Sunday, March 22, 2009

Heckuva job, Timmy!

Our country's view of smart has become interchangeable with complex. Instead of building a simple system that works we need to over think the problem and develop the most complex system possible. The more complex, the smarter the solution right? Not always. I think the latest treasury program (which I initially heard good buzz about) is an example of using bad data, flawed assumptions, and more of your money to reflate the next debt bubble.

In a nutshell here is the problem with the banks. They have assets that no one wants to buy and they think these assets are worth 60 cents on the dollar. There might be a real market for these assets at 20 or 30 cents on the dollar, but selling the assets at this price would cause another massive round of losses for the banks. The new Public/Private Investment Plan will make up the gap between what the market value for the assets is and what the banks would like to sell them for. This is another massive give-away to the banks. I've said for sometime that for all the praise of Sec. Geithner, I think he has a fatal faith in the banks. This allegiance to the banks is costing you billions.

Some of the best observations of the plan so far....

24/7 Wall St.
It may be the most complex set of programs in the history of the federal government.


The taxpayers exposure of these programs is significant for two reasons. The first is that the government will, in many cases, provide loans to private capital firms so that they can buy toxic assets. These will be “non-recourse” loans. If the value of the assets being purchased falls sharply, the government absorbs most of the losses beyond what private capital firms have invested to buy the assets.

The other potential problem is that private capital firms will have to negotiate with banks for the prices to buy toxic assets. If two parties cannot agree on price, what happens? The troubled paper could remain on bank balance sheets, which defeats that purpose of the entire set of programs, or, the government can “bridge” the difference by offering to offset the amount between what banks will take for toxic paper and what private equity will pay for them. That puts taxpayers at greater risk for losses. Sine the taxpayer has become the lender of last resort for the entire
financial and credit system bailout, that should come as no surprise.

From Paul Krugman - NY Times

In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

I'm not sure what Wall Street's take on this will be. Clearly it's a bad deal for taxpayers, the US government and frankly, capitalism as a whole. However, it seems like a sweetheart deal for the banks and so, their stocks could rise and the banks have been driving the markets over the last two weeks.

Cheers!

1 comment:

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