The Geithner Plan FAQ

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

Q: Where does the trillion dollars come from?

A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program's operations.

Q: Why is the government making hedge and pension fund managers kick in $30 billion?

A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.

Q: Why then should hedge and pension fund managers agree to run this?

A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.

Q: Why isn't this just a massive giveaway to yet another set of financiers?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion--and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?

A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.

Q: So the Treasury is doing this to make money?

A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment.

Q: How does having the U.S. government invest $1 trillion in the world's largest hedge fund operations reduce unemployment?

A: At the moment, those businesses that ought to be expanding and hiring cannot profitably expand and hire because the terms on which they can finance expansion are so lousy. The terms on which they can finance expansion are so lazy because existing financial asset prices are so low. Existing financial asset prices are so low because risk and information discounts have soared. Risk and information discounts have collapsed because the supply of assets is high and the tolerance of financial intermediaries for holding assets that are risky or that might have information-revelation problems are low.

Q: So?

A: So if we are going to boost asset prices to levels at which those firms that ought to be expanding can get finance, we are going to have to shrink the supply of risky assets that our private-sector financial intermediaries have to hold. The government buys up $1 trillion of financial assets, and lo and behold the private sector has to hold $1 trillion less of risky and information-impacted assets. Their price goes up. Supply and demand.

Q: And firms that ought to be expanding can then get financing on good terms again, and so they hire, and unemployment drops?

A: No. Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.

Q: Oh.

A: But all is not lost. This is not all the administration is doing. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector's books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector's books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.

Think of it this way: the Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job. And if it turns out that we are right, more programs and plans will be on the way.

Q: This sounds very different from the headline of the Andrews, Dash, and Bowley article in the New York Times this morning: "Toxic Asset Plan Foresees Big Subsidies for Investors."

A: You are surprised, after the past decade, to see a New York Times story with a misleading headline?

Q: No.

A: The plan I have just described to you is the plan that was described to Andrews, Dash, and Bowley. They write of "coax[ing] investors to form partnerships with the government" and "taxpayers... would pay for the bulk of the purchases..."--that's the $30 billion from the private managers and the $150 billion from the TARP that makes up the equity tranche of the program. They write of "the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money..."--that's the debt slice of the program. They write that "the government will provide the overwhelming bulk of the money — possibly more than 95 percent..."--that is true, but they don't say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well. Deborah Solomon in the Wall Street Journal does, I think, much better. David Cho in tomorrow morning's Washington Post is in the middle.

Comments

[Mbuna:]

For an update on the Geithner pre-plan and the pre-Geithner pre-plan see www.rollingstone.com/p...

Mar 22 04:44 AM

[Dave Wrixon:]

So if all this works and we finally get back to where we were before the crash, what happens then? Doesn't that all add up to another Bubble economy that is just about to burst again?

Mar 22 07:16 AM

[MJJP:]

I for one do not want to get back to where we were before the crash. That was an illusion. I want to get back to where we were before the crash as long as its real and sustainable.


On Mar 22 07:16 AM Dave Wrixon wrote:

> So if all this works and we finally get back to where we were before
> the crash, what happens then? Doesn't that all add up to another
> Bubble economy that is just about to burst again?

Mar 22 07:41 AM

[tb1975:]

to suggest somehow that the government will profit in all of this is absurd...if there was good money in these bad assets then private money would have already stepped in long ago.

how much money will they have to print to turn a "profit"?

Mar 22 07:44 AM

[APM:]

Ah ... all the effort to get back to an abnormal normalcy. Since when a 17%

That's for the clean and clear explanation. I am still confused, though, about the 850 billion debt financed by FDIC. I thought the FDIC is itself in need of equity injection, so where will this 850 billion come from?

Mar 22 07:51 AM

[huskerbob:]

Thanks for selling this idea Brad! The only way this plan won't work is because " we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition."
Run and tell Geithner quick, so he can hedge with a trillion dollar water, needle, and ammo fund. Taxpayer's can only win!
Thank goodness you are here to set the record straight. I'm glad the government is buying these assets before other savvy buyers snap them up! My only regret is that I can't get in on the action, "Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity".
Some fools are trying to convince people that this is just a way to leave taxpayers holding the bag. Who could be so stupid?

Mar 22 08:50 AM

[richjoy403:]

I keep re-reading the first paragraph:

"The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit."

However, I still don't understand why private capital hasn't already bought these undervalued assets to make these profits?

I certainly do hope those talking heads who are so smart will find this program to be a sound approach. We NEED FOR THIS TO WORK!

Mar 22 09:16 AM

[Zoltan L. K...:]

Let's hope its not throwing good money after bad. Sure, if it works out, it could be a gain for taxpayers.

Mar 22 09:53 AM

[Momintn:]

As an investor, I can decide at any time to sell my shares or pull my investment out. I have yet to invest in a hedgefund because you have to turn over alot of your money, pay a significant fee, and lose some of the flexibility of when you can get your money back. This Geithner plan sounds quite risky to me because of the size of it and the lack of transparency. I'm afraid that the people who will be controlling our money will be as unknown as the people who made the toxic assets for AIG Financial Products. It sounds almost like Geithner is creating another federal reserve system who can make decisions that impact our economy and control our money supply by spending future tax dollars on things that ordinary people cannot understand nor even see. We have been told that these toxic assets are so complicated that we have to pay people bonuses for retention so that they can unwind them. It's almost like the criminals are now making demands from the judicial system and declaring that they are the only ones who can save lady liberty. And the recovery for Main Street is increasingly being tied to the recovery of Wall Street. By doing this, local autonomy to recover on its own is not given any opportunity to do so. We are saying that Wall Street's mistakes must be assumed by the government and paid for by the taxpayers, before we can recover. We are held hostage first for a $1 trillion dollars, then another $1 trillion dollars, and possibly $4 trillion dollars. And for what? Something that we don't even understand. And it isn't that we as taxpayers are too stupid to understand. We are invested in a variety of asset classes, some of which are more risky than others. But each one can be explained in detail and do not depend upon people with no names who have deemed themselves to be beyond reproach. And what we have seen from Wall Street lately is that when Wall Street doesn't like something the government does, or even says, then they use trading strategies invented for hedging to take down our stock markets. Perhaps they will use their new government-backed hedgefund created by Geithner to control our government even more. And how will we ever know the truth? Once these un-elected wealthy people are in power, who will remove them? What happens if they fail? Maybe they will succeed just enough to continue the hedgefund indefinately so that they can pay themselves big bonuses to continue investing in something with future tax dollars that the public does not understand. After all, it can't be unwound or that would be the solution.

Mar 22 10:01 AM

[Jim O:]

That's the AIG plan he's describing, only much, much, much bigger. And much, much more harmful. Geithner is leading us to disaster, and guys like DeLong are marching beside the platoons like good sergeants, calling cadence with pieces like this.

Society long ago developed a means to deal with problem companies without busting the public treasury. It's called bankruptcy, and it works. The bad company reforms or is dissolved, the creditors get back at least some of what they are owed, and life goes on without foisting 80% of the risk of failure on the taxpayer. But, no, says Delong. It's this monstrosity, or canned food and guns. The only thing Obama, Geithner and Delong have to sell is fear itself.

The New Deal merely prolonged the depression.I wish that was the worst that could be said for what Obama and Geithner have in store. People, don't forget as you reach the cliff that it was guys like DeLong who led you there.

Oh, by the way. I don't know whether his essay was subjected to "lousy" editing or "lazy' editing, but even so, its form is better that its substance.

