Is there a realistic way from here to there? And why not just nationalise them immediately, if that's the aim? The political fall out won't be any less dramatic if it happens a couple of years from now rather than next week.
Because they don't want to expropriate them - they would have a massive lawsuit in their hands.
Look at it this way. If zombie banks have managed to postpone the day of reckoning for 18 months, they might still take another two years to fall over. Instead you pass an Act of Congress mandating a Federal audit of large banks and maybe not next week, but maybe you'll know next month that a particular bank is insolvent.
Note also how they are not saying "audit" - they are saying "forward-looking stress-test". Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
If a lot of banks fail the audits - which they will if the audits are honest - you have Lehmann II, III, IV, all the way up to an interesting but indeterminate double digit number. Market confidence won't be improved by this. All you're getting is a very expensive political pretext for a possible nationalisation program which would have to be vast and sweeping to have any effect at all.
But the catch is that after signalling insolvency after an audit, a fatal run on those banks is almost guaranteed.
We've already seen today what that would mean, and how precariously balanced confidence is.
If the audits are dishonest, no one is going to be better off because the toxic assets will still be toxic, and there will still be the nudge-wink implication that the government will be the lender of last resort.
Either way, all you've bought is the illusion of some breathing room while the sludge continues to accumulate. As the depression bites, 'proper' lending done with due diligence, will be decimated to the same extent that sub-prime has been, because formerly safe loans will turn bad as people lose their jobs.
So the problem is that even if this is a genius plan for nationalisation by the back door, it doesn't do enough to deal with the real problem - people without jobs and with mounting debts who could be doing something useful and getting paid for it - and it also creates an audit mechanism which will destroy confidence before it can do anything to improve it.
Maybe I'm missing something, but that doesn't look like a win to me.
There need not be a run on the banks, the FDIC is taking part in the audit. And a run on the stock should be the least of our concerns.
The banks won't go bust like Lehman because the Treasury is there ready to recapitalize the banks. But not to buy their toxic waste at a fictitious price. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
FDIC's capitalisation is limited, and any support above and beyond would have to come straight from the Treasury.
For the rest - I thought the plan was to push a private sector solution for recapitalisation?
And if you're going to recapitalise banks which would die anyway, why not avoid the drama with a First National Bank of Not Actually Everyone Else's Shitpile, and use that to lend directly to the people who need useful credit?
The point for me is that audits don't deal with the Financial Uncertainty Principle. And Geithner seems too much of an ideologue to push for the kind of clarity that's needed. E.g.
The Ticker - Is Geithner To Blame For Today's Market Plunge? - Economy Watch
Rep. Sherrod Brown (D-Ohio) was upset to learn that some companies receiving bailout money are offshoring jobs to save money. He wondered if the government shouldn't require that such companies employ Americans, in addition to the limits on executive compensation they're now facing. "I do not believe we can put ourselves in position of raising the prospect where government comes in and directly manages at great detail the choices [companies] make," Geithner said. "Ultimately, we will end up costing the economy and taxpayers much more." Geithner said that he is "deeply offended" by "many of the judgments" top executives have made, clearly referring to big bonuses and other perks. "But the important offsetting obligation we have is to not create the prospect that the government is going to come in and make decisions for institutions that want to remain in private hands," he said.
Rep. Sherrod Brown (D-Ohio) was upset to learn that some companies receiving bailout money are offshoring jobs to save money. He wondered if the government shouldn't require that such companies employ Americans, in addition to the limits on executive compensation they're now facing.
"I do not believe we can put ourselves in position of raising the prospect where government comes in and directly manages at great detail the choices [companies] make," Geithner said. "Ultimately, we will end up costing the economy and taxpayers much more."
Geithner said that he is "deeply offended" by "many of the judgments" top executives have made, clearly referring to big bonuses and other perks. "But the important offsetting obligation we have is to not create the prospect that the government is going to come in and make decisions for institutions that want to remain in private hands," he said.
