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     Feb 18, 2009
Page 1 of 2
Perhaps a cool hand
By Julian Delasantellis

It wasn't the planet-killing asteroid from 1998's Armageddon that you heard slamming into Earth with a deafening thud last week, but the consequences of what it was may be just about as serious. It was but the latest attempt, the Treasury Secretary Tim Geithner plan, to pull the US financial system out of the deep hole it so aggressively and enthusiastically threw itself into during the great credit boom early in this decade.

How bad was it? Well, as Wall Street secretary pretending to be investment banker Tess McGill (Melanie Griffith), in 1988's Working Girl, observed on her attempt to pitch a corporate buyout seemingly going badly, "They don't exactly have bouncers at

 

these things, they're a little more subtle than that."

Geithner should be thankful for that as well. If not, he would have been grabbed by his collar and thrown out into the gutter on Pennsylvania Avenue, beneath the statue of Alexander Hamilton, his country's first Treasury secretary, realizing that, on the basis of the tax problems and this dubious financial system rescue plan that have essentially become the coming-out party for the Treasury debutante, he has a long way to go to even match up to the standards of Ogden Livingston Mills, Herbert Hoover's second Treasury secretary, let alone the giants in the office such as Hamilton.

The basic complaint about the Geithner plan was that it was vague. At a time as dire as this, the press, and, it turns out, the markets, with the Dow Jones Industrial Average dropping over 350 points just as Geithner was speaking, wanted something a bit more substantial than just the Treasury secretary playing coy and batting his baby-blue eyes before the entire world.

On his "Conscience of a Liberal" blog, New York Times columnist and current Nobel Prize in economics winner Paul Krugman was confused.
An old joke from my younger days: What do you get when you cross a godfather with a deconstructionist? Someone who makes you an offer you can't understand. I found myself remembering that joke when trying to make sense of the Geithner financial rescue plan. It's really not clear what the plan means; there's an interpretation that makes it not too bad, but it's not clear if that's the right interpretation.
On his "Maverecon" blog on the Financial Times, Willem Buiter's reaction to the Geithner plan was so bad, it was driving him to drink.
Picking through the entrails of this multi-faceted, surprisingly incomplete, seriously underfunded, occasionally well-designed but mostly inadequate, counterproductive and unnecessarily moral-hazard-creating set of proposals was just too depressing. I will wait till I am at my parents' home this weekend, mollified and mellowed by my father's good claret, before I review the Geithnerbharata.
On Portfolio.com's "market movers" blog, Felix Salmon was similarly unimpressed.
On November 21, when Barack Obama announced that he was nominating Tim Geithner to be his Treasury secretary, the Dow rose 494 points and broke through the 8,000 barrier. On February 10, when Geithner gave his first major speech as Treasury secretary, the Dow fell 273 points and broke through the 8,000 barrier ... The speech was surprising only in its vagueness. It's been over 11 weeks since Obama's announcement, and this is the best that Geithner can come up with? Geithner promises unprecedented levels of transparency for the new plan. So far, all we have is talk. The markets will wait to actually see the details - and, of course, will wait for Congressional approval of all this - before they start believing.
Having a transparent window is nice, I suppose - assuming that there's something of value on the other side to look at. Unlike those who saw the plan's vagueness and were willing to give Obama and Geithner (probably more the former) the benefit of the doubt, on his "Naked Capitalism" blog, Yves Smith was in no mood to offer it any measure of faith, hope, charity, or any combination of the three.
I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP [Troubled Asset Relief Program], which showed utter contempt for Congress and the American public was in some ways less troubling. [Former Treasury secretary Henry] Paulson demanded US$700 billion, nearly $200 billion bigger than the Department of Defense, via a three-page draft bill, nothing more that a doodle on a napkin, save that it did bother to put the Treasury secretary above the law ... And the TARP initially did have some supporters (perhaps most important, among the media, who trumpeted the "Something must be done" case). Fans are much harder to find for the latest iteration of the seemingly never-ending "let's throw more money at the banks" saga.

As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street's interests as the Bushies were. The differences increasingly look stylistic, not substantive. Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the "oh he has to work on the stimulus bill" is as close to "the dog ate my homework" as I have ever seen in adult life).