Mar 22 10:21 AM

[Mad Hedge F...:]

Geithner is sticking around for a while. I thought President Obama did a pretty good job with comedian Jay Leno last night. With some pundits already pronouncing his administration a failure, he has the moxie to appear on a late night talk show. For the last eight years, presidential visits to California have been about as frequent as Bigfoot sightings. You can diss all those rumors about Treasury secretary Tim Geithner resigning anytime soon. After 59 days in the White House his bowling score is up to 129. All of his favorite picks for the Final Four basketball championships were in politically sensitive swing states (North Carolina, Indiana, Iowa). While playing basketball, he doesn’t get knocked down as much while the secret service is watching, guns at hand. Obama still has the magic touch, speaking with the deliberateness of a trial lawyer, but with the folksy charm of your local barber. One thing is for sure though. Your taxes are going up, baby.

Mar 22 10:22 AM

[JR Ewing:]

Not only will the Fed make the 17% (not that I really believe that anything they do will ever be profitable or that if they are it would actual be used to pay back borrowed money), They will make the capital gains tax on the money that they are creating in the profits for these hedge fund investors at the new higher rate. They might be smarter than we think, nah.

Mar 22 10:40 AM

[Bruce Vande...:]

This reason private capital hasn't bought the toxic assets is because the financial institutions are unwilling to sell at a the price the buyers will pay. Sellers are holding out for the higher government price.


On Mar 22 09:16 AM User 329713 wrote:

> I keep re-reading the first paragraph:
>
> "The Geithner Plan is a trillion-dollar operation by which the U.S.
> acts as the world's largest hedge fund investor, committing its money
> to funds to buy up risky and distressed but probably fundamentally
> undervalued assets and, as patient capital, holding them either until
> maturity or until markets recover so that risk discounts are normal
> and it can sell them off--in either case at an immense profit."<br/>
>
> However, I still don't understand why private capital hasn't already
> bought these undervalued assets to make these profits?
>
> I certainly do hope those talking heads who are so smart will find
> this program to be a sound approach. We NEED FOR THIS TO WORK!

Mar 22 11:26 AM

[mhg2:]

Let me preface my comments by stating I am not a financial expert, but I would appreciate if Mr. DeLong and any commenters could help me understand the following:

Investors clearly would be willing to buy toxic assets if the market were allowed to decide the price. Lehman auctioned off their assets. The problem is the banks do not want to sell these assets at "market determined prices".
The banks obviously interpret that the true value of these toxic assets will go up substantially in the near future and do not want to sell them at today's market prices at a huge loss. The vast majority of us have a component of these toxic asset. Its called our home. With home values expected to continue to drop, who would want to sell their home now and move into an apartment for five years and then get back into the market and buy a new home in five years. Any takers? Is it a wonder that our banks are not willing to voluntarily sell their toxic assets? Won't that be financially destructive to them in the long run?
The first issue is there is a gap in what holders of toxic assets are willing to sell and buyers are willing to buy. The second issue is that banks are being assessed at mark to market rules limiting their ability to leverage and lend. How will Geithner's plan correct these two situations? Thanks for any replies.

Mar 22 11:27 AM

[EMS:]

Let's hope it works. Otherwise we are in for really, really big TROUBLE.

Mar 22 11:54 AM

[Steve in Gr...:]

Nobody who understands economics thinks this mess will work.

Mar 22 12:08 PM

[MarvinMBA:]

The bailout is using a Model of the World Economy that is DOA. We need some deeper thinking because were throwing pearls at swine with our bailout funding. Actually the depth of the problem is really beyond the ability of the Fed and Treasury to cope with. Perhaps saving what limited resources we have and limiting our Deficits might be the best thing in the long run. I believe we need a new game plan.
MarvinMBA

Mar 22 12:09 PM

[Elliott:]

People who think the Geithner plan will fail are forgetting one thing: the same government that is the 5/6 partner in the toxic assets is also the same government that prints money. Flood the world with paper dollars and the dollar value of the toxic assets will go up -- in nominal terms, not real terms. The Geithner plan will eventually show a "profit" on paper and the government can claim "success."

Mar 22 12:45 PM

[Chris coxbl...:]

"Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition."

ABSOLUTELY NOT TRUE

We survived the GD because the current gov't was not stupid enough to do this so early on in the crisis

do you realize what another 800 bil in treasury losses + say another 500 bil in fdic, not to mention whatever other stupid programs they cook up will mean

it will mean treasury dislocation...now that is real freaking bad...if this program blows up we might get that...without this program and a few others we would not have to worry about that

keep drinking the kool-aid brad

Mar 22 01:03 PM

[Ricard:]

Thanks for the perspective - this Geithner plan now sounds like a great idea, and what should have been done with the TARP since inception.

Live and learn.

Mar 22 01:31 PM

[Sigmax:]

This plan sounds a lot like where Hank Paulson was going last fall.

For those of you that were wondering - the reason private capital hasn't stepped in is because of the ever-changing plans-they couldn't make a committment.

Mar 22 01:31 PM

[Vladimir Se...:]

I don't know why, but i'm shocked. How stupid do they think we are?
Well, I guess . . .

Perhaps I shouldn't be shocked at all.
Perhaps it should have been obvious that a GOOD hedge fund manager knows
how to do two things . . . how to leverage and how to be
"too big to fail".
What's the ideal way to do that?

Here is how I understood Geithner's Plan:
1) You come up with a little money of your own, or maybe not your own, the money you embezzled from your clients earlier or are in
the process of embezzling.
2) You make US Treasury your partner and yes, you get money from them
too. You have to. This is how you start getting too big to fail.
3) You take the resulting sum ("your money" + the US Treasury's money) and
leverage it about 6.66X using . . . hmm . . . FDIC. FDIC knows US
Treasury is good for it, so you get a free ride here. And by the way,
this leverage is free or almost free. You don't pay interest that anyone else would have to pay if they wanted this kind of a leverage for this kind of a risky and for this long a term (potentially indefinite). And yes, this is how
you get bigger than "too big to fail".
4) You take the most insane risks you can come up with. You are too
big to fail, after all. You are in the position to change any rules here! The f'ing treasury and the FDIC are in on it!

I think this plan puts Meriwether to shame.

Mar 22 01:32 PM

[ed233:]

I love this little expose of Mr. Geithner's plan. Have you ever gone to one of those sweat rooms where these smart talking boiler plate salesmen come in to convince you that this investment will make you millions. First what is behind these toxic assets?. If they are comprised of housing and chattels you can bet that their value has eroded so much so that their true value on the market could be under water as far as real value. Let's take for simplicity purposes one of the assets represents an automobile or a boat. We know that the day you take one of these assets off the sales lot its value has eroded nothwithstanding the state of the economy good or bad.
A house has for appraisal purposes a life span of about fifty years under normal conditions. What is the real value now and in the future for these assets? You've got to look behind the skirt of each one to see if something is there. Don't you? Here I bet the king has no clothes. These toxic assets will be foisted onto somebody????

Mar 22 01:49 PM

[user guest:]

Q: Where does the trillion dollars come from?

A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC



meanwhile on Friday the headline on Bloomberg was this:

Bair Says FDIC Reserves May Hit Zero Without New Fees

March 20 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair talks about the depletion of the fund reserves and the need to increase fees and premiums.

Bair, speaking before the Independent Community Bankers of America conference in Phoenix, Arizona, also discusses the importance of community banks and the need to create financial "disincentives" to curb the size of banks. (Source: Bloomberg)

www.bloomberg.com/apps...

