Geithner: My Plan for Bad Bank Assets (WSJ Op-Ed)

[TeamJordan23]

My Plan for Bad Bank Asset
The private sector will set prices. Taxpayers will share in any upside.

By TIMOTHY GEITHNER

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.

No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.

The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.
Getty Images

We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans.

Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features...

Continue Reading: http://online.wsj.com/article/SB123776536222709061.html

[Skink]

1. Isn't he such a great guy.

:pals:

[xchrom]

2. so we're really not going to break these bastards up and sell them off?

it almost seems unreal to me when i read it.

the tax payer will still be at risk at some point in all of this.

[uponit7771]

4. Yes, Bernanke is going to make sure of that a bank that's "to big to fail" is against all common...

...sense at this point and no one wants to be held hostage by the bastards.

The Bush admin let BoA, ShitiGroup and AIG to absorb as many regional banks as possible and that has done this country great harm

[democracy1st]

3. since when did a democratic official start writing op ed's for the WSJ ?

[uponit7771]

5. When there needed to be clear information communicated, Geithner hasn't been seen to be all that

...detailed ...his first "announcement" wasn't a good one IMHO...kinda left people hanging in a time of uncertainty.

This is an improvement no doubt

[FrenchieCat]

6. Once we finally got some who could write.

[TeamJordan23]

7. Obama and Clinton have also written Op-Eds in the WSJ before. nm

[Uzybone]

8. Geez, you must be new to this

or reaching for straws to bash Geithner with.

[FrenchieCat]

9. No one wants to admit that Barack Obama is staking his presidency on this....

and he needs to be allowed to get it done, without the crying in the background by those with all of the answers until they don't have the answers.

Obama has to take responsibility...so at least he should have a choice, and not just do what the mob decides; a mob of which half don't have a fucking idea as to what they are talking about...but like to repeat things they heard that they kind of understood, but not really.

Strange how sometimes ignorance breeds arrogance.
Or is that the other way around?

[BlooInBloo]

10. You're kidding, right?

[beachmom]

56. Since ... forever.

[usregimechange]

11. kick

[BlooInBloo]

12. For all the talk on DU, it's rather amazing that a kick was necessary.

[Sarah Ibarruri]

13. He is SUCH an ass! Listen to this!

"No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk."

UH NOT EXACTLY, TIMMY. As a nation we were CHEATED by people like you, and the crooked and deregulated (deregulated by the Repukes, who else was it going to be?) financial system, came up with bullshit financial instruments to fool us into spending our money so they could pocket it stash it in offshore banks, then say, "Oh how sad! Things have gone badly for you suckers!"

[BlooInBloo]

14. (facepalm)

[girl gone mad]

15. It's all a bit too ironic, considering that he's asking us to..

take on even more enormous levels of risk with this proposal.

[Sarah Ibarruri]

16. I'll bet anyone who knows who he is wants to take a punch at him

He's an anus. Obama needs to dismiss the a-h.

[FrenchieCat]

18. Ok. But what do you think of the plan?

Should we do a combination program where we attempt to attract and maintain investors and stop the bleeding, set up a conservatorship/government system to deal with the failing banks, and implement a strict regulatory framework that would extent to any foreign activity involved with American financial institutions, or not. If not, why not? What are the draw backs, and what would be a better way to go, and why would that way be better?

[BlooInBloo]

19. The person can't say anything until Krugman does...

At which point the person will simply say "I'm certain Krugman is right!!!".

:rofl:

[alcibiades_mystery]

21. This is what crowd psychologists would call the "milling stage"

They're waiting for the reference signal that would set the mob upon its target.

:rofl:

[BlooInBloo]

22. A perfectly serviceable term.

[Sarah Ibarruri]

20. (sigh) I'll be perfectly honest....

I'm like a person that walked into the lobby of her condo building and tripped over a dead body. I'm so traumatized by the dead body, I can't even find the frikkin' cell phone to call the police and I'm just standing there in shock.

I have no idea how to fix the F'd up MESS they've created! I mean, should we let all these corporations they bled dry, die and allow our economy be flushed down the toilet? Should we bail out these corporations? Should we find ways to throw all these a-hs in prison, even if it's just on tax evasion? I have no clue. Right now these evil a-hs that caused this, have this country on its knees, helpless, and starving. How does one save it?