What he served up as an initiative is weeks to months, depending on the item, away from being operational (if even then; the public-private asset purchase program will either not see the light of day, or be far narrower and smaller than what is needed) ... Yesterday, I got an e-mail from a political consultant who got a report on the Senate Banking Committee briefing by the Treasury the night before the announcement. No briefing books, no documents. He deemed it to be no plan. That assessment was confirmed today by a participant at the session, who said that the details were so thin that one staffer asked, "So what, exactly, is the plan?" and repeated questions from one persistent senator got "absolutely no answers".
So just what is it that turned Wall Street's smile upside down, and got the buzzing gnats of the bloggers swarming out of the hive? Well, if we assume that a research animal is an intelligent being if it learns from its mistakes, if, once shocked, it avoids the behavior that caused it pain, than we are forced to start raising serious questions as to whether US Treasury secretaries can be considered intelligent beings.

For over a year now, I've been saying that the world financial crisis would only end when the mortgage backed securities (MBS) carved out of the crest of the US real estate boom a few years ago but now spiraling down in value were removed from the portfolios of the banks that currently owned them. As these securities declined in value, they shrunk the capital bases of the banks that owned them, and the resultant vicious circle contraction of bank lending is the core phenomenon of what we now call the worldwide credit crisis.

In late September, bloodied and beaten from the huge world stockmarket declines that occurred after the fall of Lehman Brothers, Paulson saw the light upon the feeling of the heat. He proposed the $700 billion TARP to buy out the bad MBS, then convinced the Democrats in Congress to nail themselves to the TARP's cross in order to assure its passage.

Then Paulson changed his mind, decided he wasn't going to do TARP. He was going to leave this dirty, sopping and fetid diaper wrapped around the banks, for then president-elect Obama to have the joy in changing once he moved into the White House. As you would expect, in the interval between regimes, the problem only got worse; that nappy really began to stink. With Obama's inauguration on January 20, followed by another dreadful unemployment report on February 6, well, maybe change had come to America, but it was the banking and financial sector that needed a change in the absolutely worst way.

The problem is the same as it's been since the crisis began - it's that, for the sake of the health of the general economy, the government wants to save the banks a lot more than the banks want, or are willing, to be saved. Specifically, due to prospective fears of mortgage defaults that started with the subprime sector but are now spreading to the core of US housing finance, the few MBS that are at this time changing hands are usually doing so at prices of 25 cents to the dollar or less; in response, if that's what the banks can get for them, they won't sell them.

They're still holding out for prices at 80 cents or more to the dollar as if it were still 2005, when every secondary school dropout tossing tortellini at Olive Garden was considered by the banks to be yet another potential mortgage borrower just two or three flips away from being a real estate millionaire. Thus has been created the phenomenon of the so called "zombie banks", lenders that, in reality, have liabilities that are far in excess of their assets but only now exist in the dark shadows of the land of undead, draining the lifeblood out of the financial system as a whole, with no conscience or counter in sight.

In the opening hours of the Obama administration, you know, that long-ago-time from three weeks past, reports leaked out of the his administration that they were planning to retrieve the baton that Paulson had dropped, buying up the bad MBS and putting them in a so-called "bad bank" to be called "The Aggregator" (see Back to the woodshed, Asia Times Online, January 28, 2009).

However, once Geithner promised to be always a good boy, looking both ways before crossing the street, never playing with matches, always paying his taxes, et al, he won approval by the Senate, got to work, and apparently headed off in a new direction, away from any solution that involved simply having the US government purchase the MBS at prices to the banks' liking.

In the days before the official unveiling of the "Financial Stability Plan" last Tuesday, press reports had Geithner in bureaucratic battle with Obama chief of staff Rahm Emanuel and senior advisor David Axelrod, who supposedly were seeking a policy that took a more politically popular, harder, less accommodative stance with the banks. When the policy was finally revealed to the public, not many understood it, but it did seem fairly clear that Emanuel and Axelrod had lost.

This is the section of the plan that deals with the question of what is to be done with banks' bad assets.
Together with the Federal Reserve, the Federal Deposit Insurance Corporation, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.

By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets. We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it. We believe this program should ultimately provide up to one trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.
The "public-private partnership" became a hot buzzword under the bastardized triangulated centrism that became the standard operating procedure for domestic policy in the Bill Clinton

Continued 1 2  


The 'best men' fall - again (Feb 13,'09)

Bankers' greed and supervisors' folly
(Nov 19,'08)


1. The new Fallujah: Up close and ugly

2. Silence is golden

3. Israeli election muddies Obama's waters

4. When allies drift apart

5. Tang Dynasty TV takes on China

6. Slumdog communists

7. Taliban send a bloody warning

(Feb 13-16, 2009)

 
 


 

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