Mar 22 01:49 PM

[Sentinel:]

This FAQ is absolutely correct and factual...........

If....and only if....you believe that.....

1) The Best Possible Scenario (BPS) economically plays out and the dreams of the Cornucopians of another Bull Run for 2 decades occurs after we come out of our "downturn" (thanks to Bush The Stupid for that moniker) sometime at the end of 2009-early 2010.

2) The Fed can reabsorb the 10's of trillions of dollars they have only begun to pump into the economy to fight off deflation....that is to say.....to bribe investors to buy stocks in distressed companies instead of letting them go bankrupt and to outright buy toxic assets that most if not all SMART companies are not touching with a ten-foot pole and a suite of lawyers.

3) The money "We The People" will make either at the end of maturity or at the time of sell will be worth anything if the Fed CANNOT REABSORB the ten's of trillions of dollars they are pumping....printing...... the economy.

4) The Obama Stimulus.....The Obama New and Improved New Deal.....The Obama 2nd Stimulus.....The Obama Grandfather Clause Bonus Claw-Back....The Obama Health Care Takeover....The Obama National Energy Overahul.....The Obama Tax Hikes.....The Obama 3rd Stimulus....etc..etc..... will NOT Bankrupt the Nation and will NOT convince the Chinese and any other country who holds our debt to unload our Treasuries like a bad case of the runs when it is finally on the front page of every newspaper that the National Debt (at least the Debt that is "officially" trotted out for publication) has finally reached parity or is more than that year's GDP (in 2007 GDP was 14.5 trillion and Federal Debt was @9 trillion....it is now 11 trillion and climbing with a bullet and we ARE DEFINITELY NOT making 14.5 trillion this year or years to come. PLUS we are already at 350+% over GDP if you really do an honest accounting of the ENTIRE debt which comes to 88 trillion....this according to the President of the Dallas Fed....and we will DEFINITELY reach 100 trillion before Obama either leaves peacefully or is ousted due to a special recall vote.

5) The Government can actually orchestrate all of this in a better manner than the market or the private sector (And by the way, I'm no fan of the "market"....the psychosis of the Wall Street Whores and the lazy idiocy of us..."We The People"... proves to me we are screwed either way...just we will be screwed with no KY by the Gov.)

So....yeah....this will work itself out just fine if you can believe all the above and wash it all down with a glass of El Don chasing a Qualude.

Mar 22 01:55 PM

[prudentinve...:]

Hedge funds ......" ...stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money....."

So the government is now an investor in hedge funds, leveraging them by 33:1. When I thought we had already seen the height of absurdity, we get even more and more!

Mar 22 02:06 PM

[Dave Wrixon:]

Its not so much that they don't want to sell. They simply cannot afford to realize the loses, because they would have to write them down. That would effectively make them bankrupt. So instead they hang on to this largely worthless junk and keep trying to keep up the pretense. The Government understands the predicament and feels constrained to allow them to offload them at price that makes sense on the balance sheet. Anyone that actually believes that taxpayer stands to make a profit out of all this must have an IQ of less than 3.


On Mar 22 11:27 AM mhg2 wrote:

> Let me preface my comments by stating I am not a financial expert,
> but I would appreciate if Mr. DeLong and any commenters could help
> me understand the following:
>
> Investors clearly would be willing to buy toxic assets if the market
> were allowed to decide the price. Lehman auctioned off their assets.
> The problem is the banks do not want to sell these assets at "market
> determined prices".
> The banks obviously interpret that the true value of these toxic
> assets will go up substantially in the near future and do not want
> to sell them at today's market prices at a huge loss. The vast majority
> of us have a component of these toxic asset. Its called our home.
> With home values expected to continue to drop, who would want to
> sell their home now and move into an apartment for five years and
> then get back into the market and buy a new home in five years. Any
> takers? Is it a wonder that our banks are not willing to voluntarily
> sell their toxic assets? Won't that be financially destructive to
> them in the long run?
> The first issue is there is a gap in what holders of toxic assets
> are willing to sell and buyers are willing to buy. The second issue
> is that banks are being assessed at mark to market rules limiting
> their ability to leverage and lend. How will Geithner's plan correct
> these two situations? Thanks for any replies.

Mar 22 02:08 PM

[Momintn:]

Will the return on these toxic assets be in today's dollars or in the deflated value of the dollar after we pile on trillions of dollars of more debt?

Mar 22 02:15 PM

[Chris coxbl...:]

>>>"J. Bradford DeLong is a professor of economics at the University of California at Berkeley, chair of its political economy major, a research associate of the National Bureau of Economic Research, a visiting scholar at the Federal Reserve Bank of San Francisco, and was in the Clinton administration a deputy assistant secretary of the U.S. Treasury. "

sounds like another FEDHEAD shill to me...

Mar 22 02:16 PM

[GoldMoney:]

We'll all be billionaires by the time DeLong, Krugman, Geithner, Paulson, et al are done...just like in Zimbabwe.

Mar 22 03:03 PM

[SilentP:]

The creation of the now toxic assets required massive amounts of credit to be available. Without credit, there is simply not enough cash out there to purchase these assets outright. The Treasury is simply restoring 30-1 leverage ($30B * 33 = $1T) to soak up some of the supply.

Add to that a deteriorating economy where no one knows where (or when) the floor on housing prices and consumer credit will be, it is not hard to see why investors don't want to jump in with cash to buy those assets.

"However, I still don't understand why private capital hasn't already bought these undervalued assets to make these profits?"

Mar 22 03:07 PM

[user guest:]

* Sentinel
"So....yeah....this will work itself out just fine if you can believe
> all the above and wash it all down with a glass of El Don chasing
> a Qualude."

I believe the preferred beverage would be a glass of Kool-Aid

Mar 22 03:37 PM

[sickofthehype:]

Private capital won't pay the high price that these will be bought for, that's why they haven't stepped in. You can charge a lot more when you sell to yourself.




On Mar 22 09:16 AM User 329713 wrote:

> I keep re-reading the first paragraph:
>
> "The Geithner Plan is a trillion-dollar operation by which the U.S.
> acts as the world's largest hedge fund investor, committing its money
> to funds to buy up risky and distressed but probably fundamentally
> undervalued assets and, as patient capital, holding them either until
> maturity or until markets recover so that risk discounts are normal
> and it can sell them off--in either case at an immense profit."<br/>
>
> However, I still don't understand why private capital hasn't already
> bought these undervalued assets to make these profits?
>
> I certainly do hope those talking heads who are so smart will find
> this program to be a sound approach. We NEED FOR THIS TO WORK!

Mar 22 03:48 PM

[TR1:]

I have seen a lot of people against or unsure about this way forward.

This plan will work if you believe in the following:

1) You believe that we as a country will figure out a way to stay a leading economic power. Those who want to nationalize now, in my opinion, have closed the book on our capitalist system. I want to give it a shot. We can still nationalize the banks down the road if this does not work. But then we are in uncharted territory that will make it hard for private capital to work and hard to get back to the strong private sector we have known.

2) You believe that we are addressing things like education, healthcare, and energy, and re-building that will undergird the next 30 years of economic success in the new Global economy. Hence, for the long-term investor, American assets are a buy. I do not believe that if we did nothing that this country is in a position to support itself at an agreeable level, but I do not think we will do nothing.

