Public/Private Taxpayer Pilfer Program: Social Implications of Geithner's Plan

Includes: BAC, C, JPM, KBE, UBS, WFC
by: Envoy Global Research

While there has been much discussion over the potential economic outcome of Geithner’s new toxic asset plan, there has been little attention paid to the crafty use of new terminology to justify the largest theft in the history of capitalism. One wonders not about the short-term economic effects of such a plan, but rather the long-term social implications of this brazen attempt by the government to pull the wool over the eyes of a myriad of hard-working, entrepreneurial, smart, and risk-taking Americans who do not labor in the financial industry, and are faced with a true economic crisis.

In case you missed it, I highly recommend you read up on the two-part plan at the Treasury website. Here is the link. I think you’ll be fascinated by the ingenuous use of new words to justify questionable actions and whitewash the key figures whose activities have caused this crisis.

Toxic Has Morphed into Legacy

Notice, for example, how the government has deftly redefined the debate from a discussion over toxic assets and a financial crisis, to one of troubled legacy loans, and legacy securities. Legacy presumably has a much more positive ring to it than toxic or, better yet, liar loans, the more apt description for many of these securities.

Surely legacy engenders emotions of pity, as opposed to outrage, for the unfortunate situation of banks who find themselves in the terrible situation of having to hold these loans after they have already cashed in to the tune of trillions, when many of these loans were first originated.

But, even though a bank and its employees have already profited handsomely from these troubled loans, rest assured that the government stands ready to provide a second payout under the legacy loan program, the first part of the Geithner plan. This program is supposed to, “cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets,” via public/private partnership.

With Infinite Capital, Who Needs a 7% Partner?

As explained in the press release, on a sample $84 purchase price, a private investor partner must put up $6, or 7%, of the total, while the government, via the FDIC and the Treasury, will fund the rest.

Leaving aside again the issue of whether this type of structure will actually work to clean up bank balance sheets (of course it will), and how easy it is for any idiot to game this type of program, the more poignant questions are:

  1. How exactly is this a partnership, if the private party is putting up 7% of the total capital, and assuming virtually no risk?
  2. Seeing that the government via the Fed and Treasury has the complete authority to readily print trillions of dollars no questions asked, providing the taxpayer with unlimited capital, one wonders why there is even a need for private capital? If the government thinks the assets should be removed from the banks balance sheets, why doesn’t the government itself buy the assets? Why is there a need for a partner?

If Government Employees Are So Stupid, What Does That Say About Our Treasury Secretary?

Anticipating these simple questions, the government has dutifully provided us with the following inane justification for the partnership:

But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.

One sincerely hopes that nobody from the government actually reads this passage, which must rank as the most public slight yet to the intellectual capabilities of government employees. Ironically, isn’t the Treasury Secretary himself and Bernanke, the head of the Fed, also government employees? Aren’t they the ones who actually wrote this plan? If in the role of government employees, they don’t have the intellectual capacity to not overpay for legacy loans, how on earth are we giving them the responsibility to actually run our economy? In reading this, it’s of course not surprising that Geithner has had a difficult time hiring more staff to work for the Treasury. Apparently, the entire intellectual brain trust of our nation resides with a bunch of gamblers on Wall Street.

The Least Risky Alternative: Pay the Market Price or Lower, Stupid

But don’t worry, in case you're as stupid as I am and can’t understand how not to overpay for complex assets that for two years already have challenged some of our best economic minds, and that only a combination of prophets and crooks could possibly value, some geniuses from some hedge funds are here to help for 7% . Sorry, I think I’ll pass and take on another whopping 7% of risk, and eliminate any worry of the overpaying risk, by taking the obvious, and least risky alternative, of simply paying the market price, or more appropriately lower than the market price, for these assets!

The Transfer of $1 Trillion for No Risk and No Economic Output

If after this most basic deconstruction of the Geithner plan, you’re tempted to delve into the second part of the program, the so-called Legacy Securities, we’ll save you the trouble. It’s full of the same nonsense as the first part and cloaked in similar misleading wording.

