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The old bait and switch, again

Our own HughS has done an excellent job of outing the bait-and-switch aspect of the Geithner PPIP bank bail-out plan. Now, Mike at RortyBomb (who generally leans left-of-center on matters of politics) has written a lengthy explanation of exactly how the PIPP bait-and-switch will work. And the beauty of it is his analogy -- ENRON:

It is August, 2000. Let's say you are a trader for Enron. You know your energy in California is worth $50, and you also know the energy that Reliant Energy has is worth $50. You call your buddy up, the trader at Reliant, and make a deal. Happens all the time - you even have a nickname for it, The Daisy Chain Swap. You go to bid, and you bid $80 for Reliant's energy. Then you wait. If Reliant doesn't come through, you are screwed out a lot of money. And hey, isn't this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your energy - $80 from Reliant. You have each bid up each others assets and traded them. And now the government is screwed, because it has to pay you $80.


The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, let's get them to someone else who wants them. However Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid "for moving energy to relieve congestion, without actually moving any energy or relieving any congestion." And, it appears, that the large banks are gearing up to do just that; with the Geitner Death Star that they'll just be collecting a large fee to run them in a circle, without actually moving any of them off their collective books. For old time's sake, I hope they route their loan bids through Oregon and then Utah before putting them back right where they started.

No wonder the banking sector and the financial markets were excited about the plan. They make out like bandits, while the public sector (that's you and me, by the way) ends up eating the cost. It's also worth pointing out that our government (Democrats and Republicans) stood by twiddling their thumbs while Enron did this stuff. Heck, they even gave Enron more and more power to conduct unregulated energy trades (and in return, Enron gave more and more campaign and lobbying money) and no one grew indignant until the whole house of cards collapsed. Sound familiar?

Recently, the Obama Administration shopped around the idea of a bank restructuring plan similar to the one imposed by the government of Sweden in the early 1990's, following a real estate boom and subsequent market collapse that left Swedish banks holding a lot of devalued mortgages and noncollectable debts. But the Swedish Model was dependent upon the government working with banks to accurately re-value their assets and auction them at realistic market prices. It was also based on the assumption that the Swedish government would take a smaller role -- not a increasingly larger one -- in the management of banks after their books had been straightened out.

The Swedish Model was a success. The Geithner Model? Well, let's just say that no one other than bankers and Administration shills seems excited at this point.

More from Clusterstock:

Banks buying assets from each other to inflate their books has nothing to do with "price discovery" or any such nonsense. It's all about using taxpayer money to create bids that are higher than what the market currently prices those assets at. And if it turns out those bids were too high and the cash flows never materialize then, oh well, it's the taxpayer left holding the bag.

And this:

Look, the government's actions all revolve around one overriding strategy: Moving more and more of our private debt to the public ledger. That's it! There's nothing more to it. The bet is that the public balance sheet can withstand a lot more leverage before it busts, and that a delevered private sector can return to health.

Thus all these bailout efforts are meant to be gamed. If there were no gaming going on, the schemes wouldn't be living up to their full potential, because that would represent debt staying in the private sector.

Of course this strategy has drawbacks. For one thing, it's totally dishonest, because it's not being sold this way. It also is rewarding failure, maintaining a status quo that's proven to be unsustainable. And what's more, if Washington is wrong, and the public balance sheet can't withstand more leverage, the effects could be catastrophic.(emphasis added)


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Comments (12)

I consider it very interest... (Below threshold)

I consider it very interesting that there is much (broadly defined) bipartisan dissatisfaction with Geithner's plans. Conservatives don't like the meddling, and liberal economists like Paul Krugman (give him his due, he's smart and cares) don't like the favoring of the financial industry, propping them and not the little people etc. The start of a motley but fruitful, populist collaboration against the bipartisan Establishment?

Great piece.......... (Below threshold)

Great piece.......

Surprised? This is what happens when you give money to Democrat candidates like Chris Dodd.

Dodd took AIG exec's money and built in governmental protection to pay off his supporters. At least the AIG guys got their just reward when the public threw a fit and both Obama and Dodd had to shame them into returning bonus money. They got what they deserved.

Now the taxpayer is about to get fleeced again.

That's some kind of wonky b... (Below threshold)

That's some kind of wonky blog that dude has got over there. First I've ever heard of a "financial engineer", but the writing seems to fit the profile of how one might assume a financial engineer would think and express his/herself. Good link, Michael.

That is not an accurate des... (Below threshold)

That is not an accurate description of Death Star.

I realize that it's just quoted text but it's not accurate. Death Star was a completely legitimate trading strategy.

There was no fraud or conspiracy at Enron.

Isn't it fun creating crise... (Below threshold)

Isn't it fun creating crises? And they're so useful.

There was no fraud or co... (Below threshold)

There was no fraud or conspiracy at Enron.


Yep. Nothing hinky at all ... (Below threshold)

Yep. Nothing hinky at all at Enron. That why all of those investors and employees suddenly went broke, and rational competitors like Exelon that refused to follow the same strategies are sill alive.

No, actually, all the inves... (Below threshold)

No, actually, all the investors at Enron have been repaid; they were repaid within the first seven months of the collapse. Now they're being compensated AGAIN for things like bonuses that they didn't receive for 2001 (ironic, isn't it?)

Secondly, the reason Enron collapsed had nothing at all to do with the trading strategies; the trading organization was making money. What happened was the same thing that happened at Bear Stearns and Lehman's: there was a run on the bank caused by several things, including a deliberate attack on the stock and then the discovery of Andrew Fastow's theft. The irony there is that Fastow was stealing FROM Enron, not for Enron.

Yeah, as a resident of Kali... (Below threshold)

Yeah, as a resident of Kalifornia, I'd like to personally thank all my fellow citizens who voted for energy deregulation so that they could "save" money. The system was 'gamed' from day one. Just another benefit of our wonderful "progressive" legislature.

GarandFan (of the rifle?), ... (Below threshold)

GarandFan (of the rifle?), deregulation is not "progressive" it is a typically conservative approach. (Just consider the etymology.) Some Democrats have done it, that doesn't change the logical status of the thing itself.

How awful, people wanting t... (Below threshold)

How awful, people wanting to save money. Horrors.

ENRON was a big time enviro... (Below threshold)

ENRON was a big time enviromentalists supporter






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