Live Discussion: Treasury's Bank Recovery Plan

At 2:30pm Eastern time today, we hosted a live discussion on the Treasury Department's recently-announced bank recovery plan. Panelists are the following 4 Seeking Alpha contributors, and here are links to posts they've written on the plan:

• Felix Salmon of Portfolio.com: Geithner's Doomed Bailout Plan • How Treasury's Bank Bailout Could Make Things Worse

• James Kwak, co-founder of The Baseline Scenario: The Toxic Assets Plan - Yes, It's a Subsidy • In Private/Public Partnership, Why Not Let the People In? • Geithner's Plan Isn't Money in the Bank (@ LA Times)

• Brad DeLong, professor of economics at the University of California at Berkeley, former deputy assistant secretary of the U.S. Treasury: The Geithner Plan FAQ • Why I Think Paul Krugman Is Wrong

• Mark Thoma, faculty, Economics Dept., University of Oregon: The Geithner Plan: Will It Work and How to Tell • Which Bailout Plan Is Best

You can replay the entire discussion in the box below.

~ Mick Weinstein, SA Editor-in-Chief

Comments

[Armin Stuk]

Just planking a trillion bucks on the table doesn't necessarily mean whether it's spring overall or resolving the banking crisis will suddenly become any faster. In recent weeks, President Obama and Treasury Secretary Tim Geithner have come under fire from US lawmakers and Wall Street for being slow in coming up with a detailed plan, though.

2009 Mar 24 10:21 AM

[Linus Wilson]

My paper “The Put Problem with Buying Toxic Assets” at ssrn.com/abstract=1343625 suggests that the gap between the price at which banks are willing to sell toxic assets and the price at which the private sector is willing to buy toxic assets may be large. The bid-ask spread will be larger for banks that are more insolvent. It will also be larger for banks that have more distressed or volatile toxic assets. My research shows that it is much better to buy toxic assets from troubled banks in receivership than before their assets are written down.

2009 Mar 24 11:11 AM

[Scott Sambucci]

Brad Delong has been taking an active role in communicating his perspective on the "recovery" plan. Caught him at UC-Davis a couple weeks back for the "Stimulus Smackdown" - a lively debate with Michele Boldrin of the CATO Institute. Here's a recap of Delong's comments then:

seekingalpha.com/artic...

2009 Mar 24 12:56 PM

[Dave Friedman]

One thing I do not understand is this: what incentive does a private investment have to co-invest with the government?
Why wouldn't a private investment fund assume that it will be the target of future populist outrage, and become a target for clawback legislation down the line?
Absent any guarantee on the part of the government that private funds with which it co-invests will not be subject to confiscatory legislation in the future, I don't see why a fund would choose to participate in this.

2009 Mar 24 02:07 PM

[Louis Paquette]

The Chinese are suggesting a substitute should be found for the US Dollar as the world's reserve currency. Trillion dollar per year governement deficits are being forecased.

How long before the Dollar crashes?

2009 Mar 24 02:26 PM

[Ichsala]

To answer Kwak's initial question, what Geithner's been saying is that they want private $$ to mitigate the risk. Of course that implies there is some chance the assets don't recover - which is not what he told the House today.

2009 Mar 24 02:39 PM

[Max Fraad Wolff]

I believe there remains a basic lack of detail. It is hard to forecast anything other than emotional response from the murky outlines we have.

Max
seekingalpha.com/artic...


On Mar 24 10:21 AM Armin Stuk wrote:

> Just planking a trillion bucks on the table doesn't necessarily mean
> whether it's spring overall or resolving the banking crisis will
> suddenly become any faster. In recent weeks, President Obama and
> Treasury Secretary Tim Geithner have come under fire from US lawmakers
> and Wall Street for being slow in coming up with a detailed plan,
> though.

2009 Mar 24 03:06 PM

[David Van Knapp]

Thanks to Brad and Felix...at least they tried to mount a discussion. Nice of Mark to drop in from his busy day.

Brad DeLong should never be invited to one of these again...he was obviously distracted, treated the discussion as a joke, used in-phrases and obscure acronyms rather than trying to be understood, name-dropped, and dissed the heartland of the country. His contribution was less than zero, negative. It's difficult to see why he agreed to participate.

2009 Mar 24 03:40 PM

[observer2]

Here's a thought on how this process gets twisted.

Part 1 – private party buys bank stock (which is holding toxic assets) and/or options cheap.

Part 2 – private party purchases toxic assets from said bank(s) via treasury program with participation and guarantee by Treasury and FDIC. The private party pays high or par value for toxic assets to ensure that lots of money flows into the bank they now own and because their liability is limited to initial investment in the toxic assets.