Mar 22 04:02 PM

[User 380828:]

As an investor I take losses, I watched my portfolio take a dive.
When you play with junk bonds, CDO's, or toxic packages you invest to make a killing. If you loose you take your losses. Here is the plan. You buy toxic holdings and junk today as an investor and Geitner will exempt you from all Capital gains and taxes because you as an investor took a chance. ( You invested in saving the country). If you loose money you would be allowed to write off your losses in the next 10 years no cap on what you can write off each year. Next anyone who helped create this mess politicians, bankers, investment houses should taxed / and or jailed for illicit gains and fraud. What ever happened to ethics??
Bernie looks like a small time petty crook compared the people who carried out this giant fraud.

Mar 22 04:07 PM

[jq1234:]

Maybe those who understand economics you described have their own agenda.

I understand economics. I think this is only reasonable plan (try) we have at the moment, better than the far right who want the banking system fail while ignore the much higher cost to the country and world, and the far left who want to nationalize the banking system while ignore the fact the government is no better at running business than private companies.


On Mar 22 12:08 PM Steve in Greensboro wrote:

> Nobody who understands economics thinks this mess will work.

Mar 22 04:13 PM

[Wolfeman52:]

If the so-called toxic assets are in fact worth more than the value at which they are reflected on the banks' balance sheets, isn't the problem how the value for bank balance sheets is determined in the first place?

In other words, does mark-to-market not work in an environment such as we are in? If it doesn't, why don't we establish a methodology that more accurately reflects the "real" value of the assets?

And aren't we - the taxpayers - incurring yet another loss on these assets? We bailed out the banks for the reduction in their capital caused by the write down of these assets (that cost taxpayer money). Now they will be sold to these funds which will make a "profit" shared with the private investors. That "profit" is yet another loss to be born by taxpayers. Alternatively, if the funds overpay for the assets, the taxpayers lose also.

How can an ordinary citizen get in on this deal with the upside potential (and limited downside)?

Mar 22 04:29 PM

[bcncv:]

Q: So when the New York Times reports that one of these private hedge funds made 75%-100% returns with taxpayer money, won't Congress decide to tax that at 90% retroactively?

A: Yup.

Mar 22 05:04 PM

[virerus:]

i don't understand why everybody is so negative... really. so what, economy is down 5-6% and unemployment is 11%. so what? i tell you it's only in the near-longer term is making the economy more efficient and productive. as to people who "lost" their jobs let them retrain and do something useful with their lives. trust me qualified workers they don't lose jobs, when they do, they get even better ones.


you are bringing the "bad" to yourselves, everybody is afraid that the sky is falling, will not happen. this is the biggest opportunity of your lives, people. use it get rich! you don't have a house buy one, you don't have a portfolio build one. you'll be happy 3 years from now.

as to savings banks, buying debt, CDOs etc, i think it could be good for the taxpayers/everybody if they don't have to pay the banks the full amount for it, which i don't think they will. if they get it cheap, that's like buying a $500k house for $100 if they get it 20 cents on the dollar. it's not going to go back up to 500k but when economy is good you can sell it for 250-300k. this is not BS, just set your mind back and remember Lone Star buying Merill Lynch assets on 20 cents on the dollar late last year.

www.reuters.com/articl...

Mar 22 05:46 PM

[jlocke:]

How will the market react tomorrow?

Mar 22 06:26 PM

[Chancer:]

Having hedge funds put up only 3% is an admission that the Feds are not sifficiently capable (smart enough) to do this with government employees. What the government is good at is "Monday morning quarterbacking" when the "horse has left the barn." They scream outrageously when they realize they did not get the details right. the hedge fund managers are smart enough to "skin" the government once again.

Mar 22 08:07 PM

[Sentinel:]

Viverus burped out this comment above...

"i don't understand why everybody is so negative... really. so what, economy is down 5-6% and unemployment is 11%. so what? i tell you it's only in the near-longer term is making the economy more efficient and productive. as to people who "lost" their jobs let them retrain and do something useful with their lives. trust me qualified workers they don't lose jobs, when they do, they get even better ones."

Yeah....lots of people are retraining as we speak.....at Hamburger University. They're really useful to you as you pull away with your minivan full of Whoppers.

Oh...hope you are one of those "qualified" workers you mentioned. Better yet....you had better hope that YOUR BOSS thinks you're a qualified worker AND getting paid less than what YOUR PEERS in the OTHER COMPETING CORPORATION are getting paid AND YOUR CORPORATION IS NOT DOWNSIZING BECAUSE THEY ARE FAT AND LAZY COMPARED TO YOUR COMPETITION!

Otherwise you could be as qualified as anyone and still be fired to make room for some snot-head out of college who will work for peanuts and be a part of a much smaller benefit package because YOUR COMPANY thinks you're more a "QUALIFIED COST" than an LOWER OVERHEAD ASSET.

Then I'll see you after YOU graduate from Hamburger University.

Yes....I WOULD like fries with that !

Mar 22 08:15 PM

[nova:]

Dave Wrixon wrote:
" So if all this works and we finally get back to where we were before the crash, what happens then? Doesn't that all add up to another Bubble economy that is just about to burst again?"

Not exactly. There is no way to get to where we were before. US taxpayers will lose additional $2T going straight into a bankruptcy.

Mar 22 08:32 PM

[Al-USA:]

virerus said:
"
i don't understand why everybody is so negative
"

You need to get out more often. You also need to read up on what the serious strategists of capital are fearing: if this continues for too long, the proletariat might, eventually, come for and string up the bourgeoisie.

2009 03 08
"Capitalism Future Of: Seeds Of Its Own Destruction"
www.ft.com/cms/s/0/c6c...

Mar 22 08:40 PM

[Randy_H:]

Wow. This author has managed to make clueless Pollyanna prattle sound almost intelligent.

You know, it could be that these so-called "toxic assets" aren't undervalued, but really are worth squat, but that the world won't end because of that nonetheless.

You can always pick out a lame argument when it starts right off offering you a false-choice. Sorry Brad, it's not a simple binary either-or scenario. Were it that easy, we wouldn't be debating all this.

Mar 22 09:00 PM

[MarkTwain:]

There are 4 fundamental reasons that private investors have not purchased these investments yet. First, the macro and market pictures are so cloudy and full of uncertainty that no one can effectively price risk. To the extent that a plan reduces uncertainty, it creates a positive feedback effect upon the willingness of private investors to take risk. And that in itself makes the macro and market picture less cloudy.

Next, there has been no leverage available to purchase these assets. You can't just buy a mortgage at 70% of par and hold it for 25 years and generate the type of risk-adjusted returns that investors need today. Leverage, particularly non-recourse leverage such as what the government is providing, is necessary to goose the returns.

Third, the banks have not been forced to sell. But you can see the proposed bonus tax as an unintentionally clever way of increasing the pain on the banks to the extent that faced with a choice of selling assets and exiting TARP so they can pay themselves well or bulling it out for 10 more years, they'll sell.

Finally, the hedge funds themselves have been suffering massive withdrawals and have been in no position to commit capital. However, this type of "one way" bet will be seen as too good to miss. Billionaires like Leon Black generated their wealth by picking up the pieces of previous boom/bust cycles.

Mar 22 09:15 PM

[Bo Peng:]

It could be a gain for taxpayers who don't understand arithmetic of inflation. Who win? Those who swap the assets for cash now. They'll use the cash to make bets, make a spread over inflation, or at least buy gold and commodities, and come out ahead of the above-mentioned winner taxpayers.

See? Everybody's happy.

Mar 22 09:56 PM

[vaughn:]

The private partner must use its own capital.The treasury's capital come from the 700 billion Tarp fund. The FDIC never put up 820 billion as claimed in this article. What will happen is that FDIC will sell guarantee and charge a fee for the guarantee (likely 100 bps) so that private investors, like pension funds, will buy up the 820 billion medium term note debt offering. In short, the funding cost of this debt offering will be absorbed by the public private partnership.

