Posted on 03/23/2009 7:08:47 PM PDT by genghis
The Geithner Plan [David Freddoso]
What to make of Treasury Secretary Tim Geithner's op-ed today in the Wall Street Journal, and his plan to save the financial system through a Public-Private Investment Program? Rep. Scott Garrett (R, N.J.), one of the few members of the House Banking Committee who really understands the issues involved and asks pertinent questions during hearings, told me that he has a few concerns with it. Among them:
1) Is a $500 billion to $1 trillion plan large enough to restore confidence for investors, when the size of the problem here is greater than $2 trillion? And what if the worldwide problem is several times as large? What impact does the global market for toxic assets have on the ones we're buying here?
2) Geithner says nothing in his op-ed about the issue of mark-to-market, and whether some kind of measures will be taken when the PPIP purchases mortgage-backed securities to ensure that it does not have a ripple effect. When the purchases are made, will the newly established (and lower) value of such assets suddenly burn huge holes in the balance sheets of institutions that do not or cannot take part in this round of the bailout? "It probably would have been good if he said something in that op-ed about addressing mark-to-market at the same time."
3) While advocating provisions that prevent abusive use of government bailout money — for huge bonuses, for example — Geithner offers this cautionary note:
These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.
With Congress acting out of rage and haste (and a desire on Democrats' part to cover their rear-ends) to pass the 90 percent AIG bonus tax, Garrett wondered whether they might be undermining what Treasury is trying to do, creating a huge disincentive for marginal institutions considering participation in the new bank bailout. (This concern is probably reflected in President Obama's apparent coolness toward the AIG tax.)
Meanwhile, House Minority Whip Eric Cantor (R, Va.) offers up this statement in opposition, advocating instead the use of the insurance model that some Republicans had offered up as an alternative to TARP:
[T]he plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer. In its current form, Secretary Geithner’s plan is a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it. Six months after Congress debated the first TARP, it is inexcusable that taxpayers still have not been told their true exposure.”
I don’t think it will work, at least not as intended.
The housing market is still overpriced. Individuals are refusing to drop prices and waiting it out or renting out until the market picks up. Developers seem to be doing that too. A few years ago, many of the apartment complexes were converting to (overpriced) condos. Now, all the condos that were sitting empty have converted to apartments.
And banks? They’re bidding on their own property at foreclosure auctions. They refuse to sell for less than the mortgage price.
Is the problem that no one is willing to buy the toxic assets? Or is the problem that banks aren’t willing to sell them at a loss?
Here is what I do see happening:
CitiBank (or their shell investment company) puts up $50 million and gets $950 million in matching funds from the government. Then they buy $1 billion (based on 2007 bubble prices) of their own junk, which is of course, totally worthless. Oops.
Nothing is going to happen.
It is about the only thing the govt. could do to try and break the log jam at the banks and financial institutions.
Currently, these banks cannot raise any capital because the mark to market rule caused their values to plummet, in some cases down to zero.
Yes, they could cancel the mark to market rule, but they still would be billions and trillions in debt with little chance of selling the mortgage backed asssets at anywhere near what they paid.
doing nothing would just cause the market to sit stagnent for another two or three years, maybe longer.
Rep. Scott Garrett ping
[What happens when the really smart sharks go after this with a fine tooth comb? I am still shocked the market responded as it did. ]
Don’t be shocked, I’ve been expecting a dead cat bounce maybe to 8000 or more. A lot of traders are Democrats who haven’t realized that business is NOT as usual and we are screwed on so many levels that a big crash is inevitable. Sell now and buy closer to 5000
If banks sell this distressed assets at say .20 or .30 on the dollar, they will have to immediately realize the loss.
These banks don’t want to sell their “decent” assets at firesale prices. And their crap is just that...crap.
So the only way the banks are “helped” is if this investor/taxpayer partnership OVERPAYS for said crap.
Who does that help?
i recently bought a triplex for 180k.
It sold for 450 in 06. It had a 370 first and a 70 second. these are the so called assets these banks have. It is just fantasy, 30 cents on the dollar seems about right. combine this with market accounting and kaboomb. the jigis up.
the triplex is great, rents for 2600/ month.
The banks aren’t lending because balance sheets are messed up. it isn’t a credit crisis, it is a balance sheet problem. You do not lend when people are losing 20 trillion dollars.
**** I think I figured out this Geithner plan?? I’ll summarize it as I see it.
Its the biggest wealth transfer to ever occur EVER !!! The govt (taxpayer) is going to buy (overpay) these toxic assets so that the banks can remove the liabilities from their books and become solvent again. So, the people (banks) that created these toxic assets get paid full price for them. Most of these toxic assets are work zilch and the govt (Fed Reserve) loses its investment(taxpayer money.) The amount of taxpayer money Obama and Geithner are about to spend (blow) will make AIG bonuses seem like chump change. Does anybody here even care what the heck is about to happen. Liberals and Obama lovers are bantering and name calling over the AIG bonuses while their fearless leader(The Messiah) is about to reward the criminals with our tax dollars.