Part 3 – bank gets rid of toxic assets and has massive inflow of payments (mostly from the government) to improve their balance sheet and value of stock rises dramatically.

Part 4 – private party takes loss on the toxic assets and tax payer picks up the losses.

2009 Mar 24 03:50 PM

[User 382266]

Suppose a hedge fund invests, gets Government money, and buys a collection of home loans. What happens if they want to foreclose on a home? Will they be allowed?

2009 Mar 24 03:56 PM

[IANR]

The new investing would likely be at a much higher rate (cents on the dollar) than a private investment firm could begin to buy in the marketplace. But by participating with the US Gvt one is entering into a program whereby the Gvt underwrites 95% of the downside risk. Not saying this makes it a good deal, but I do think it's why this program will attract private funds.
Best solution? Buy NOW and take 100% risk AND participate with the Gvt in a few weeks time!


On Mar 24 02:07 PM Dave Friedman wrote:

> One thing I do not understand is this: what incentive does a private
> investment have to co-invest with the government?
> Why wouldn't a private investment fund assume that it will be the
> target of future populist outrage, and become a target for clawback
> legislation down the line?
> Absent any guarantee on the part of the government that private funds
> with which it co-invests will not be subject to confiscatory legislation
> in the future, I don't see why a fund would choose to participate
> in this.

2009 Mar 24 04:08 PM

[Big Al45]

Bingo!! You've just revealed the hedge fund game plan.

Conversely , they can also decide to go short on a bank, buy CDSs' on that bank's stock, and refuse to make a realistic bid for the bank's toxic crap. This would require collusion with other hedge funds to be successful, but they do that anyway.


On Mar 24 03:50 PM observer2 wrote:

> Here's a thought on how this process gets twisted.
>
> Part 1 – private party buys bank stock (which is holding toxic assets)
> and/or options cheap.
>
> Part 2 – private party purchases toxic assets from said bank(s) via
> treasury program with participation and guarantee by Treasury and
> FDIC. The private party pays high or par value for toxic assets to
> ensure that lots of money flows into the bank they now own and because
> their liability is limited to initial investment in the toxic assets.
>
>
> Part 3 – bank gets rid of toxic assets and has massive inflow of
> payments (mostly from the government) to improve their balance sheet
> and value of stock rises dramatically.
>
> Part 4 – private party takes loss on the toxic assets and tax payer
> picks up the losses.

2009 Mar 24 04:14 PM

[Majorca Property]

President Obama and Treasury Secretary Tim Geithner have come under fire from US lawmakers and Wall Street for being slow in coming up with a detailed plan.
It is hard to forecast anything other than emotional response from the murky outlines we have.

2009 Mar 24 04:46 PM

[CJJ]

Lets do a bit of a simpler metaphor with the banking situation and sports that if the downturn is bad enough could actually end up occurring. We'll use baseball.
Right now the biggest, most successful, most storied, biggest profit potential, biggest payroll teams are still paying for players like the World Economy is on an upswing. The Yankees just committed about $500 million to 3 players over the next 8 years(numbers may not be exact, but that's not the point). At the moment "who cares". These teams are still strong, baseball hasn't felt the crunch yet.
Lets say next year smaller teams(whose team salaries are 10-30% of the biggest) cut back, some teams even go under. The Yankees, Red Sox, Angels, Dodgers keep on overpaying for good, mediocre and even bad players compared to the other teams. Maybe they even buy some teams.
Let's say all of a sudden no one is going to games. Let's say the owners businesses in real life are tanking. Over the next 10 years small teams are on average on the hook for $100-$200 million dollars while the big teams are on the hook for $2-$5 billions of player contracts. The owners money and the money these teams made off of TV contracts and stadium and goods drys up.
All of a sudden we have the same situation we have with the banks. The big banks bit off more than they could chew and their costs(for banks loans) are just of such an immense number it overwhelms the cushion they started off yet.
SOOO...the multi-trillion dollar question is....Do you just wipe these teams out, wipe out the contracts and start over with new teams but with new names, new statdiums, new uniforms, etc???
Answer: Absolutely NOT.

I think nationalizing the banks will destroy the whole system. These economists don't seem to realize human beings interact with the markets. The fallout and panic that would be caused Nationalizing any of the big banks cannot be measured. Forget about starting over, it would be a full scale mess.

Don't forget, the bankers are going to be the same before and after nationalization. The top few people may change but no one has proved in any case they are more to fault than anyone else(ahem Congress...this means you).

