Geithner's Plan - Who Passed It?

Is that it, then? You know, the "Public Private Investor Partnership" that the Treasury Secretary introduced on Monday. Are we doing that?

The plan involves the Treasury, FDIC, and Federal Reserve putting hundreds of billions, perhaps more than a trillion dollars, at risk. That should require some sort of Congressional approval, right?

I remember the whole TARP debate last fall. I thought that was a terrible plan. I faxed my senators and representative several times, and urged them not to pass it. I was gratified, and for a brief moment optimistic, when the bill was initially rejected in the House. I felt like it was a miscarriage of democracy that Congressional leaders staged a do-over on that vote, reintroducing substantially the same plan and passing it just a few days later. That battle was lost, but this is a democracy and I am an engaged citizen. There would be other battles, I thought.

In my view, Geithner's PPIP includes two mechanisms intended to ensure that "private investors" offer substantially inflated bids for "legacy" assets, and the net cost of the plan will be comparable to that of TARP. I might be wrong about that, but I might be right. Much of the risk will be due to loan guarantees offered by the FDIC. Is there any legal basis for using the FDIC this way? Aren't the laws describing how the FDIC is and is not supposed to behave?

And isn't Congress supposed to have the power of the purse? A loan guarantee is a contingent liability, a cost in real terms. Can the US Treasury spend money without Congressional approval, as long as it promises to spend only if a coin flip comes up heads? That's exactly what the Geithner plan (along with the scandalous but already active "Temporary Liquidity Guarantee Program" program) does. Is that even Constitutional?

FDIC is a full-faith-and-credit agency of the Federal government. There's been a lot of commentary trying to explain the recently high CDS spreads on US sovereign debt. After all, wouldn't the government just print money to pay its debt rather than default? Well, here's a scenario: Suppose the FDIC's loan guarantees come badly acropper, putting taxpayers on the hook for hundreds of billions of dollars. Suppose FDIC is short the cash, and has to come to Congress for an allocation. Given that neither Congress nor the public ever signed on to all these guarantees of bank assets, and that in fact FDIC is behaving in a manner precisely contrary to the laws under which it is chartered, the level of anger might be high enough that the public might just say no. Welcome to the world of full-faith-and-credit default.

Maybe that's why Chris Dodd wants Congress to give the FDIC a $500B loan commitment. Maybe it explains the apparently limitless appropriation of "such sums as are necessary" to the FDIC that Justin Fox noticed in a proposed bill that would actually authorize these sorts of liability guarantees. (The bill would also authorize FDIC receiverships of systemically important non-banks — yay! But it leaves out the "least cost resolution" stuff from the traditional FDICIA, and would give the Treasury Secretary and the FDIC complete discretion over whether firms are to be taken over or just bailed out in any of a number of ways.)

It seems to me that committing hundreds of billions of taxpayer dollars should still be considered a serious business. It seems to me that if Congress wouldn't approve the Geithner plan, in a democracy, that ought to have some meaning, and not just get written off as populist outrage and then extralegally ignored.

So I'll ask again, who passed the Geithner plan? What deliberative assembly gave the plan a pass? What's that you say? The stock market went up by nearly 500 points when it was announced on Monday? Oh. I guess the buys have it, then.

Comments

[Dave Wrixon:]

Germany lost its democracy after the hyperinflation of the Weimar Republic. The same thing could easily happen in the US.

Every citizen need to be vigilant to that possibility and defend their freedom of speech to the utmost. I don't think Obama is the going to be that kind of threat, but precedents set now can be exploited later.

My fear is that the wave of racial support that helped bring him to power could turn negative. I am not saying that having a Black President is a bad thing, indeed quite the opposite. What I am saying is that a negative experience of Black President could be a very bad thing.

Mar 29 07:15 AM

[ArkansasAngie:]

The process is important.

The fatal flaw of the Bush imperial presidency -- You aren't in charge now.

Fiat legislation using fiat money leads to a fiat recovery.

Congress must do its job even if it means not getting re-elected. The trick is making the right thing to do for the country the right thing to do to get re-elected.

That's our job. If we don't do it, you can be sure no one else will either.

Mar 29 08:40 AM

[Chezfrederick:]

I support your point of view 100%

We heard all the administration's good words: disclosure, transparency, oversight and accountability. We liked them, and now we want to see them in practice. Is that too much to ask? If we may end up footing the bill, should we not be given the opportunity to voice our views (through congress)?