[FrenchieCat]

25. I understand the frustration, as I am feeling it myself.

However, we must keep things in perspective, and understand a couple of facts.

1. On November 4th we elected Barack Obama as President.
a) he has staked his presidency on the recovery of our economy.

2. Barack Obama is a capitalist.
a) He is not a socialist as has been rumored by the GOP.
b) He is not about to become a socialist, no matter how much Mr. Krugman insists that he should.

3. The President chose his cabinet members and appointed his White House economic team.
a) The cabinet members were confirmed.
b) The economic team is short handed, and they have been working on this night and day to make up the slack.
c) Geithner and Summers were chosen by the Prez for what they know about the financial system, both nationally and globally. They have the type of knowledge and history to understands all of the intricacies of the system, and he has confidence in them. They serve at the pleasure of the President.

4. Barack Obama has listened to and studied the various options available to him, and has to decide which is the best alternative in order to return the ecomomy to a place of strength, based on a situation that has not real equal in the history of mankind (and no, The U.S. is not Sweden). Again, he has staked his presidency on making the right choice. Not the most expensive, not the easiest, not the cheapest, not the most complicated, but the best in his estimation according to all that he knows.

5. Barack Obama is now presenting his plan that he has chosen....although my understanding is that there are more parts not yet announced.

6. Barack Obama must be given the chance to implement his chosen plan without people who don't truly understand exactly what is going on due to their limited understanding of financial systems and what it takes to fix them yelling and shouting about money.

There is a sad thing going on around here that has to do with people not understanding that theories are just that, and that none of them are fool proof, and that each has drawbacks. What we want to be sure to avoid, in order to be fair to the new President, is not jump on a bandwagon and claim absolute knowledge of what is and what isn't.

7. If the economy has not recovered in a way acceptable to voters, on Election Night 2012, we will let Obama know.

In otherwords, we have to be reasonable and studied.

Paul Krugman is one of many economists....all who have their own theory, some are the same and some are not. Some, if not all of the theories could work, and/or some may have unintended consequences that have not been foreseen. Since they are not accountable for the results of their theory if it is implemented by someone else, they can only opine.

I think it is good to put ideas out there, and I think a lot of that has been going on.

However, at some point the debate has to end in reference to this specific subject, and the plan chosen by the President has to be allowed to work, or not.

And at some point, it is true, they can do a great disservice to this President, because they refuse to conceed (think Norm Coleman) and allow the President to be the President.

Folks can scream "It's my money" all they want, but since we are operating in deficits, it is really the Chinese's money. Obama has promised to cut those deficits, and so we will have to see about that as well.

What I can tell you is this; there is not one right answer. But regardless if some like it or not, we are a capitalistic country, and Barack Obama will not turn it into a socialistic one. Those who want that, shouldn't hold their breath. It ain't gonna happen. So the next time there is an election, those folks should vote for a socialist.....and then that person can nationalize the banks on a dime, no hesitation.

Till then.

[Sarah Ibarruri]

57. You're right. And basically, Republicans have destroyed this country

They left the doors wide open, deregulating everything so these people could cheat to their heart's content. Leaving the financial markets free to get away with theft is not all that Republicans did. They also deregulated everything else, causing generalized economic problems in every economic area.

If this is capitalism, we need to change the country so it is no longer capitalistic.

[earcandle]

42. good questions

[earcandle]

41. Yep! THanks for not being a coward in the face of formality.

When the formal structure is corrupt,
the only thing you can count on is the infrastructure. 

[Median Democrat]

17. Well, I'll Read This, But Can't Help But Ask, The WSJ?

The WSJ and its cheer leading of Reaganomics/Bush-o-nomics helped get us in this mess, and they have already blamed Obama for the recession, so I do hope that this article is not an exclusive to the WSJ.

[LittleBlue]

23. Fraud

"Proving a market which does not now exist..."

Hmmm, yeah, of course swindlers will love this because we (the taxpayer) are putting up ~90% of the capital, while the private sector puts up less than 10%.

What a fucking joke.

[BlooInBloo]

24. And we (the taxpayer) receive ~90% of the equity profits.

[LittleBlue]

26. Assuming there are profits to be had

And indeed, what will we be paying for these gems? Oh yeah, waaaay above market values.

Payment above market value is either a result of stupidity, or swindling, or both. In this case, both.

