Geithner: A Fool with a Plan? And Is That a Bad Thing?

My dad said a fool with a plan can beat a genius with no plan.
-- Boone Pickens

Given the criticism the Geithner plan is getting from many quarters (see here and here, for example) it might seem surprising how much higher the market is moving today. We’re seeing moonshots upward in every major market on the announcement of Treasury’s public-private partnership scheme.

Should we be surprised? Not really. The markets have been desperate for a sign that someone somewhere is in charge and doing something. Any semi-coherent plan showing that the Administration and Treasury are trying to get in front of things, and have committed capital, is, to that way of thinking, better than the current rear-guard action.

While the current plan isn’t optimal -- far from it, as a matter of fact: Why would banks participate if they’re not compelled? -- it is, in this view, better than no plan at all. Pace Boone Pickens, that is what really matters to the markets here, at least initially. Once that euphoria wears off, however, we will quickly see over the next few weeks how the “fool with a plan” thing goes.

[Update] Someone please tell Larry Summers to stop staring at his Bloomberg terminal -- unless he is going to say that markets hate him when they don’t go up on a future announcement.

Comments

[Doc 224899:]

The fool's plan hits a brick wall at the point when FDIC (using taxpayer dollars) has to kick in for losses due to defaults on the sub-prime mortgages.

Up to this point, the only people who would get hurt by bad sub-prime mortgages were the stupid people who couldn't afford to buy houses but who went for a mortgage they couldn't afford anyway (and probably didn't have the vaguest understanding of, and who probably were not mentally competent to sign because they were incapable of informed consent), the stupid people who gave them ballon mortgages they obviously would default on, and the dummies who bought the bundled bad loan paper. These are the people we should allow to be hurt, because getting hurt is one of the natural consequences of being stupid, and not bail the dummies out.

Now, the Obama/Geithner plan finds a way to hurt all taxpayers by guaranteeing the bad loan paper through FDIC.

The other "fools" involved in this plan would be the "private investors" (investment banks, hedge funds), who will willingly buy the toxic loan paper that nobody in their right mind wants.

Mar 23 04:22 PM

[Gtarras:]

Oh, isn't it cute? "A fool with a plan". Paul, after a ton of inaccurate data you posted on your blogs, would not it seem decent to limit that cutesy stuff?

Mar 23 04:35 PM

[Mark Bern:]

This plan was preannounced some time ago, while vague in the details at the time, the principles have not changed. Private investors to date have not expressed appreciable interest in the plan. I suspect that there will be some interest, but not nearly enough to make the plan viable.

Investors, such as hedge funds and investment banks, are looking for bargains. If the pricing of the toxic assets are expected to be at levels that encourage private investors to step forward there would be a line already forming. I don't see that line.

I suspect that prices will need to come down in order to interest private capital (i.e., to "market prices"). At the lowered price levels for the toxic assets, the banks could become insolvent.

Therefore, we have a conundrum: prices too high = no investors; prices too low = banks are insolvent. The only solution, other than allowing the banks to fail, is for the government to step in and make up the difference. As a taxpayer, I don't like this concept. I'd rather have an orderly bankruptcy plan where deposits and good assets are sold for reasonable prices, toxic assets are auctioned off for whatever they can get, and we get this whole thing over with so we can start over with some certainty. Properly handled, bankrupcy works.

Shareholders and debt/bondholders get creamed as they should because they placed their confidence in poorly managed institutions. I just don't buy the concept that any company is too big to fail, not even a bank. I do believe that a prepackaged bankruptcy similar to what I expect to be put together for GM and Chrysler could work without significant disruption to the economy. And, it wouldn't cost the taxpayers trillions of dollars.

Mar 23 04:45 PM

[dcb:]

God, maybe because I am from somewhere outside of the financial industry that I can actually understand more about how markets work that the pro's.
This plan is perfect for the markets. private equity, hedge funds, and banks get the upside with minimal costs. It encourages over paying for the assets at tax payer expense. The people who have th power to influence the market are getting paid off.