Nationalization is a terrible idea and will crush profit power ALL banks. Regional and smaller banks will be crushed by runs as people irrationally lump all banks togeter. The only option afterwards will be to recreate large banks.

Not sure why laws and regulations can't be put into place with the system already. Restarting is assanine on every level.

Either way it looks like we could be months from seeing it unfold. These economists better get their appearance fees while they can. They could soon be the people holding the bag for the next leg of the crisis they help create.

This isn't Sweden with 5 banks and sane citizens. This isn't 10,20,30, years ago with no internet and press and blogosphere intent on rumor-mongering and promiting failure as opposed to solving problems.

2009 Mar 24 09:21 PM

[Jason Rines (iThinkBig)]

Those were my thoughts as well. But I will give Mr. Delong a tad bit of credit. He has stated here publically at SA this is really an all or nothing gambit. Nothing meaning that if this fails in conjunction with the reinflation attempt (as part of the plan of course) the banks would be nationalized, unemployment would become 35% and we would have a banana republic for a decade.

Sorry, to be so frank but this last decade has been the biggest *ucking swindle ever perpetrated on a population in global history. If this is what being an American is, I am ashamed to call myself one.

To me the political side of the equation and the ramifications for the decision makers will likely extend beyond just being fired by the U.S. citizenship or being sued in a court of law.

On Mar 24 03:40 PM David Van Knapp wrote:

> Thanks to Brad and Felix...at least they tried to mount a discussion.
> Nice of Mark to drop in from his busy day.
>
> Brad DeLong should never be invited to one of these again...he was
> obviously distracted, treated the discussion as a joke, used in-phrases
> and obscure acronyms rather than trying to be understood, name-dropped,
> and dissed the heartland of the country. His contribution was less
> than zero, negative. It's difficult to see why he agreed to participate.

2009 Mar 24 09:57 PM

[Hari Seldon]

Why are we letting people (felix specifically) who hasn't read the term sheets talk about the program? I have a hard time taking him seriously if he isn't going to take the time to read all of the documents before opining on them.

To have missed the fact that CDO^2 are not covered under the plan is huge. This is where most of the problem is. The AAA mortgage securities should be OK (will not lose 100%) but a CDO^2 AAA backed by BBB is 100% loss already.

This is part of the systemic problem in this country. People are too lazy to take the time to truly understand things and still feel they are qualified to talk about them. It is a diservice to everyone to allow this.

2009 Mar 24 11:04 PM

[Hari Seldon]

Further, the self dealing clause is nonesense. If ten banks all collude to participate, then they can provide the 99% of the equity (9.9% each) and artificially inflate the prices by securing the underpriced debt. They shouldn't be allowed to participate at all. If you are selling assets, you should not be able to invest in the sale.

2009 Mar 24 11:08 PM

[Hari Seldon]

And James Kwak should stop talking about accounting. You can't just declare you are holding the asset to maturity and leave it at par. It still has to be tested for impairment.

Moderate inflation will not solve the default problem. People are assuming that inflation will create wage increases, which it may but only if it is out of control. Otherwise, inflation will kill the middle class through reduced purchasing power and you still have a housing problem.

The only worthwile question (comments from observer2 and BIG AI45 are quality) was "[Comment From Steven]
Still wondering why there has been no administration discussion of bank bondholders versus taxpayers in absorbing bank losses? At a minimum we are owed an explanation, don't you think?"

And it wasn't even answered except for "scared to do that." If we are throwing out any risk in bank senior, sub or preferred, then the government might as well fund it all and make the income. Anything less is a farce.

2009 Mar 24 11:20 PM

[The Daily Bail]

Hey Hari.

I am Steven from the chat.

Here's a link to my story about today's discussion.

dailybail.com/home/no-...

The only worthwile question (comments from observer2 and BIG AI45 are quality) was "[Comment From Steven]
Still wondering why there has been no administration discussion of bank bondholders versus taxpayers in absorbing bank losses? At a minimum we are owed an explanation, don't you think?"

2009 Mar 25 01:26 AM

[The Daily Bail]

To be honest, and not to impugn Brad Delong, but I thought he sounded like a shill for the Treasury.

I was a little upset by some of his comments. Especially when he asked Felix not to use the word 'dishonest' and instead 'creative'.

Damnit, Brad. Dishonest is the correct word.

I'm sorry but it's true.

Read my rebuke of Delong in this piece.

dailybail.com/home/the...

The Great Unclog of 2009: Who's Bringing The Industrial Strength Drano.

Steve

2009 Mar 25 01:30 AM