The private partners are in for the potential of multiple return s with the downside risk capped at their initial investment. Since the private partner makes the decision of what assets to buy, it is unlikely they will overpay the price.

Now that the private partner can enjoy a decent leverage with secured financing, they will tend to pay the true intrinsic value of assets. Without financing and leverage, private equities or hedge funds can only lowball the bid in the hope distressed sellers will sell so that they get the return similar to that with leverage. Unfortunately for them, sellers with distressed assets are not distressed at all due to the Fed near zero fiscal policy with unlimited liquidity supply. Hence, you got no sellers in the market to sell legacy assets which yield over 20% at the moment.


On Mar 22 01:49 PM user guest wrote:

> Q: Where does the trillion dollars come from?
>
> A: $150 billion comes from the TARP in the form of equity, $820 billion
> from the FDIC
>
>
>
> meanwhile on Friday the headline on Bloomberg was this:
>
> Bair Says FDIC Reserves May Hit Zero Without New Fees
>
> March 20 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman
> Sheila Bair talks about the depletion of the fund reserves and the
> need to increase fees and premiums.
>
> Bair, speaking before the Independent Community Bankers of America
> conference in Phoenix, Arizona, also discusses the importance of
> community banks and the need to create financial "disincentives"
> to curb the size of banks. (Source: Bloomberg)
>
> www.bloomberg.com/apps...;sid=aoXQRRSXeGMQ

Mar 22 10:09 PM

[paxromanus:]

the above answers do not agree with the analysis provided by ZERO HEDGE blog

see my 1st "BEST" at the link below

it's important that the TRUTH be told....we are at one of the most dangerous times in our history....please get informed....

Maximus
4best4worst.wordpress.com/

Mar 22 10:11 PM

[vaughn:]

It is coming this April 2, 2009.

The last trading price for the assets in an inactive market will not be allowed to use to value the assets. This will force Auditors to do the hard work to value the underlying assets.

Let me give you an example. Currently the super senior trench of CDO was marked to down to 30 c on the dollar, which assumes a foreclosure rate of 70% with zero rate recovery. Historically, the recovery rate is at least 50%. Using 50% recovery rate at 70% foreclosure rate gives you a final loss of 35%, which means the super senior trench of CDO shall be valued at 65 c on the dollar, not 30c on the dollar. But the trading in the inactive CDO market was 30c on the dollar. The rule using last trading price will be abolished this coming April 2.


On Mar 22 04:29 PM Wolfeman52 wrote:

> If the so-called toxic assets are in fact worth more than the value
> at which they are reflected on the banks' balance sheets, isn't the
> problem how the value for bank balance sheets is determined in the
> first place?
>
> In other words, does mark-to-market not work in an environment such
> as we are in? If it doesn't, why don't we establish a methodology
> that more accurately reflects the "real" value of the assets?
>
> And aren't we - the taxpayers - incurring yet another loss on these
> assets? We bailed out the banks for the reduction in their capital
> caused by the write down of these assets (that cost taxpayer money).
> Now they will be sold to these funds which will make a "profit" shared
> with the private investors. That "profit" is yet another loss to
> be born by taxpayers. Alternatively, if the funds overpay for the
> assets, the taxpayers lose also.
>
> How can an ordinary citizen get in on this deal with the upside potential
> (and limited downside)?

Mar 22 10:16 PM

[vaughn:]

3% is quite a lot. Usually fund managers put up no capital at all. Look at all those sivs sponsored by banks. They put zero capital while charging management fee (50 basis point at least) plus profit sharing.

By forcing the private capital to put at least 3% capital as the first loss position is quite an achievement if you know the industry.


On Mar 22 08:07 PM Chancer wrote:

> Having hedge funds put up only 3% is an admission that the Feds are
> not sifficiently capable (smart enough) to do this with government
> employees. What the government is good at is "Monday morning quarterbacking"
> when the "horse has left the barn." They scream outrageously when
> they realize they did not get the details right. the hedge fund managers
> are smart enough to "skin" the government once again.

Mar 22 10:21 PM

[vaughn:]

The leverage on the private public partnership is less than 6 times ( total capital will be 18% with 82% financing coming from debt guaranteed by FDIC and bought by private investors, such as pension funds or bond funds)


On Mar 22 03:07 PM SilentP wrote:

> The creation of the now toxic assets required massive amounts of
> credit to be available. Without credit, there is simply not enough
> cash out there to purchase these assets outright. The Treasury is
> simply restoring 30-1 leverage ($30B * 33 = $1T) to soak up some
> of the supply.
>
> Add to that a deteriorating economy where no one knows where (or
> when) the floor on housing prices and consumer credit will be, it
> is not hard to see why investors don't want to jump in with cash
> to buy those assets.
>
> "However, I still don't understand why private capital hasn't already
> bought these undervalued assets to make these profits?"

Mar 22 10:27 PM

[SilentP:]

Agreed, you are technicaly correct. However, from the perspective of the private money, the leverage is effectively 30+ to 1, as they are putting up only 1 dollar to get buying power of 33 dollars.


On Mar 22 10:27 PM vaughn wrote:

> The leverage on the private public partnership is less than 6 times
> ( total capital will be 18% with 82% financing coming from debt guaranteed
> by FDIC and bought by private investors, such as pension funds or
> bond funds)

Mar 22 10:59 PM

[Lin:]

Sentinel

Go Boy ! you are right on .Nova , you are correct ! Obama is already saying " he will have to " look at " entitlements . Social Security is Going Away ! You cannot bail out banks + hedge funds using trillions of taxpayer funds + continue to pay SS . Note , Over 3 trillion has been looted from the formerly locked SS fund already ! Government will distance itself from the blame stating " it was the economy that forced this ". Remember , Obama said frequently during his campaine " he would have to make some difficult choices ". it's coming . Starvation for many in the US. If you don't think so , your head is truly in the sand !

Mar 22 11:04 PM

[Freedoms Truth:]

"The New Deal merely prolonged the depression.I wish that was the worst that could be said for what Obama and Geithner have in store. People, don't forget as you reach the cliff that it was guys like DeLong who led you there."

This needs to be repeated again and again and again until it penetrates the thick skulls of the neo-socialist New New Dealers: "The New Deal merely prolonged the depression."

If enough people realize that the New Deal failed as an economic program, we might get our national conversation away from the illusion that Govt bailout/rescue is worth doing.

It is an absolute and utter illusion that $1 trillion in Govt assets spent on risk assets is a good use of such funds. If this was a 'good deal', the private sector would/could carry the assets. Or alternatively ,what will be happening is that income streams will be removed from finanical institutions - hmmm. If not, then its a bad deal for taxpayers. Barney Frank promised in October that the $700 billion in TARP would have a net cost of under $100 billion ... but how much was lost in AIG alone?

Mar 22 11:17 PM

[VP of Commo...:]

All the government really needs to figure out is what tranche their getting (out of how many, 3rd of 3 = bad, 3rd of 7 = not so bad) and where the underlying assets are located. Mean loan to value at origination and the age of the asset pool vs. default rate are also interesting, but this crap really isn't all that hard to value once you look at it with realistic underlying assumptions.

As far as why private capital has yet to step in, I agree with websage.

Mar 22 11:18 PM

[growser7:]

There is a big "if" built into this whole plan---that "if" the toxic assets are dealt with then everything will be fine and the economy will start growing again and the fed and our economy will somehow cheat death. The flaw is the simplistic belief that it is just the toxic assets that are impeding credit formation, and all we need is credit to flow.