In other words - fuck you, Mr Little Guy.
And also
Trying to figure out how much to pay for this assets -- which once had a value, now are virtually worthless and probably will have a value at some point in the future -- is a tough task. Geithner just said there's a couple ways to price them: A) The government can set a price or B) The government can use an independent economic model to price them. "We were concerned that neither of those two would give us the level of comfort" we want, Geithner said. Instead, that's why he came up with the public-private funding mix: The government will use the private money as a kind of guide dog in entering this market, as the private sector has a better sense of the value of the toxic assets than the government does, and the private money knows it can invest without taking the whole risk on its shoulders, owing to the taxpayer co-investment. At least that's how it's supposed to work. Many traders are calling out for the government to set a price on the toxic assets -- any prices -- so they can get started at cleaning up the mess.
Trying to figure out how much to pay for this assets -- which once had a value, now are virtually worthless and probably will have a value at some point in the future -- is a tough task.
Geithner just said there's a couple ways to price them: A) The government can set a price or B) The government can use an independent economic model to price them.
"We were concerned that neither of those two would give us the level of comfort" we want, Geithner said.
Instead, that's why he came up with the public-private funding mix: The government will use the private money as a kind of guide dog in entering this market, as the private sector has a better sense of the value of the toxic assets than the government does, and the private money knows it can invest without taking the whole risk on its shoulders, owing to the taxpayer co-investment.
At least that's how it's supposed to work.
Many traders are calling out for the government to set a price on the toxic assets -- any prices -- so they can get started at cleaning up the mess.
That longer paragraph looks completely insane to me.
Guide dog? The private sector knows the value, but it can invest without taking the whole risk?
Really - wtf? What could possibly be clearer about the real aim here - privatising profit and socialising risk, as usual?
Co-investment? Where? Most of this money will come from profit on loans, so - er - that will be interest paid by businesses and ordinary people.
Paying tax to Wall St on taxpayer's money, in other words, in some vague as yet undefined proportion which will be based on some vague guide dog element of private investment, probably.
Nothing has changed here. It's the same game, and the outcome will be similar. The can is just being kicked slightly further down the road.
You're supposed to make a proper risk analysis whether you put in 20 or 100M - that(s what the government is counting in. and what it brings is more money to invest, alongside.
That's a failry basic risk allocation and sharing mechanism, there's nothign wrong with it per se - as long as public and private investors take the same risk pari passu. In the long run, we're all dead. John Maynard Keynes
If a lot of banks fail the audits - which they will if the audits are honest - you have Lehmann II, III, IV, all the way up to an interesting but indeterminate double digit number. Market confidence won't be improved by this.
Well, yes and no. Certainly I think we're going to find ourselves looking at some pretty horrifying losses. And there's a risk that a good chunk of the public sees Treasury declare BofA or Shitibank or whatever to be insolvent and responds with a run on the bank. (I don't think it's a very big risk, honestly, especially not if met from the beginning with assurances that deposits are protected no matter what they find.) But it's going to do a lot more for confidence over even the short term to know what's what.
The plan at least seems to get that right. And the plan doesn't, so far as I can tell, seem to involve Geithner simply running out to buy toxic shit at hyper-inflated prices like Paulson did.
Clearly Geithner and Obama are being chickenshits, politically. (Referring to audits as "stress tests" makes me wonder if Mark Penn and Frank Luntz edited Geithner's paper for him.) But they do seem to be cracking the back door open on nationalization, while obviously running away from saying anything about nationalization.
And I think Mig probably makes a fair point about the reaction to this on Wall Street and in the press. (You really should've seen CNBC erupt with Geithner Derangement Syndrome when this was released.) I don't think it's insignificant that investors got the hell out of financials. And I do think the blogosphere may have jumped the gun a bit. It might still wind up being right, but I'm just sayin'.
Much of it is, as Krugman said, subject to interpretation. "The Rorschach Plan," as he called it. So, once more, I declare, "We'll see." Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