Pulling away the veil from the fancy terminology, one is forced to the following simple summary of Geithner’s program: the government is going to print and/or borrow (simply choose the term that rings better to you) another $1 trillion, and simply transfer the $1 trillion to businesses that take on virtually no quantifiable risk and provide no useful products/services in return.

Where does the government get this $1 trillion? Presumably it comes from taxpayers. But why would taxpayers give away $1 trillion to people who don’t take on any risk and provide no economic output? Obviously they won’t. Which is why they have not been asked to provide the $1 trillion. Instead, they are being told to give the $1 trillion or else? In other words, the taxpayer has been robbed.

If You Can’t Beat Em, Join Em: How Do We All Get in on Geithner’s Public/Private Taxpayer Pilfer Program?

But, now that we know that we’ve been fleeced, and there is nothing we can do about it, what’s the best way of joining in on this scheme.

Well first of all, it’s not entirely clear why any rational person can feel motivated any longer to produce anything real for the economy.

If certain companies and individuals can simply receive $1 trillion in free government aid for doing nothing but showing up at the doorstep and offering to buy piles of crap, then why should any company produce anything remotely useful to society? Everyone should just go into partnership with the government to buy crap assets. It requires no special skills, virtually no capital, no risk, and is completely guaranteed by the government. Can there be a better business?

So if you’re thinking of getting in on that new construction project, think again. There is a simpler and more profitable opportunity available: Buying crap assets.

If you’re thinking of operating a solar energy panel manufacturing business, think again. Times are tough. Close up shop and get in on the risk-free Geithner program.

You see, if Rewarding Fraud and Failure, Manipulating Asset Prices, and Printing Money to Provide Free Capital to Businesses that Take No Risk and Provide No Economic Output are the accepted solutions to our economic crisis, then it’s fair to say that the next logical steps are the cessation of business activity in the country. Anyone who engages in a real non-financial business attempting to make a profit is surely a fool or a masochist.

The True Foundation of Capitalism

The goal of capitalism is the pursuit of profit by individuals who take a risk, both financial and personal, to develop and provide real products and services to society. It encourages fiscal discipline, and the calculation of fair, not inflated, assets values based upon a careful analysis of expected future cash-flows.

Any program that shakes these foundations of capitalism and seeks to: provide profit without risk, reward subsidies in the event of abysmal failure and fraud, and set inflated pricing for garbage assets, will surely ruin capitalism and ultimately render all financial asset values meaningless. In so doing it returns us to a pre-capitalist society replete with massive poverty, income inequality, and its associated enormous social ills.

How Can We Get Out of This Mess? Finance as a Means, Not an End

Ultimately, the whole problem with solutions to the financial crisis to date, is that the key powers in the government, namely Bernanke and Geithner, labor under the false notion that the financial economy drives the real production economy. But, nothing could be farther from the truth.

While, it’s true that the financial economy has grown so enormous, with its complex derivatives and imaginary financial products, so as to completely dwarf the world GDP, this situation is highly anomalous and particularly dangerous as we’ve recently experienced.

Throughout the history of capitalism, finance was used to support the production economy, not usurp it. In that role of support, finance plays a crucial role in driving innovation forward to the benefit of society. But, finance is merely a means, not an end. Banks do not create the economy, the economy creates the banks!

If finance becomes the end, as is now the case, then finance by its nature becomes divorced from reality and implodes on itself.

I sincerely hope that at least someone in the government wakes up and puts a stop to these reckless financial bailouts and programs. It is high time for the government to support a return to real capitalism and instead of expanding finance, shrink it back to its prior, and still highly useful and profitable, role of providing support to entrepreneurs and larger enterprises, in their quest to build businesses that provide real products and services.

It is time to reign in the Fed and the Treasury, both of whom now operate above the law, and fail to uphold the key tenets of a democratic society, by rewarding those few who do nothing, to the detriment of the many who do everything.