This sidesteps the greater structural problem---that households and corporations are overleveraged, not just banks. The percent of household cash flow consumed in debt service is unsustainable, and untl that is dealt with either by liquidation or savings and payment, consumption will remain low. And with low consumption, you have low demand, poor earnings, ongoing unemployment etc etc.

So, Geithner et al are building a one-legged stool that is surely going to fail. More credit is merely the hair of the dog after a decades long bender. A top down fix isn't going to work; even with banks restored to health, we will find that in fact the demand for credit won't snap back because there aren't enough credit worthty entities on the demand side.

Bottom line: if it sounds too good to be true call a cop. Any solution that is a win-win with everyone walking away from the table fat and happy is impossible. The nation was overleveraged, with leverage being a draw on future consumption. To restore balance there is going to be suffering. Geithner and the administration are advancing ideas right up there with cold fusion and perpetual motion machines.

Mar 22 11:50 PM

[Gary A:]

It is clear to me that the ponzi off balance ponzi scheme of Basel 2, 1998 version, overleveraged the American consumer, the golden goose of world prosperity. The golden goose was broken by the Basel 2 scam and DEMAND for loans will be less than our arrogant government thinks will be in play. Supply of loans is only half of the equation and without demand Humpty Dumpty will not be put back together.

Mar 23 01:05 AM

[aa44aa:]

video.google.com/video...

Mar 23 02:16 AM

[NKB:]

Instead of spending vast sums of money to buy toxic assets, why does not the Govt issue an insurance policy to these troubled banks / institutions guaranteeing them the payment of the book value of these toxic assets after a period of say 10 years? The government could charge a premium which is equal to the estimated payout plus an additional fee (such premium could be adjusted yearly) . Insured firms and the Government could share the upside in-case their toxic assets valuations improve during the policy period of 10 years. The firms could expense this premium every year and hopefully show a decent operating profit by moving away from MTM losses which in the current situation is one of the root causes for the financial depression and panic. Such a solution would enable :
(1) troubled banks / institutions to avoid huge MTM losses every quarter - since losses will be effectively ammortised over next 10 years
(2) reduce the need for troubled firms to seek additional capital and thus diluting shareholder value
(3) stabilise house prices by breaking the vicious cycle of MTM losses - reduced stock prices - additional capital mobilisation - reduced stock prices - negative market sentiment - lower house prices - MTM losses ....
(4) Government could earn money as insurance premium rather than spending trillions of tax payers money upfront without a clear correction plan from the troubled firms
(5) put an incentive for the troubled firms to clean up their own mess over next 10 years rather than simply bailing them out and transferring the risk entirely to the government

Difficult times sometimes need different solutions -- simply throwing money to fill a ballooning hole is not going to be effective - we need to stop the hole from growing and then shrink the hole in the least painful way for all people ...

Mar 23 02:33 AM

[Paul H. M.:]

I wonder how many people claiming the plan is a failure (before it has even been implemented) would say the same thing if it was McCain in charge?

Seems like on this site, we have a lot of bitter GOP supporters who would claim the plan is a failure no matter what.

I'm not saying it will work for sure, but the people working for the Fed likely have far more education on this matter than anybody on this board (otherwise, you'd have a job in the industry or with the Fed rather than posting comments on a website).

Even Obama, who is not an economist, has probably done more research on the economy than anybody on this board.

This is the first time in eight years that we've had an intelligent and well-read man in charge. Let's give him and his appointees a chance. It doesn't help your country to cry doom and gloom before we give the plan a chance. Part of having a strong economy is confidence, so let's not try to bring down our country attempting to lower the public's confidence.

I'm also wondering how many of these doom and gloomers are simply hoping to bring down the market to improve their short positions.

It's also funny how GOP supporters thought the government could do no wrong under Bush, but now, suddenly, EVERYTHING the government does is going to bring down the country.

Let's take off the GOP-bitterness glasses and look at this a bit more objectively.

Mar 23 02:37 AM

[Mark in SF:]

GEITHNER PUT.

How to avoid it? What's to prevent some hedgee bidding face value, and letting the private/public SIV crash and burn? So long as are LONG in some other hedge fund on the bank they are handing the taxpayer cash over too, they are golden.

Smells like an invitation to tunneling to me. It stinks and makes me sick to my stomach.

Mar 23 02:41 AM

[Mark in SF:]

Paul: "Seems like on this site, we have a lot of bitter GOP supporters who would claim the plan is a failure no matter what."

I voted for Obama. Krugman voted for Obama. We all hate the Geithner plan. It a blatant handout to banks, that obfuscated just enough so to public can't really get it.

Mar 23 02:43 AM

[Paul H. M.:]

Question to those who are claiming the U.S.A. is a sinking ship: when are you moving out?

Have you removed 100% of your money from U.S. Equities and cash, and converted that money into ammo, bottled water, and canned food (since those will be most valuable if your prediction of our demise comes true)?

If you still live in this country, and you think it's going to fail, then why not get out now? Let those of us who believe in the system that's brought stability since the Great Depression stay and fix this mess without you.

In modern history, there has never been a stable nation without a central bank that smooths out inevitable crashes (crashes that happened much more often before the Fed was born).

I understand if you are frustrated with the Fed, but do you really want people running on the banks every several years? That's how it was before we created a system to smooth these things out.

The Fed has its flaws, but the system we had before the fed was MUCH MUCH worse (after all, people lost their bank deposits all the time, something that doesn't happen much anymore, if at all).

It's easy to be a back-seat-driver to our system, but many of you take for granite how stable things are compared to the days of small government and no Fed.

Small government with no central bank is great in theory, but it's proven to create great suffering every time it was tried. The U.S. was worse than most third-world countries (in terms of stability) before we created our current system.

Mar 23 02:47 AM

[Frank Lind:]

Here's what I don't get about the argument Krugman's been hammering for weeks now. He says the banks that own a lot of CDO's are "zombie banks" that must be killed, purified and then, uh, reanimated, which makes the zombie metaphor kind of a dead end. But I digress.

In Krugman's argument, the CDO's are next to worthless, because a thing is only worth what someone will pay for it and no one will pay much of anything for CDO's of any kind right now. In a real sense, that is true, but it's true because it is a definional tautology. "What someone will pay" is a definition for "worth," therefore a think no one will pay much for is next to worthless.

The unstated assumption in that definitonal tautology however, is that the information upon which the market's valuation of the asset is based is both rational and factually correct.

And that's where I have a problem with Krugman's argument. By insisting that these assets are intrinsically and irrecoverably worthless such that Citibank must be burned, razed and sown with salt, he's implicitly stating that the market's valuation of Citi's CDO's is rational and that' market's information is correct. The problem is that this means he is pinning his entire arugment upon a current valuation made by the very same market thatcaused this problem by overvalued these same assets based upon what everyone now acknowledges was irrationality and information that was more delusion than data.

So upon what basis does Krugman now contend that that market now has more and better data and a better emotional control than it did when it was bidding these things up into the stratosphere? He doesn't say--and indeed conspicuiously ignores this whole issue.`Instead, we get sneering about "misunderstood assets."

Some of these assets have to have still be producing income. Indeed, given some of them have to be producing 100% of the income they were expected to produce. That's the way their structured. An issue of bonds gets paid from the stream of revenue from a particular pool of mortgages. The class A bonds get first dibs on that income, the Class B bonds get paid from what's left over after the A's are paid and the C bonds get whatever's left after the B's are paid, and so on. Unless the foreclosure rate in the pool of mortages backing the debt is 100%, the A's have to be getting paid in full. Given the rate's I'm seeing in the paper, the B's are almost certainly paying back at 100%. And, indeed, the "C" must be getting something, though less than 100%.