[BlooInBloo]

29. (shrug) And that's the nub of the debate, instantiated by Krugman/Delong....

If you know *for certainty* the true value of the securities, please don't keep it a secret.

:rofl:


EDIT: Since Krugman and Delong both acknowledge they don't know for certain. They're just betting differently.

[LittleBlue]

30. LOL "true value"

What the hell does that mean? There is no such thing. It is a value above fair market value, aka charitable donations to corporations.

Fair market value, in respect to purchasing things, is everything. Some fraudulently determined value is nothing.

[BlooInBloo]

31. Oh boy.

[LittleBlue]

32. Care to elaborate?

Or will a snarky reply substitute for knowledge?

I can wait. :popcorn:

[FrenchieCat]

27. What's your plan again?

[LittleBlue]

28. Nationalization

at a cost of a modest $400 billion, at most.

[FrenchieCat]

33. You realize that Barack Obama is not a Socialist, right?

and that America is not Sweden.

Please tell me how your plan works.
Also let me know if there are any downsides,
to nationalizing our banks, or if it is risk free.

I'm listening.

[LittleBlue]

34. The investment risk is the total capital invested

That is true of any purchase.

Labels such as "socialist" is superfluous.

[FrenchieCat]

35. There are other risks involved here.....

and you must know that.

And labels are what they are.

It is for sure that President Obama stated clearly that he is not a Socialist.
And so I'm not surprised that he wouldn't be the First President that nationalized the banks
in the history books. Being the first Black President is more than enough I'm sure.

I believe that his plan can and will work....and I respect him enough that since I voted for him,
I will let the man do his thing. If you don't want to vote for him next time around, be my guest.
That's how things work in a democracy. Everyone has their say on a policy issue, and then a decision is made by the individual that we collectively elected to make those decisions. As long as what he is choosing to do is not against the law, isn't a facist action, and is done in good will to simply deal with the issue of stabilizing our financial systems as we elected him to do, that where I am.

You can go on and be upset and smear him...however, at some point you become part of the problem, not part of the solution.

Up next is the Budget. What do you think about it?

[LittleBlue]

36. It's a nice sentiment, much of which I share.

But again, what risk? There is far less risk and capital invested in a nationalization plan than a zombie banks scheme.

I'm on here because there is a hell of a lot of disinformation being put out against nationalization. Look at this poor soul above named BooInBloo: he makes snarky replies, but when challenged has no clue about which he speaks.

[FrenchieCat]

37. The risk that I am talking about are international in scope

and political in ramification.

Who is responsible to pay the debtors in your nationalization scheme?

[LittleBlue]

38. The corporations

They are a separate legal entity; the owners are never responsible for the corporation's debt, anymore than a mother is responsible for a child's due to the fact that she birthed the child.

[FrenchieCat]

39. We would be responsible.......

you are sticking to the lawyer's argument,
I am talking as a practical matter as it relates to our foreign relations.

You know that United States companies is who caused this mess, right?
and you know that foreign countries have been affected.
Yet you believe that the government could nationalize financial institutions,
and not be held responsible (I'm not speaking about legalities here)?
and then go and borrow some more money from foreign countries to finance our current deficit?

[LittleBlue]

40. Not at all

Do you know how irregular it would be to pay for a corporation's debts? This is unheard of in business. Any businessperson would look at such a notion with confusion, since it is utterly alien to the world of big business.

This notion that we would be taking on the debts of the company is a nonsensical invention, unheard of before in the world of business or law.

[Frank Booth]

44. That's not true at all, but I have a feeling it's not worth explaining why.

While you're at it, can you please explain to me how nationalization will only cost $400 billion, and has a 100% chance of success? Thanks.

[LittleBlue]

46. Well, I don't claim it has a 100% chance of success

but it is certainly FAR less costly than what we've spent so far. You can go to Yahoo Finance and find the total market cap (the value of all the common shares outstanding) of the top troubled banks.

For instance, Citi (largest bank by assets in the world) could be purchased for a mere $13 billion.

http://finance.yahoo.com/q?s=c

Now go through the top 10 banks in the country (the top four amount to ~60% of banking activity), and you'll see it is far below $400 billion.

[SanchoPanza]

51. What do you call subsidized private risk?

Socialism, like capitalism, tends to have a lot of gradations.

