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Geithner Bank Plan Continues Façade Of Potemkin Banks

Treasury Secretary Timothy Geithner's plan to fix the bank problem is coming into focus this weekend. Based on initial reports it appears the Obama administration is going to attempt a variation of the "bad bank" cum "private investor" approach that was employed during the Texas Savings and Loan meltdown twenty years ago. This is probably why Paul Krugman is so teed off today:

The Geithner plan has now been leaked in detail. It's exactly the plan that was widely analyzed -- and found wanting -- a couple of weeks ago. The zombie ideas have won.

....To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad -- I mean misunderstood -- assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

And,

But it's immediately obvious, if you think about it, that these funds will have skewed incentives. 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. Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

Krugman is exactly right (did I say that?). In fact this plan is every bit as much a moral hazard as the mortgage bailout plan because it fails to punish the parties that necessarily should accept the risk for participating in the upside of the credit excesses that preceded the crash: the stockholders and bondholders of the financial institutions that will be selling the assets under Geithner's plan. Without getting into the minutiae of bankruptcy and creditor law that has served this country well for over a hundred years it must be said that turning this well informed area of the law on its ear in a time like this is insane.

In Geithner's plan large banks and financial institutions will sell "toxic assets" to buyers that will pay for their purchases with what is essentially taxpayer dollars because the Obama administration proposes to lend the buyers the funds on a non recourse basis. Even my eight year old understands that the currency in this game is no different than the notes I handed her last night when we played Monopoly.

Tim Geithner is getting rolled by the banks on this. Tax payers are going to ultimately fund a scheme that will enrich the very guys that helped create this problem and the only thing standing between this proposed heist and déjà vu all over again is a Congress with a spine. It would be helpful if there was a Republican out there with the sense to see what this clueless administration is advocating, but I'm beginning to resign myself that it may be necessary to destroy the place in order to save it. Sigh....


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Comments (14)

"...it fails to punish...."... (Below threshold)
GarandFan:

"...it fails to punish...."

Yeah, that would be CONGRESS. Funny how they managed to divert the process.........

This financial clusterf*ck ... (Below threshold)
hyperbolist:

This financial clusterf*ck really should be uniting everybody with half a brain against Tim Geithner and, insofar as he's giving him a vote of confidence, Barack Obama. It's no surprise to me that you agree with Krugman, as he has been a vocal and credible critic of setting giant piles of taxpayer money on fire as opposed to wiping out shareholders and temporarily nationalising financial institutions that are "too big to fail".

"little capital but lot... (Below threshold)
marc:

"little capital but lots of government-guaranteed liabilities"

Gee, where have I heard a variation on that?

Oh Yeah... fanny and freddie mac.

The only difference is instead of "guaranteed liabilities" it was guaranteed financial support for other banks liabilities and piss-poor lending policies.

<a href="http://strata-sphe... (Below threshold)
marc:

AJ says it best:

Mr. Krugman and I disagree on the source of the problem and the solutions (and just about everything else in life too). But here we must agree. This is the same risky liberal scheme that got us into this mess, where unscrupulous investors get win-win deals which line their pockets and we, the hard working taxpayers, have to foot the bill to cover their missteps, while they get to keep any rewards. Is it too soon to call for impeachment on the grounds of incompetence? Can we trust the Dem Congress to avoid this disaster?

Can we trust the Dem Congre... (Below threshold)
GarandFan:

Can we trust the Dem Congress to avoid this disaster?

Hahahahahahahahahaha! NO.

Hyper"This financi... (Below threshold)
retired miltiary:

Hyper

"This financial clusterf*ck really should be uniting everybody with half a brain against Tim Geithner "

All those with half a brain or more voted for McCain. We are already against Geithner and Obama.

The Obamabots appear to hav... (Below threshold)
GarandFan:

The Obamabots appear to have taken the day off. I was expecting at least one tearful post "to leave Timmy alone!"

Helicopter Ben Bernanke is ... (Below threshold)

Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!

http://fargoneworld.blogspot.com

It has been almost three mo... (Below threshold)
WorldCitizen:

It has been almost three months already. Why isn't everything fixed???

Throw the bums out. Lets have a recall!!!

As I recall, conser... (Below threshold)
Steve Crickmore:

As I recall, conservative supply sider HughS liked Geithner the most of Obama's cabinet picks, when he was chosen. He gave Geithner a glowing A+. That had me worried.

He's got an F right now, St... (Below threshold)

He's got an F right now, Steve.

To borrow a phrase from that ubiquitous UPS commercial, "Take him straight to detention".

It seems to me that Geithne... (Below threshold)
Steve Crickmore:

It seems to me that Geithner has a very difficult.. well impossible task...On the one hand, he is being criticized by the right, for advocating too much government interference/ infusion of public money /executive pay caps etc. and then on the left, (more my point of view), of not being radical enough. Mark Kleiman sums up that point of view:

The decision to put Tim Geithner at the Fed was a decision to try to cooperate with the financial-services industry in working out the problems; Geithner was their guy, which is why his tax problems were survivable when Daschle's weren't. I'm not saying that was a bad strategy. But now the Wall Street folks have made it clear that they're in it for whatever loot they can carry away, and it's time, in the words of Michael Corleone, to get rid of the peacetime consigliere and hire a wartime consigliere.

"The decision to put Tim... (Below threshold)
Oyster:

"The decision to put Tim Geithner at the Fed was a decision to try to cooperate with the financial-services industry in working out the problems;..."

Sure. Better that he worked with Obama's guys. Guys like Franklin Raines, Jim Johnson, etc. What do they care? They got theirs.

Here's how your quoted paragraph should look to me:
The decision to put Barack Obama in the White House was a decision to try to initiate a new era in politics - bi-partisan cooperation - in working out the problems; Barack Obama was their guy, which is why his Ayers/Rezko/Wright/ACORN problems were survivable when McCain's problems weren't. But now the special interest folks who boosted him have made it clear that they're in it for whatever money for their social projects they can carry away,...

Need I go on?

In Geithner's defense, he's... (Below threshold)
Oyster:

In Geithner's defense, he's tried to offer a better alternative than this 90% tax issue. But people are screaming for blood. They don't care who they get it from.




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