Appraisors, accountants and lawyers routinely use measurements of value other than mere market value. In particular, appraisors, accountants and lawyers often value assets for which there is no ready market using the income approach. The CDO's--even the really, super crappy sub-prime backed CDOs--are generating income. Again, I know this because the mortgage default rate is not close to 100%. So they have value. The problem, as I understand it, is that no one is buying even the decent respectable Class A and B CDO's backed by 30 year, high down payment mortgages because they do not do not know how bad the foreclosure is going to get and thus cannot figure out how much to pay for them.

And that leads me to the other thing I don't get about Krugman's--and, especially the scare quote progressives nationalize/recieversh... argument.

What do they propose do do with these assets after they nationalize the banks? Sell them for whatever anyone will pay right now? Now that's a prescription for rewarding the evildoers--they'll buy them up for a song and profit handsomely when the economy turns around, default rates bottom and market values can again be determined. Transfer them to the government for value? Why would you do that? Aren't they "toxic" and "worthless?" Transfer them to the government for nothing? Doh! Stupid Fifth Amendment!

Mar 23 06:55 AM

[Frank Lind:]

You, and several of the other scare quote progressives here, would be a lot more convincing to me on this topic--and most others--if so much of what you propose wasn't so in-my-face obviously based upon emotion and, in particular, rage and a deep emotional need for retribution. Rightly or wrongly, it really does seem to me, as a reader, that you get so furious at the mere thought that anyone in the world of finance might make money out of a plan for recovery that it causes you to instantly reject the possibility that such a plan could work.

God knows I've got my own anger control demons to deal with on a daily basis, so, in justice, I have little room to criticize. Indeed, I have been known to type the occaisional harsh comment myself. (Like, say, this one.) I'm just noting that it rather seriously undermines the reader's ability to put a lot of stock in your judgment in an argument that is, in the end, about judgment.

And make no mistake, that's what this argument is about: judgment and only judgment. A lot of people--Krugman and economists in general most particularly--talk like the consequences of implementing policy A vs. policy B can be fortold like Hari Seldon mathematically deriving the future in the Foundation novels. In fact, no one knows. All one can do is assess risk--a judgment call because the risks cannot be meaningfully quantified--and take action based on one's evaluation of those risks, another judgment call.

You may be right. The Administration's policy may lead to disaster and the one you favor, whatever that is, might lead to some glorious utopia. But it is also at least possible that you, and all those denizens of Akadame whom you cite are the ones who are disasterously wrong--because ivory tower experts may, in fact, have been wrong about something at some time past--and the plan proposed by the administration might somehow, by some miricle, stumble bassackwards into success.

It's the failure of many engaging in the discussion of economic policy here to acknowledge, at least implicitly through tone, the possibility that they might be wrong that disturbs me. That, and the increasingly common attacks on the good faith, motices, and intelligence, the apparant believe that one's own viewpoint is so self-evidently true and good and right that anyone opposing it must be evil.

If I wanted iron certitude that increased in inverse proportion to its relevance to the speaker's area of expertise, I'd have gotten a teaching job somewhere so I could attend faculty meetings.

Mar 23 06:56 AM

[Wasabinator:]

Well I'm afraid to say that the US appears to have become one big casino, with Fed employees hired as croupiers.

Mar 23 09:06 AM

[techzone12:]

Geithner, who is a "tax evader", is now in charge of the treasury. Way to go poeple. You are in safe hands!!

On Mar 22 09:40 AM the ilster wrote:

> These so called toxic assets will most likely never recover and if
> the did it would be 10-15 years from now. Stop bailing out the fucking
> banks already. Geez!!!!. Let everyone take a loss and lets start
> over. I am getting IRATE!!!!!! We are watching the looting of the
> US Treasury to save a fiat monetary system that is destined to fail.
> Start buying commodities Inflation is on is way. This article in
> Rolling stone is a MUST read.
> www.rollingstone.com/p...

Mar 23 10:07 AM

[Jason Rines...:]

Wasabinator has it right. I just keep remembering what the IB's did when they got hold of $250 B at the Fed discount window in February of 2008. They dropped it all into energy, specifically oil. Looks like a redeaux on steroids with the taxpayer footing the entire bill in outrageous sums in energy for the financial systems bad bets in real estate.

Mar 23 11:13 AM

[Plan B Econ...:]

Aggregator Bank redux...this was probably the lesser evil in terms of saving the banking system.

Costly but necessary.

Circa Jan 20th:
www.planbeconomics.com.../

Mar 23 12:10 PM

[banpreso:]

there's a good chance of private moeny stepping in given the FDIC insurance aspect of this program, but the government is taking on risks that are just beyoung my comprehension. the government is gonna leverage, and on top of that, guarantee the leverage!

what happens when some of this stuff default and FDIC runs low? print more money? crazy infaltion?

Mar 23 12:20 PM

[Socialism c...:]

If Zimbabwe is success, we'll be successful. But we'll be living in a new banana republik.


On Mar 22 12:45 PM Elliott wrote:

> People who think the Geithner plan will fail are forgetting one thing:
> the same government that is the 5/6 partner in the toxic assets is
> also the same government that prints money. Flood the world with
> paper dollars and the dollar value of the toxic assets will go up
> -- in nominal terms, not real terms. The Geithner plan will eventually
> show a "profit" on paper and the government can claim "success."

Mar 23 12:31 PM

[Socialism c...:]

"A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment."

Huh? Reduce unemployment? Wow. When we already have an oversupply of housing...the idea that we can forge a plan to rid banks of toxic mortgage assets, and that will somehow lead to a reduction in unemployment...is a VERY big leap in logic.

This plan is a FARCE -- it presumes to lead us into thinking that this will not be costing taxpayers money over the lifetime of the plan, whereas it is just shifting the costs from immediate debt issuance, to hyper-inflation. The participation of private money is just a drain on taxpayer funds...it will not indicate the viability of the plan. This is just more socialism. And socialism has NEVER worked!!

Mar 23 12:37 PM

[anonymous1003:]

Have we not learned that leverage can be a very dangerous scheme? Hope this is good leverage by the Fed, or else we are all screwed. Moving some assets to emerging nations is my bet.

Mar 23 12:58 PM

[Mad Hedge F...:]

After reading 40 pages, I’m sorry I’m late getting my comments out today, but I had to get my application in to manage the Treasury’s latest $1 trillion bailout program. They’re due April 10, and I wanted to get mine in ahead of Black Rock’s and PIMCO's. I only have to show $10 billion in assets under management and the ability to raise $500 million. For this, the FDIC will effectively lend me interest free long term loans to buy all of the toxic assets I want at deep discount prices with 6:1 leverage. I’m sorry, but I can’t resist those “heads I win tails, you lose” trades the Feds are offering, hence the rush. This certainly takes nationalization of the banks off of the table, and makes those buyers of Bank of America (BAC) two weeks ago at $2.50 look pretty smart. The government has now shot its wad, and there is really nothing else they can do now but sit back and pray until the $3 trillion in stimulus/bailout/reliq... they have committed to starts to work.

Mar 23 01:35 PM

[Barb:]

If you clean up your mouth, I might get past the second sentence to find your comments credible.

