Free Markets, Free People

Obama Administration

The Banking Plan

Thanks to last night’s White House info dump, we now have gotten the outlines of the White House’s banking recovery plan.  As I mentioned earlier this week, the banking problem is the fundamental issue in the current financial crisis.  We’ve been waiting for the White House to give it to us.  Now that we’ve got it, I don’t like it much.

The details, as reported, are as follows:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending…

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

That last paragraphs is a howler, since it’s so self-evidently untrue.  As Ezra Klein at The American Prospect–hardly an enemy of the Obama Administration–notes:

You almost wonder if that’s a typo. It seems to imply that the protection comes because private investors will accurately price the assets. After all, they don’t want to lose money.

But it’s not their money. It’s our money. The plan uses public funds to protect and subsidize private investors. As such, a private auction will not price the assets. It will price the potential upside of the assets given that taxpayers will assume the brunt of the losses. [Emphasis mine–EDF]

As illustration, imagine an art auction. Now imagine an art auction where Sotheby’s loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby’s or the private investors? As Calculated Risk says, “With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.”

As for the contention that “the government will be buying the troubled loans of the banks at a deep discount to their original face value,” I’m not even sure what to say about that. Their original face value was a lie. If I pretend this beautiful bic pen is worth $60 million and then sell it to you for $1.00, you’re not getting a $59,999,999 discount because I’ve come down from the imaginary price where I started. The question is what these assets are actually worth, and whether taxpayers are paying more or less than that. We’re in this mess because the original face value is wrong.

I don’t know how to explain it any better than that.  Moreover, Ezra links to Yves Smith, who further comments:

First, the banks, as in normal auctions, will presumably set a reserve price equal to the value of the assets on their books. If the price does not meet the reserve (and the level of the reserve is not disclosed to the bidders), there is no sale; in this case, the bank would keep the toxic instruments.

Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.

So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank’s reserve, which would be the value on the bank’s books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

The last point is another big problem.  There are a number of other ways to accomplish recapitalization, from just purchasing the assets from the banks for cash to outright nationalization of the banks.  Whether we would actually like those options is another story, but at least they have the virtue of simplicity.  Even laymen would be able to grasp their essentials.  That certainly isn’t true is the case of what the Obama Administration has released. It is complicated.  It’s made of three different parts, all of which are complicated in their own special ways.  Ezra Klein again:

If it goes bad — and it really might go bad, and the details might prove galling in much the way that AIG’s bonuses did — the byzantine approach could well leave voters feeling tricked. That risk might make sense if this were the only viable path forward. But it’s actually hard to imagine the set of questions you ask that ends in this particular answer.

And it’s difficult to see how this  actually becomes an answer in the real world.  The trouble with these kinds of complicated plans is that they so often crash against the rocks of reality.  When one part of the plan goes awry, the whole plan breaks up.  With the triple complications of the plan leaked by the administration, there is a not insignificant chance that the plan will fail due to it’s unnecessary complexity.

I don’t think that will be helpful.

Zombie Ideas And Moral Hazard

Paul Krugman has seen the new Treasury plan (the “Geithner plan” as he calls it) that addresses the problem with the banks and he finds it wanting:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

The plan itself is a three part plan as described here:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The Geithner Plan

The Geithner Plan

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

 As noted, Krugman is not impressed. In fact, he suddenly discovers the problem of “skewed incentives” and “massive” moral hazard:

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

How in the world could the level of intrusion contemplated by the government create anything but “skewed incentive” and “massive moral hazard”? But that aside, will it work?

Per Krugman, probably not:

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Indeed. And an amazing admission by Krugman who was as sure as anyone in the tank for Obama that he’d be “the answer” to all of our problems. Instead he’s discovering what a lot of Obama supporters are discovering – Obama’s an empty suit who is more interested in the perks and rewards of the office than the work it entails.

Quote Of The Day

From, of all people, Paul Krugman (discussing the AIG debacle specifically and financial policy generally):

This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

Uh, I guess the honeymoon is over?!