[CTLawGuy]

49. and would the Blue Dogs in the house go for that?

would Specter, Collins or Snowe? How about Evan Bayh's gang of 15?

[SanchoPanza]

52. The Problems with Nationalization

Or receivership, if you like, is that there is a good chance that corporate liabilities in these securities is so great that they couldn't possibly cover all the debts. At least not all the debts to both foreign and domestic creditors. That leaves the government as the practical guarantor, and I seriously doubt you'll find much support in Congress for the repayment of debts to foreign creditors before domestic ones.

Some of the countries in question are facing much more severe crises because of this. Iceland, Spain, Ireland, etc. Unless an international framework is adopted for the larger transnational operators, you could trigger regional depressions that could last a decade or more. And if the inability of the EU to come to a workable consensus is any indicator, you most likely will not get that framework.

Of course, if the liabilities are so great that nationalization isn't workable, then Geithner's plan isn't going to work all that well either.

[earcandle]

43. safe havens

[chill_wind]

45. Show us your good faith, Mr. Geithner. EXAMINE THE LOAN TAPES.

Did he say he will do that? I can't read the full page at WSJ (some ungodly junk on there freezes up my firefox)
If he can but chooses not to, that will be very meaningful.

James Galbraith:

The way to find out who is right is to EXAMINE THE LOAN TAPES. An independent examination of the underlying loan tapes -- and comparison to the IndyMac portfolio -- would help determine whether these loans or derivatives based on them have any right to be marketed in an open securities market, and any serious prospect of being paid over time at rates approaching 60 cents on the dollar, rather than 30 cents or less.

(snip)

If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x61152

http://firedoglake.com/2009/03/21/james-k-galbraith-reponds-to-geithners-toxic-asset-plan/
By: James K. Galbraith Saturday March 21, 2009 8:47 am

[SanchoPanza]

53. Due Diligence. How Quaint.

Galbraith pretty much underscores the need for proper asset valuation. Why Fed/Treasury keeps dithering about on this is really beyond my ken. Part of me suspects that they and the FDIC don't have the financing or the personnel to do it. But if that's the case, the prospect of them managing this new plan without allowing systemic moral hazard to result from all these non-recourse loans to hedge fund shops goes from being very unnerving to inducing a sweat-drenched night terror.

I understand why the private parties involved don't want it. These folks built their inflatable fortunes by passing astronomical amounts of risk on to other people. It makes sense for them to avoid any public assessment of their billion dollar pyramid scheme.

[AllentownJake]

47. This guy soooo needs to go.

[alcibiades_mystery]

48. Why?

[chill_wind]

54. For one small thing, Sen Levin had to f*#*ing threaten him with a subpoena

to get information out of him about our goddam money. You know-- transparency and all that.

And maybe people might want to read up a little more on his record as a Fed watchdog in general.

Like, how Citigroup Unraveled Under Geithner's Watch.

And how we should be asking how come Citi got $25 billion meant for 'healthy banks'.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=4979094

And maybe we should be asking how come now here comes Citi CE Lewis Alexander to his Treasury

Citi--- which has booked a total of more than $37 billion in net losses in the last quarter.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x61159#61208

For just a couple starters.

[SanchoPanza]

50. Personally....

I'd rather see the systemic fixes Geithner hinted at toward the end before I make any big conclusions. Particularly with respect to the entity being constructed to better manage failures of excessively large companies. Stopping the bleeding is one thing, but a lot of people (myself included) are going to want to know the regulatory structure that's supposed to prevent this from happening in the future. Personally, after everything that's transpired up until now, the repeal of Gramm-Leach-Bliley is the absolute least I expect.

As for the plan itself, there are some things that beg a few important questions, mostly dealing with the lack of asset valuation. I have serious doubts that this Public/Private plan will get the job done, no matter how much the Fed and FDIC back the investments, since the fear that these assets are generally undervalued will not go away until some proper asset valuation gets going. The stress tests the government is requiring now simply aren't enough. Problem is, I don't even think the FDIC has the statutory authority to deal with it, but I could be wrong. Either way, I seriously doubt they have the capacity at this point.

I bet a lot of people at Treasury are starting to feel like an elephant just shit all over their house and the only options they have to clean it up are their bare left hand or their bare right hand.

[high density]

55. Sounds fine to me

Geithner can't predict the future and neither can Krugman.