If we nationalize the banks, or buy the toxic assets at a real price, or cut out private equity, hedge funds, and the banks, we get the upside potential along with the downside potential.

The first plan even if it doesn't work in the long run will make the markets go up. The second plan if it works in the long run will make the markets go down.

You are attempting to apply a logic to the markets without understanding how they work.

The plan that would be approved the most by the markets would involve unlimited tax payer funds, to insolvent banks, for as long as it took, without any oversight. This would be the markets ideal plan.

Think about how each would influence the market. Therefore, if the market approves the plan, does it mean it is a good plan.

the market goes up if there are increased profits to be had by the plan. it does not care the nature of those profits. It thinks short term, so like the mortgage bubble it may go up short term only to crash later when a bad plan fails

Mar 23 04:45 PM

[dcb:]

what you suggest is mentioned in the financial times today I can assure you your plan (which I like), won't happen because it doesn't pay off wall street enough. The people who buy congress expect a pay off. This plan doesn't have enough of one.


On Mar 23 04:45 PM Husker Mark wrote:

> This plan was preannounced some time ago, while vague in the details
> at the time, the principles have not changed. Private investors
> to date have not expressed appreciable interest in the plan. I suspect
> that there will be some interest, but not nearly enough to make the
> plan viable.
>
> Investors, such as hedge funds and investment banks, are looking
> for bargains. If the pricing of the toxic assets are expected to
> be at levels that encourage private investors to step forward there
> would be a line already forming. I don't see that line.
>
> I suspect that prices will need to come down in order to interest
> private capital (i.e., to "market prices"). At the lowered price
> levels for the toxic assets, the banks could become insolvent.
>
>
> Therefore, we have a conundrum: prices too high = no investors; prices
> too low = banks are insolvent. The only solution, other than allowing
> the banks to fail, is for the government to step in and make up the
> difference. As a taxpayer, I don't like this concept. I'd rather
> have an orderly bankruptcy plan where deposits and good assets are
> sold for reasonable prices, toxic assets are auctioned off for whatever
> they can get, and we get this whole thing over with so we can start
> over with some certainty. Properly handled, bankrupcy works. <br/>
>
> Shareholders and debt/bondholders get creamed as they should because
> they placed their confidence in poorly managed institutions. I just
> don't buy the concept that any company is too big to fail, not even
> a bank. I do believe that a prepackaged bankruptcy similar to what
> I expect to be put together for GM and Chrysler could work without
> significant disruption to the economy. And, it wouldn't cost the
> taxpayers trillions of dollars.

Mar 23 04:49 PM

[market ace:]

Geithner pretending that private investor funds are willing to step up and take the place of the gov't in buying toxic assets is a noble thought, but then when you get into the details of how his plan is nothing but another disguised tax payer bailout of failed financial instutions, his plan smells of desperation and fraud. Now we get the FDIC involved in playing gov't interventionist in the markets instead of their real function which should be to take over these failed banks and liquidate them.

Apparently the plan makes good headlines and fools the markets for a while as every major bailout announcement has so far, but then reality will again set in and we are back to square one with failing financial institutions still stuck with toxic assets that they cannot afford to sell at FMV (which obviously private investors will want to pay) because that would prove how broke they really are. We will also be stuck with even more gov't debt being piled on more debt to solve a debt crisis and Bernanke working full time to create even more money out of thin air to finance this fiasco.

Of course still missing from this plan is any answer for the real banking problem - derivatives. Until they are willing to disclose, regulate and unwind derivatives no banking solution will ever be complete or successful.

Mar 23 04:56 PM

[Vuke:]

Using the Monopoly game analogy it appears the holders of Boardwalk and Park are now running the bank with new rules.

We, left holding railroads or Baltic are heading to jail or, at best, a draw from Chance.

The safest play in this self dealing mess may be gold, especially if it's sold down to buy into the new casino.

