clogs like yourself

  30. Anonymous

    I’m actually quite sorry to see a lot of my erstwhile Liberal Democratic colleagues embrace this abortion of a plan. shah8’s characterization of this as a political as opposed to an economic crisis is particularly depressing.

    Obama has vaporized a huge amount of political capital signing on to Wall St. over Main St. Like Krugman, I’m depressed at the way this is going. You can’t reflate a bubble. Let it go.


  31. Edward Harrison

    Anonymous said:

    “The Republican partisanship of this post bleeds through, despite the attempt at masking.

    Obama can probably do a B- job on the economy and cruise to reelection; the broader public no longer sees Republicans as credible economic stewards. This IS supportable with voluminous data.”

    Your assumptions are incorrect. I am NOT a Republican. Most regular readers here or on my blog know this.

    Michael Fiorillo, you make a good point that I will address at some point here or on “Credit Writedowns.”



  32. Anonymous

    very costly imperial games around the world like everything is normal! Just another day at the office…

    Maybe Saint Obama should consider trying to stay in the office for a whole day, to get the feel for it, instead of being on TeeVee all the damn time

  33. maximus

    Can’t believe your conclusion that you will get behind this because it’s “the best we will get”

    Haven’t we seen enough of “we have to do SOMETHING NOW”….

    Sometimes, it’s best to step back and assess the actual damage, then help those who need it most.


  34. Anonymous

    Wouldn’t it be possible that the same institutions that sell their toxic assets in an auction could have straw men like befriended hedge funds bidding on them?

    Let’s say a toxic asset is worth 30 cents on the dollar in today’s market. A bank carries it at 60 cents and doesn’t sell because it fears the writedown. The bank arranges for someone (e.g. two hedge funds) to bid the asset price to 75 cents. The winning hedge fund gets the overpriced assets but there would hardly be any risk because it is 83% financed with a FDIC guaranteed non recourse loan and the bank makes up for the remaining 17% of the 75 cents (= 12.75 cents).

    A game played like this results in:

    (a) The bank can unload the toxic asset at 62.25 cents on the dollar, near or above current carrying value.

    (b) The hedge funds get to hold the toxic asset at no risk and 100% financed. Maybe they could get an additional “service fee” from the seller.

    (c) The tax payer looks at a potential loss of 35 cents on an asset bought for 75 cents, a loss of 47% or more.

  35. sanjay

    I keep hearing comments this crisis is worse then the great depression. Do we not need a dose of reality- unemployment is at 8% and expected to go to 10% and the forecast is for the economy to decline 6% this quarter and something less than tht for the whole year. That hardly sounds like the great depression with its 25% unemployment.

    BTW even the stock market working of the lows of 1987 is on a 7% p/a compound growth trendline – that is scarcely a dooms day scenario.

  36. sanjay

    how anybody in their right mind could call Obama a leftist after the Geithner plan beats me. He is probably to the right of the DLC. But then again for some people anybody with an education is a leftist.

  37. Jeff D

    Great piece.

    Just one note:

    I strongly believe the reason Goldman Sachs said their exposure to AIG was immaterial is because they already knew they’d be getting the back-door $13 Billion bailout – from the Government via AIG. In effect, they weren’t lying.

    The Great Moral Hazard lives on…….

  38. Mr. Cynical

    Furthermore, not only is the PP watering down Obama’s economic capital but it may also cause Congress to poo-poo his best budget ideas like healthcare and cap n trade. Flush it all: Go nuclear now, Barack!

  39. Anonymous

    This is the same plan put forth by Paulson 6 months ago.

    The whole thing is yet another gift to the crooks who caused this problem to begin with.

    Two months into his presidency, and Mr. Obama has already sold out.

    Vinny Goldberg

  40. Anonymous

    Edward – You post a brilliant piece of economic journalism and then show your political bias.

    1) Washington is a Cerbeus. Two ugly heads and one mutated dog.
    2) Obama just continuing the Bush/Paulson plan.

    So close to getting reality but your brainwashed and cannot really help Edward.

    Let me put my balls out on the line: Make no mistake, this is the Clash of the Titans era over a very big prize. The international monetary peg of the globe. The two main competitors are the West and the East. Central Banking wins either way as usual. Note whom is calling for a new international peg in China, was it the dog-catcher or there Central Banker?

    If you pick sides, West or East you are already fodder. Let me take that back Edward. You are already fodder because you don’t understand point #1.

    What is all of this bullcrap about helping out Obama or even speculating on his rate of success? If the man did what he said and said a LOUD FAT NO TO EARMARKS on the first stimulus bill, he would have had the entire country behind him and would have crushed the power brokers of Pelosi and Reid into submission. His entire Presidency is already over. He can appear on Oprah all he wants and shoot some hoops on stage. He is already worse then President Bush and that one is hard to top.

  41. eh

    This is why I have decided to get onboard with this package.

    Oh come on. What does that mean? Are you going to be buying some of those “toxic assets” yourself?

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