~McQ

Former CBO Director Now Finds CBO Numbers Not So Good

This parallel world that exists only within the DC beltway and where the laws of economics don’t apply has got to be merged again with the real world we all live in as soon as possible:

Despite new estimates that say President Barack Obama’s budget would generate unsustainable large deficits averaging almost $1 trillion a year, the White House insisted Friday that the flood of red ink won’t swamp its costly agenda.

The Congressional Budget Office figures released Friday predict Obama’s budget will produce $9.3 trillion worth of red ink over 2010-2019. That’s $2.3 trillion worse than the administration predicted in its budget just last month.

Worst of all, CBO says the deficit under Obama’s policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

Just feast your eyes on those statements. First – 10 years of trillion dollar deficits “won’t swamp” the “costly agenda” of the Obama administration? Really? Or is it just that the administration refuses to acknowledge the reality of the coming deficits and intends to imperil the economy to push its social agenda forward? Which is more likely true?

And how does the administration address the CBO projections?

White House budget chief Peter Orszag said that CBO’s economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.

About those deficits?

About those deficits?

Orszag, the former director of the CBO, now finds the CBO just isn’t an entity in which we should put much stock when it comes to budget analysis – especially when it finds such budget numbers “unsustainable”. Nope. Instead we should heed the Fed – which has proven to be such an economic font of solutions in this current crisis – and unnamed “private economists” whose only claim to fame is they agree with the administration’s projections. The organization Orszag previously led suddenly has a credibility problem.

However Orszag did have to admit that if the CBO is right, well, that’s a horse of a different color:

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained. “Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.

Of course there have been many economic analysts prior to the CBO projections who have found the administration’s projections to be very optimistic in outlying years, in fact the term “rose colored glasses” seems most apropos.

So which makes more sense to you in this particular time of financial crisis- listen to those who say your projections are too rosy and trim them back (and the deficits they produce) to ensure that should it happen as the more pessimistic projections hold, you don’t chance pushing the nation into a period of unsustainable debt, or waive them off and take the chance that you’re right and they’re not?

“Caution” seems like a very important watch-word at this point, or it should be.

Instead we’re seeing a “damn the icebergs, full speed ahead” attitude from the crew of the economic Titanic.

~McQ

From Here To Electricity

Share photos on twitter with Twitpic

Any rumors that the President and his muse were on the outs is pure folly, despite Obama been seen speaking out in public alone. From an interview with the TOTUS:

Teleprompter, is the president ever argumentative with you, or is he compliant with your instructions?

Teleprompter Of The United States

Teleprompter Of The United States


Good question. Look, like any relationship, we have our ups and downs. Last year on the campaign trail, The Big Guy came to me and told me that like the cigarettes, he really felt like he needed to start working through his dependency. Then he went out and did this townhall session on health care.

Suffice it to say, we aren’t having those unpleasant discussions any more.

[Photo by www.therightscoop.com; HT: HAHL]

Good Thing That Doofus Bush Is Out Of Office (UPDATE)

Because Mr. Smooth is much less likely to commit the same sorts of gaffes he was:

Leno asked the president whether the White House bowling alley had been “burned and closed down” in light of Obama’s gutter ball embarrassment on the campaign trail last year.

Obama replied, “No, no. I have been practicing . . . I bowled a 129.”

The audience roared with laughter, and the late-night talk show host assured Obama “that’s very good, Mr. President.” To which Obama interjected, “It’s like — it was like Special Olympics, or something.”

The audience laughed. But the White House didn’t let the comment linger without clarification.

“The president made an offhand remark making fun of his own bowling that was in no way intended to disparage the Special Olympics,” White House spokesman Bill Burton told reporters flying aboard Air Force One after the taping of the show, according to a transcript released by the White House. “He thinks that the Special Olympics are a wonderful program that gives an opportunity to shine to people with disabilities from around the world.”

Ummm. Got it (and yes, I believe it – it was a poor attempt at humor by someone who still hasn’t figured out he needs to be very careful with his speech). That’s what you get when you let him go talk sans the teleprompter. And even with a teleprompter, he’s had some fun lately, hasn’t he?