Mar 23 05:05 PM

[terryt:]

It is always easier to pan someone else's plan as foolish.
Now put yourself into Geithner's position, let me ask you this: if you think it's a fool's plan, what's your 'smart' plan?

Mar 23 05:07 PM

[Alok Swain:]

Excellent comment "dcb".
:-)

The plan that would be approved the most by the markets would involve unlimited tax payer funds, to insolvent banks, for as long as it took, without any oversight. This would be the markets ideal plan.

Think about how each would influence the market. Therefore, if the market approves the plan, does it mean it is a good plan.

the market goes up if there are increased profits to be had by the plan. it does not care the nature of those profits. It thinks short term, so like the mortgage bubble it may go up short term only to crash later when a bad plan fails

On Mar 23 04:45 PM dcb wrote:

> God, maybe because I am from somewhere outside of the financial industry
> that I can actually understand more about how markets work that the
> pro's.
> This plan is perfect for the markets. private equity, hedge funds,
> and banks get the upside with minimal costs. It encourages over paying
> for the assets at tax payer expense. The people who have th power
> to influence the market are getting paid off.
>
> If we nationalize the banks, or buy the toxic assets at a real price,
> or cut out private equity, hedge funds, and the banks, we get the
> upside potential along with the downside potential.
>
> The first plan even if it doesn't work in the long run will make
> the markets go up. The second plan if it works in the long run will
> make the markets go down.
>
> You are attempting to apply a logic to the markets without understanding
> how they work.
>
> The plan that would be approved the most by the markets would involve
> unlimited tax payer funds, to insolvent banks, for as long as it
> took, without any oversight. This would be the markets ideal plan.
>
>
> Think about how each would influence the market. Therefore, if the
> market approves the plan, does it mean it is a good plan.
>
> the market goes up if there are increased profits to be had by the
> plan. it does not care the nature of those profits. It thinks short
> term, so like the mortgage bubble it may go up short term only to
> crash later when a bad plan fails

Mar 23 05:23 PM

[KingGeithner:]

First, Bush/Obama are deemed socialists for injecting money into the financial system. Now, the administration comes up with a hybrid private enterprise/government partnership and the same people are whining about that. Doing nothing is not an option here....banks holding trillions of dollars of assets/liabilities are not similar to GM or the airline companies. Without even going into the fact that bankruptcy is not feasible/practical/pos... for Citi/B of A, think about what THE engine of growth in the world is....BANK LENDING. No banking system=no small businesses can open their doors=no job growth=no progress or innovation=America further spins down the idiot pipe. Unless we all want to resort back to the days of loan sharks, I'd say propping up the banking system is necessary, and those that keep repeating the mantra of 'we should do nothing and let them fail' absolutely do not understand the role banks play in society. I hate bankers as much as the next person, but I am sick of people criticizing every initiative government has taken without proposing what their brillant idea is in lieu of all the other plans.

Mar 23 05:46 PM

[MichaelSchm...:]

Since nobody else has started on the vast "potential for manipulation" topic here, I'll re-post a prior post. It seems as if any bank that is currently holding a mark below 93 cents can presumably "buy" the legacy assets at or near 100 cents (most likely indirectly through a hedge fund capitalized with bank money), mark a gain on the "sale" and basically just walk away from its equity stake (leaving the taxpayers with the loss, of course, when the assets prove to be less than that). Stated differently, if the mark is already below 93 cents, the bank has already lost the 7 cents it would take to buy the legacy assets at 100 cents. Why wouldn't the banks do this? Does the False Claims Act provide a mechanism for potential taxpayer recourse?

Mar 23 09:01 PM

[bigtime99:]

Uh-oh Kedrosky, you`ve set yourself up as a sky-is-falling self proclaimed commentator on the markets, you`ve levered yourself to the doom, and now it`s fading...you`re starting to see that you`re on the wrong side of the trade.
Got to start distancing yourself from Roubini et al. before your page views drop.
Bill Gross, who controls the bond market, calls this a `win-win`and said he would buy the assets.
15 minutes of fame turns out to be exactly that I guess...