I realize that time may be of the essesnce, but the principles must be enforced, otherwise cynicism will take over and populist reactions will ensue. Neither the economy nor the market can afford shorcuts that backfire.

Mar 29 10:51 AM

[fedphucksfr...:]

The FDIC is supposed to exist to protect depositors, not badly-run banks.

Mar 29 11:26 AM

[remoran:]

We are so screwed. Obama's the Confidence Man, smooth talking, risk adverse. Killing the Fed is the only way out this mess, something more people are advocating but Obama lacks the courage to do it. 'Nuff said.

Mar 29 12:20 PM

[henarl:]

This is an issue of whose will and agenda should be paramount in our country; A small ruling clique of administrative appointees and bureaucrats, and an excessively empowered privately owned bank (the Fed), or the democratically elected representatives of the people (Congress). Whereas Congress is always reactively blowing in the wind and is mostly ineffective at quickly solving problems, conceding all powers to the executive branch, in the name of expediency, is moving away from democracy and towards dictatorship.

Mar 29 04:34 PM

[I am not a ...:]

henarl,your comments could almost be transposed into Australia. We are seeing the prime minister of our country becoming daily the puppet of the Chinese ( indeed our defence minister appears to have a more than propietarial relationship with someone described as a Chinese business woman,who is the daughter of a senior CP official ) .This has lead to us being subjected to Chinese propaganda on an epic scale including the funding of Prime minister Rudds 48 nillion dollar fiscal Stimulus package. The fact that Giethner and Rudd are shown on Australian news media in mutual backslapping displays gives me reason to worry about where the US is going with it's Stimulus package. Consider one fact,the last person Prime minister Rudd saw before his trip to the US was the Chinese minister for Propaganda...a wholly secret trip to China only revealed on the weekend. What will be the Future of the much cherished US -Australia ties if we are to become another Tibet,serving as cheap source of Ore for China? ...

Mar 29 05:55 PM

[gordon:]

from nakedcapitalism.com/"New Bailour is an Endrun Around Congress">
But, more worrying for me are the changes to the TALF program now operated by the Federal Reserve. It was originally created to increase lending by increasing liquid in the marketplace for new asset-backed securities. Not any more, according to the press release by the Treasury for The Public-Private Investment Program for Legacy Assets, it will fund legacy assets.

"To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery."


Willem Buiter has a word or two to say about this in a previous missive of his:

The legacy assets to be purchased by the two legs of the PPIP are legacy securities and legacy loans. The legacy securities are toxic assets. Toxic assets are assets whose value cannot be established with any reasonable degree of accuracy, because there are no liquid markets for them and because their complexity prevents too much faith being put in mark-to-model valuations.

The legacy loans, however, are just bad assets. They are plain vanilla household and commercial loans that have become impaired. Their value can be calculated quite readily by any reasonably competent banker. It is likely to be low relative to the notional or face value of the loan. That’s sad and too bad, but not a reason for getting the state involved through the PPIP.

By bundling toxic assets and bad assets, the Treasury muddles up price discovery issues and the recapitalisation of or subsidies to loss-making banks.


The long and short here?


1. None of this requires Congressional approval. The executive branch and the Fed are working in concert in ways that exclude the legislative branch entirely.

2. Changes in the TALF program demonstrate that the true purpose of TALF has now expanded from increasing liquidity to make new loans to helping banks get rid of so-called toxic assets.

3. The assets in question do NOT all suffer from poor market liquidity. For example, loans are held to maturity on bank balance sheets and are NOT marked to market. They present no writedown risk until the loans actually sour. So, they have not been a writedown problem to date. Clearly, the PPIP is helping banks by taking these assets off their hands.

Mar 29 07:17 PM

[madmilker:]

duh!
video.google.com/video...

Mar 29 09:18 PM

[Al-USA:]

Good article and good comments.

Clearly, we need a REAL party, a third party.

Mar 29 09:48 PM

[Al-USA:]

madmilker :

Thanks for the link on the REAL Obama. I already agreed he was not what he seemed, but it is also a good video for people who might not have given it the man much thought .

Mar 29 09:53 PM

[svkoho:]

what makes you think you live in a democracy? The Fed and Treasury are beyond any realistic control of anyone. They control Fiscal and monetary policy and the Fed and influence congressional elections and appointments and the creation of law. The Fed is basically an association of private bankers. You are correct in your article on almost all points. After the south sea credit collapse in England, a resolution was introduced in Parliament to have the bankers thrown into a sack filled with angry snakes and pitched into the Thames. Timmy, step over to this sack, would you please?

Mar 30 09:05 AM