Irish Prime Minister Brian Cowen was just a few paragraphs into an address at a St. Patrick’s Day celebration at the White House when he realized something sounded way too familiar. Turns out, he was repeating the speech President Barack Obama had just given.

Cowen was set to speak twice at the White House on Tuesday night because there were two different parties going on at the executive mansion. No matter — he would give the same speech to the two different audiences.

But Cowen was 20 seconds into his second address when it dawned on him that he was giving word for word the speech that Obama had just read from the same teleprompter.

Cowen stopped and looked back at the president to say, “That’s your speech.”

Obama laughed and returned to the podium to offer what might have been Cowen’s remarks. In doing so, President Obama thanked President Obama for inviting everyone over.

Of course no one expects these things to get the play they’d have gotten if the “Doofus-in-Chief” had still been in residence. You see, Mr. Obama is “brilliant” and consequently, these little gaffes are of no consequence or importance. On the other hand, Bush was a boob, and thus the same sorts of little gaffes pointed out how horribly the country had erred in picking him.

There. Glad we’ve settled that finally.

UPDATE: Apparently Obama was wrong about “Special Olympics” bowlers as well:

Kolan McConiughey, a Special Olympics competitor who has bowled three perfect 300 games, tells TMZ that the Prez has to score a lot higher than 129 to beat him. Kolan says he bowls an average of 266.

So with a 129, he might not even make the SO cut.

~McQ

Constitution? We Don’t Need No Stinkin’ Constitution!

As the Senate takes up its version of the violation of Article 1, Section 9 of the Constitution, also known as the bill to tax the hell out of the AIG bonuses, one note of sanity sounds through. Sen. John Kyl:

“I don’t believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences,” he said.

“Frankly, I think that’s how we got into the current mess,” he added.

Heh … ya think?

Not that it matters – this will most likely pass the Senate as well and be signed into law by “Constitutional Law Professor” and President Barack Obama, but when it ends up in court and is declared unconstitutional, it shouldn’t come as a surprise. The Constitution always takes a back seat to populism and CYA.

~McQ

The Transcendant Brilliance of Timothy Geithner

So much for I only knew about this last Tuesday”.   And this was the guy Democrats said we had to have beceause his brilliance was such that we should over-look his tax problems?

Treasury Secretary Timothy Geithner told CNN Thursday his department asked Sen. Chris Dodd to include a loophole in the stimulus bill that allowed bailed-out insurance giant American International Group to keep its bonuses.

In an interview with CNN’s Ali Velshi, Geithner said the Treasury Department was particularly concerned the government would face lawsuits if bonus contracts were breached.

Freakin’ amazing.

Geithner told Velshi Thursday he takes full responsibility for the situation.

After spending most of a week denying he even knew about it prior to last week. I don’t think Geithner understands what taking “full responsiblity” really means (or should mean).  Oh, and see Goodwin’s quote below.

~McQ

The New Gitmo Plan – Release Terrorists In US

Al Qaeda having difficulty establishing sleeper cells in the US? Not a problem – let the Attorney General help:

European justice ministers met with Mr. Holder earlier this week and pressed for details on how many Guantanamo prisoners the U.S. planned to release domestically, as part of any agreement for allies to accept detainees. Mr. Holder said U.S. officials would work to respond to the questions European officials have over U.S. Guantanamo plans.

For “people who can be released there are a variety of options that we have and among them is the possibility is that we would release them into this country,” Mr. Holder said. “That process is ongoing and we’ve not made any determinations or made any requests of anybody at this point.”

Seriously, anyone – sound like a better option than keeping Gitmo open and these prisoners there until and unless another country can be found to take them?

~McQ

Quote Of The Day

Even AP seems to be figuring it out. Here’s an analysis by AP’s David Espo discussing the AIG debacle:

Which goes to the crux of the Democrats’ current political problem.

Gone are the days when they could merely bludgeon the Bush administration and promise to seek bipartisan solutions to the nation’s economic problems.

Now, in control of the White House and Congress, they are struggling to come up with an explanation for what no one in either party seems moved to defend.

You can’t help but snicker a bit, can you?

~McQ