Mar 23 09:16 PM

[E Nuff Sed:]

PK - Looks like your short positions got burned out! eh.
You don't fight the Fed.

Clearly the real plan is to "inflate" the economy and monetize the debt.

Time to buy undervalued multinational companies. As the dollar goes down their earning stream will grow.

Mar 23 10:57 PM

[Fighting Yoda:]

These kinds of double dealing excesses will happen. That is why this is risky plan, will not work.


On Mar 23 09:01 PM MichaelSchmichael wrote:

> Since nobody else has started on the vast "potential for manipulation"
> topic here, I'll re-post a prior post. It seems as if any bank that
> is currently holding a mark below 93 cents can presumably "buy" the
> legacy assets at or near 100 cents (most likely indirectly through
> a hedge fund capitalized with bank money), mark a gain on the "sale"
> and basically just walk away from its equity stake (leaving the taxpayers
> with the loss, of course, when the assets prove to be less than that).
> Stated differently, if the mark is already below 93 cents, the bank
> has already lost the 7 cents it would take to buy the legacy assets
> at 100 cents. Why wouldn't the banks do this? Does the False Claims
> Act provide a mechanism for potential taxpayer recourse?
>

Mar 24 01:18 AM

[Mafeking:]

My grandmother - though not as well known as Boone Pickens - also had a saying that is pertinent in these times:

"A fool and his money are soon parted"

Mar 24 08:57 AM

[aarc:]

A fool alright. But more like stupid.

Geithner plan or "no-plan" caused the intense sell-off last month that was fueled further by intentional statements by Obama that things will get worse before they get better. Presto, SnP went down from 878 to 666 or a 24% haircut in a matter of just 4 weeks. Stupid ploy in order to lower public expectations by giving gloomier statements while the markets were in free fall.

Were it not for the introduction of Congress discussion for Mark to Market early March, SnP would have gone down to the 600 level after a week or two of addional selloff from the last 4. Technically speaking that would result in an extended sell-off with more than 90% chance of being followed by another 3 to 4 weeks of sell-off after a minor bear market bounce. Under this scenario; probability goes high SnP would have gone down to the 510 level by April2009 with more than 65% probability. Overall; under this scenario; SnP would have finally gone down (after a multi-month bear rally to 743 from April to Sept) to 424 under normal run rate and down to 227 level under an extended run rate by Nov/Dec 2009 time frame using Elliott Waves analysis extension rules. A market meltdown by any description. Luckily, despite "no-action" plan by Geithner and Obama, somebody in Congress started mentioning Mark to Market suspention and Uptick Rule re-implementation. Those moves "saved" SnP by the "hairline" from going down the meltdown route to at least 424 level.

Geithner and Obama taking too much risk with diminishing rewards was not only foolish but a height of stupidity. Their combined actions or "no action" have almost resulted in market meltdown that would have created excessive momentum to the downside that would be extremely hard to reverse even with the help of the most current announcement of QE by the Fed and the PPIP by the Treasury.

We have to thank Congress for the pep talk on M2M and Uptick Rule otherwise such as massive drop of more than 55% from the high of 944 in Jan to projected Nov/Dec2009 potential low of 424 would have resulted in 55% market stock market loses for the year 2009. Worse than the 49% loss of 2008 from peak to trough of that year.

It did'nt happen, and I am glad for it. With the most recent bear rally of which is still unfinished; SnP500 will have higher probabily of finally making a permanent bottom by Nov/Dec2009 or early Q1 2010 timeframe of 600 to 630 range on the conservative side. Still not as bad as compared to the averted 424 target before the Mark to Market Congress inquiry early March was able to stop the impending meltdown at that time.

An extended meltdown has a potential to go down to SnP 231 level just to give readers a perspective of the true potential of a normal (in EW analysis parlance) meltdown.

We're not out of the woods yet, but at least a potential catastrophic market meltdown was avoided for the meantime.

Mar 24 09:39 AM