On Mar 22 09:40 AM the ilster wrote:

> These so called toxic assets will most likely never recover and if
> the did it would be 10-15 years from now. Stop bailing out the fucking
> banks already. Geez!!!!. Let everyone take a loss and lets start
> over. I am getting IRATE!!!!!! We are watching the looting of the
> US Treasury to save a fiat monetary system that is destined to fail.
> Start buying commodities Inflation is on is way. This article in
> Rolling stone is a MUST read.
> www.rollingstone.com/p...

Mar 23 02:03 PM

[Jason Rines...:]

1) Washington is a Cerebus now, two ugly heads one mutated body
2) I WAS a Republican. Bush lied and now Obama has lied. What made Obama sign bills with earmarks?
3) Our entire monetary model is broken. Having the international monetary peg of the globe allowed us to run huge deficits in the past. This time, the West has competition for the East.

On point #3, we all have entered the Clash of the Titans phase for this international monetary peg prize. Your post of attempting to politicize matters further shows me you needed to understand point 3. Those that don't or refuse to understand this and pick sides - West vs. East, Democrat vs. Republican - You are already fodder.


On Mar 23 02:37 AM Paul H. M. wrote:

> I wonder how many people claiming the plan is a failure (before it
> has even been implemented) would say the same thing if it was McCain
> in charge?
>
> Seems like on this site, we have a lot of bitter GOP supporters who
> would claim the plan is a failure no matter what.
>
> I'm not saying it will work for sure, but the people working for
> the Fed likely have far more education on this matter than anybody
> on this board (otherwise, you'd have a job in the industry or with
> the Fed rather than posting comments on a website).
>
> Even Obama, who is not an economist, has probably done more research
> on the economy than anybody on this board.
>
> This is the first time in eight years that we've had an intelligent
> and well-read man in charge. Let's give him and his appointees a
> chance. It doesn't help your country to cry doom and gloom before
> we give the plan a chance. Part of having a strong economy is confidence,
> so let's not try to bring down our country attempting to lower the
> public's confidence.
>
> I'm also wondering how many of these doom and gloomers are simply
> hoping to bring down the market to improve their short positions.
>
>
> It's also funny how GOP supporters thought the government could do
> no wrong under Bush, but now, suddenly, EVERYTHING the government
> does is going to bring down the country.
>
> Let's take off the GOP-bitterness glasses and look at this a bit
> more objectively.

Mar 23 02:15 PM

[wstevena:]

In the example, the government is at risk for $970 billion out of a $1 trillion purchase. That is 97% of the capital and risk. The government is getting nothing close to 97% of the potential profits. This boondoogle to the hedge fund community is even more egregious than he shows.

In addition, his model of hedge fund compenstation at 2% and 20% is out of date. In today's environment these figures have shrunk substantially.

Mar 23 02:45 PM

[freeeee:]

This will merely be a cover for banks and funds owning toxic assets to dump them off to the public. So what if they have to put a few bucks to make it look good. For every dollar they kick in, we have to kick in $13 and we overpay for assets on their books.

I say let's give them 100% of the upside and 100% of the downside!!!

Mar 23 04:08 PM

[Don a. Rich:]

I teach economics and finance, and it seems to me that this whole thing has proved the Levy Insitute correct that we have been hiding the inter-temporal bankruptcy issue by serial asset price bubbles, and this is the endgame because those future liabiltiies are now current, and all this is going to do is add to the blowing apart of all price relationships.

Mar 23 07:10 PM

[user369285:]

Somebody understands economics???


On Mar 22 12:08 PM Steve in Greensboro wrote:

> Nobody who understands economics thinks this mess will work.

Mar 23 08:12 PM

[daveddawg:]

The author says we will only need to pay in $3 T more, if this plan is to work. I am so old that I remember when a Billion was a lot of money. Like they say, a trillion here, a trillion there, pretty soon your talking some real money. What is the name for a thousand trillion?
I guess I will see that print one day.

Mar 23 08:35 PM

[Vuke:]

Well said Don. Well said.

It reminds me of a child's toy. A little head pops up but each time you hit it another pops up elsewhere. Except, in this case, the little heads keep getting bigger and bigger.............

On Mar 23 07:10 PM Don a. Rich wrote:

> I teach economics and finance, and it seems to me that this whole
> thing has proved the Levy Insitute correct that we have been hiding
> the inter-temporal bankruptcy issue by serial asset price bubbles,
> and this is the endgame because those future liabiltiies are now
> current, and all this is going to do is add to the blowing apart
> of all price relationships.

Mar 23 11:25 PM

[sboardemc:]

Don't you think that leveraging 5-1 is just putting more risk on the fact that if this does not go exactly to plan then it puts us much deeper in the hole? I mean leveraging is what got us into trouble in the first place.

Mar 24 12:00 AM

[msgtb:]

You are very naive. We are in a worldwide depression. China is calling for a new world reserve currency. There are trillions of Credit Default Swaps (CDS) on the books of the banks. Those are considered Tier III this is only for Tier I assets. The Mortgage Backed Securities are not the root of the problem it is the CDS worldwide. Stocks will continue to be worth less 90 days after you buy them. When we crawl out of this depression it won't be the rapid gain we have seen recently. This is a typical bear market rally.

Good luck and good trading

Mar 24 11:02 AM

[User 382148:]

Is it possible for small investors participate in the FDIC auction for ABS's? Where can small investors go to find details on the ABS up for auction? If the gov't is willing to lend 85% non recourse and loan 80% of the remaining 15% equity stake at 1%-3%, where do I sign up? Seriously......

Mar 24 01:30 PM

[MarkTwain:]

User 382148

The plan was just announced but there is a 5 page white paper on the Treasury site. I would keep an eye on PIMCO who will almost certainly be one of the 5managers chosen to administer the loan purchase scheme. I would expect that they may eventually offer a product for retail investors. However, I wouldn't count on it for at least 6-12 months as the mechanism gets running. This is going to be an opportunity for at least 3 years so don't worry about getting in at the ground floor.

The whole point is to create a "fire break" so that the economic panic wildfire doesn't continue to spread. The fire will continue to burn for quite some time.

Mar 24 02:15 PM

[virerus:]

who is right now? if you listened to me and bought you would have doubled your money...


On Mar 22 08:15 PM Sentinel wrote:

> Viverus burped out this comment above...
>
> "i don't understand why everybody is so negative... really. so what,
> economy is down 5-6% and unemployment is 11%. so what? i tell you
> it's only in the near-longer term is making the economy more efficient
> and productive. as to people who "lost" their jobs let them retrain
> and do something useful with their lives. trust me qualified workers
> they don't lose jobs, when they do, they get even better ones."<br/>
>
> Yeah....lots of people are retraining as we speak.....at Hamburger
> University. They're really useful to you as you pull away with your
> minivan full of Whoppers.
>
> Oh...hope you are one of those "qualified" workers you mentioned.
> Better yet....you had better hope that YOUR BOSS thinks you're a
> qualified worker AND getting paid less than what YOUR PEERS in the
> OTHER COMPETING CORPORATION are getting paid AND YOUR CORPORATION
> IS NOT DOWNSIZING BECAUSE THEY ARE FAT AND LAZY COMPARED TO YOUR
> COMPETITION!
>
> Otherwise you could be as qualified as anyone and still be fired
> to make room for some snot-head out of college who will work for
> peanuts and be a part of a much smaller benefit package because YOUR
> COMPANY thinks you're more a "QUALIFIED COST" than an LOWER OVERHEAD
> ASSET.
>
> Then I'll see you after YOU graduate from Hamburger University.<br/>
>
> Yes....I WOULD like fries with that !

Nov 20 05:49 AM