Tuesday, March 24, 2009

The Geithner Plan

If you watch the stock market, you probably noticed a huge gain yesterday.  I believe it was due to a combination of two things.  First was better than expected news about the housing market.  [Side note: tell me again why anyone pays attention to these experts, since they're always wrong??]  Secondly, Tim "tax cheat" Geithner finally offered a plan to address the core of the current financial mess: banks' toxic assets.  Here's the plan itself, but I'll try to give you a nutshell version below.

The basic idea is that the federal government wants to partner with a handful of big hedge fund type companies to start buying the toxic assets to get them off banks' books to free up lending and credit.  Taxpayer money would guarantee about 95% of the funding to buy this bad debt, and the rest would be private money.

If this sounds familiar, it should - this was the original plan that Hank Paulson put together for President Bush last fall.  The main problem with this plan is that no one really knows just how toxic these assets are, so there's no way to accurately price them.  On the one side, we'll have the sellers (banks holding the toxic assets) trying to get as much money as possible so they don't take the hit on their bottom line, and on the other side we'll have the government (with a small bit of private money) trying to pay as little as possible because they know most of the debt is bad but hoping that enough of it pulls through to still turn a profit.  The trick is to prevent a stalemate and get the two sides to meet in the middle, which will be extremely difficult.  In fact, this is precisely why Paulson and Co. originally ditched the idea - they thought it would be impossible to accomplish.  It will probably be even hard now, because the government will have to partner with the very same high-end Wall Street types that they've been targeting with punitive taxes like the 90% AIG tax and other Obama policies like increasing the capital gains tax.  Call me crazy, but it doesn't seem particularly likely that those guys will play very nice.  Of course, the dirty little secret is that most Wall Street leaders/rich guys are Democrats, so it's possible.

So, what are the potential results of the plan?  As I understand it, the American taxpayer -- as is depressingly typical -- will get screwed either way.  The only question is how hard.

If this plan doesn't work, it'll end up being another $1 trillion of debt foisted onto the American taxpayer.  At this point, I'm not sure that makes a whole heckuva lot of difference, but the principle is still at stake.  If the plan does work, the companies throwing in private money will make a killing, and the government will take the 'profits' that should go back to the American taxpayer and spend it on stupid crap for themselves like they always do.  For us measly taxpayers, it's pretty much a lose-lose, though I suppose a solid silver lining would be a theoretical unfreezing of normal lending throughout the banking industry.  But that's IF everything works.

Some other problems they'll have to overcome:
--- 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?

--- 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?

--- This is still trial-and-error. Apparently, Obama, Geithner, and crew have learned nothing after wasting trillions of taxpayer dollars, and they're back to Paulson's square one.  This does not inspire confidence.

--- Even liberal economists are skeptical of this plan actually working.  That's a very bad sign.

--- Even if the theory behind the plan is sound (which is very much in doubt), there's still the question of execution from an administration that has shown utter ineptness in its promised bipartisan progress and has yet to fill 16 out of 17 Senate-confirmed positions in its Treasury Department.

The good: at least the administration has started focusing on the core problem by offering an actual plan to deal with it.
The bad: the plan is marginal at best.
The ugly: that focus is long overdue, and they've wasted trillions of dollars only to come back to the original idea.

This plan is the first sign of life in a Treasury Secretary that has been riddled with scandal and flush with incompetence from day one, and probably should be in jail rather than dictating the economic policy of America.  In my humble opinion, the market response is kind of like watching a kindergarten soccer game - you clap and cheer for any kid who scores a goal, even if they're on the other team.  You're just happy the ball goes into the goal.  I think the stock market simply responded positively to the fact that Geithner came up with any plan at all, even if it was a bad and plagiarized one.

It will be interesting to see if the market recovery continues, or if more details and debate about the plan in the coming days will turn things downward again.  I'm guessing the downward spiral will resume shortly, but what do I know?  After all, I'm not one of those constantly-wrong experts.

There's my two cents.


Sources and Related Reading:
http://minx.cc/?post=284746
http://corner.nationalreview.com/post/?q=NTBiOWViZWExYzQ2MTk0ZGYxZWFhMGMxNGRlODI5MWY=
http://hotair.com/archives/2009/03/23/shocker-addressing-toxic-assets-instills-market-confidence/
http://www.weeklystandard.com/weblogs/TWSFP/2009/03/is_geithner_plan_road_to_recov.asp
http://corner.nationalreview.com/post/?q=M2U5YjQ4ZmNkZDViYmYxZTQxN2RkODcyZGFhMzJkNzk=
http://corner.nationalreview.com/post/?q=NGE4N2RkZDBlYzY5Yjc1ZWI5MmM5NDdmY2UwMTBiZDA=
http://corner.nationalreview.com/post/?q=NGEzMjQ3YTQ5OWE1OWU1ODVjYTlmMWMyYTkxMGFkNjY=
http://corner.nationalreview.com/post/?q=NjY2MjJkMmM5MzZkNGI0N2ZlZGFjZTI0Y2M5NWY4ODQ=

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