James K. Galbraith re: Geithner's Toxic Asset Plan: EXAMINE THE LOAN TAPES

[chill_wind]

Yes-- he is shouting.

James K. Galbraith Reponds to Geithner’s Toxic Asset Plan

By: James K. Galbraith Saturday March 21, 2009 8:47 am

I've just been reading the NYT report.

The central Treasury assumption, at least for public consumption, seems to be that the underlying mortgage loans will largely pay off, so that if the PPIP buys and holds, at an above-present-market price governed by auction, the government's loan to finance the purchase will not go bad.

Recovery rates on sub-prime residential mortgage-backed securities (RMBS) so far appear to belie this assumption. IndyMac lost $10.8 bn on a $15bn portfolio (and if you count the wipeout of equity, the total loss is about $12bn). That's an 80 percent loss. It's possible that recovery rates at other banks will be better, but how can we know? No one is examining the loan tapes.

The NYT article points out that pools of RMBS can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents -- either because they really think the loans will experience only a 40 percent loss rate, or because they fear that acknowledging market value will put them into insolvency. Which it might very well.

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.

more at link:

http://firedoglake.com/2009/03/21/james-k-galbraith-reponds-to-geithners-toxic-asset-plan/

[DJ13]

1. Jane Hamsher posted a response in the comments

Jane Hamsher March 21st, 2009 at 9:03 am
6

If I were a member of Congress, I would offer a resolution blocking Treasury from making the low-cost loans it expects to offer the PPIPs, until GAO or the FDIC has conducted an INDEPENDENT EXAMINATION OF THE LOAN TAPES underlying each class of securitized assets, and reported on the prevalence of missing documentation, misrepresentation, and signs of fraud. In the absence of a credible rating, this is the minimum due diligence that any private investor would require.

But this isn’t about true private investors and the creation of a legitimate market, is it? It’s about gambling for oligarchs with someone else’s money.

I think I do see what you’re driving at.

We’re screwed.

[leftchick]

9. yes we are

yet again tonight, Obama will reaffirm his faith in geithner, one of the crooks on his team.

it makes me sick,

[girl gone mad]

2. We have to stop this.

As Yves Smith says:

"I know we are all suffering from outrage fatigue, but this is a worthy target for your ire. I hope you find a productive outlet for it. "

Write and phone congress. Get in touch with the MSM. Treasury is currently engaging in illegal activity.

[jwirr]

4. For most of us the language is not such that we know what to write

or talk to our legislature about. I am reading all these things but not being an economist I am getting nothing so much as a headache.

When I read Paul Krugman or Robert Reich that is the question I want to ask them: What can I do about it? How do I say it?

[dixiegrrrrl]

7. What to do:

call White House number

202-456-1414 and ask to leave a message for President Obama.

What to say:

NO more loans, bailouts, buybacks of bad mortgages, bad debts, no more benefiting the big banks at the expense of the smaller banks.

Our government, our Congress has lost our trust and confidence, which can only be regained if All the ex- Goldman Sachs Treasury employees are replaced with people who are willing to work FOR the average American.
We have figured out th swindle and we want legal justice.

EOM....

[jwirr]

13. Thank you. Will do.

[chill_wind]

3. Maybe we need to get the TARP IG to look into it *before* this goes down for a change.

If not, why the fook do we even have one?


TARP IG: Learned Of AIG Bonuses After Their Payment
Dow Jones
March 19, 2009: 11:39 AM ET

http://money.cnn.com/news/newsfeeds/articles/djf500/200903191139DOWJONESDJONLINE000757_FORTUNE5.htm

[chill_wind]

5. .

[burythehatchet]

6. I'm reporting all you traitors! How dare you question the One.

[chill_wind]

8. Big question is-- will Geithner DO IT?

[leftchick]

10. go for it!

I get reported on every day! :hi:

[chill_wind]

12. Lol- and so be it. (I know bth is funnin' with me.)

Things have changed some in Washington, but not when it comes to the "culture" of Wall Street.

[leftchick]

11. Investor on Private Public Partnership: "One would have to be a criminal to participate in this

http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html


Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

It's just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You've also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.

[chill_wind]

14. So... did anybody put this to him yesterday?

eom