"China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund."
"In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.
The Feds put up 95% of the money and
Private parties like hedge funds and Goldman Sachs put up 5%
To buy these garbage assets
It is a Federal buyout with a fig leaf of private sector participation
This is absurd and puts the taxpayer on the hook for more bailouts
A lot of us care what the heck is about to happen UgLA. It is happening already. Notice how no one is talking about the Government’s Toxic Assets, the unfunded liability for entitlements that are about to roll through the Demographics? Retirement, for anyone born between 1946 and 1966, with the biggest part of that Tsunami around 1957, has been canceled. And on a MORE somber note, lives are at stake, and more than a few Living Souls. Americans are expanding a Toxic Social Institution devoted completely to self-maintenance, and things are going to get a lot worse before enough people shake off their unconscious states of Suggestion and wake up. It’s morning in America, and some are still drinking, others are hungover and a bunch are pulling the covers back over their heads and rolling over.
It's not that investors are going to be clamboring to buy these assets.
Rather, the market likes the plan because it allows banks and financial institutions to take these severely depressed financial instruments "off their books" ... and put them into a segregated clearing house, so to speak, where the govt act as a partner in selling them to private investors.
The accounting aspects of the plan, I believe, will allow banks to instantly replenish their holdings with fresh money which can (hopefully) be lent properly to creditworthy customers.
Understand, banks are ALREADY making money in the first quarter of 2009. But they are severely limited because their underlying holdings have 40/1 leveredged mortgage type assets dragging down their value.... dragging down their net worth, their portfolios, and thus they have little to no capital to work with.
Thus, businesses can't get the quick loans needed to spur commerce, etc.
Listen, I take a back seat to no one in despising Obama and Geithner. My mission in life is to see them driven from office in disgrace.
Yet, I am pragmatic enough to see that this plan (which was initially proposed last fall before Obama even got his grubby hands into it) has the potential to add confidence back into the stock and bond market.
Do I like the fact that Obama is gonna claim credit when in fact he deserves none? Nope.
Rest assured, Obama will make enough screw ups in the coming weeks. This new plan will not make him a hero. It will just help the stock markets gain some long needed strength.
The market jumped yesterday due to three things.
First, investors (and many in WashDC) finally realized yesterday that the Obama suicide health care plan and TAX hike plan, and even Cap & Trade is total lunacy and will probably never get proposed.
The Obama big universal health care plan is on life support, and likely will be terminated by Democrats THEMSELVES. Same with Obama's BIG tax hike plan.
Secondly, the stock and bonk market likes the (toxic asset) plan, I believe, simply because it will allow the banks and lending institutions to get these assets off the books, and into a clearing house so to speak where the govt (Treasury Dept) will partner in hawking them to private investors.
Thus, banks will be able to replenish their holdings with fresh untainted money, which can be lent hopefully to responsible creditworthy customers and businesses.
Thirdly, people are realizing that Obama has lost his credibility, and that the economy is doing OK despite Obama's attempt to create a crisis.
The adults will continue to do what they do in America.... run businesses... and Obama will be a gadfly who goes on Jay Leno and makes stupid comments and laughs at the economy.
......they could cancel the mark to market rule.....
If the rule is canceled, how will the assets be remarked?
One fact involved but not often noted is that it is only possible to establish the value of any specific asset at the time of sale. This means that the historical value has always been wrong at any given moment. If it is necessary to deal with a company on the basis of asset valuations, some evaluation must be made on the basis of all available information.
That is the definition of what the market does. Assets should be valued at the price of the last sale and leave the market to make an evaluation.
You cannot just get rid of a loan, someone has to buy this loan. I do not see private investors coming to buy them. If this was the case then we would not have had this problem to begin with.
The problem with mark to market is it forces banks to value real estate/properties based on what someone says those properties are worth at this exact current moment ... today.... when in fact many banks plan on keeping those mortgage investments for years or decades (or until maturity)
I saw a reasonable proposal that would allow banks to categorize their assets into two groups: ones they are going to keep for long term (10 years or until maturity) ---- and those which could be resold.
The bank would be required to declare legally whether or not they intended to keep properties to maturity (with penalties if they didn't)
Thus if the market today is lousy, the bank would not be forced to write down the value based on today's lousy market.
Many of these devalued assets in fact are still viable properties, where the 'owner' is making on-time payments and being responsible.
Also there is another proposal (I think) that would limit the downside accounting to 5% a year (or something like that) so as to prevent banks from having to go from 100% to 0% all at once.
Bottom line: it is extremely unlikely that real estate will drop in value forever, and thus why force these banks to value long term properties that way.
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