Page 1 of 2 Down the dark path
By Julian Delasantellis
I am in absolutely no possession of any historical evidence that 16th-century
English jailers employed modern stand-up comedians to bring a bit of levity to
their inheritantly bleak workspaces, but what if they had? What if, as the
clock ticked down in the Tower of London before the execution of Sir Thomas
More ordered by King Henry VIII in July 1535, a comic, in the style of the late
Rodney Dangerfield, was brought in to do stand-up?
"Hey, everybody looks great here. Anybody here Papists? Don't worry, your
secret's safe with me - I haven't even paid the withholding tax on my
foodtaster yet. I just flew in from the Isle of Man, and boy, are my arms tired
- you know what I mean? Hey, prison guards! I never knew why they called you
until I saw your wives outside the gates!"
Turning to the condemned man. "Hey, Tommy, I got good news for you. You're not
going to be drawn and quartered tomorrow."
"Pray tell sir, do not jest!"
"I'm serious. Big H's gonna cut your head off instead!"
That's a little bit like the situation with the newly revealed, final US
Treasury Secretary Timothy Geithner toxic asset recovery bank program. It may
work. It may not. Whatever happens with its effectiveness, one thing is
certain. US taxpayers are definitely going to be getting the chop, maybe you
could even say they're getting it in the chops, as a result of its
implementation and administration.
It has now been over a year since I advocated that the subprime and other
mortgage-related debt securities that were depreciating away, as a result of
falling real estate prices, in major banks' portfolios be somehow removed. (See
And the band played on, Asia Times Online, March 6, 2008.)
This idea, also advocated by other economists, was ignored during the
comparatively (compared with now, anyway) balmy skies of last spring and
summer, but once the storm finally broke with the bankruptcy of Lehman Brothers
on September 15, followed by tremendous world stock market losses as the
planet's debt markets simply dissolved, it was obvious that, at last,
government must address the problem.
In came then-Treasury secretary Henry Paulson, bringing to the table of whole
half of a donkey in the form of his US$700 billion Treasury Assets Relief Plan
(TARP). In the bitter political struggle to pass the initiative through the US
Congress, the plan's supporters always claimed that it was only through the
purchase of the banks' bad, frequently called "toxic" assets (now sometimes
more euphemistically called "legacy" assets, as if these boneheaded loans were
a treasured heirloom desk or bureau) would the boundless, pickup-driven,
plasma-TV shining, bountiful future that God promised America at Sinai (the
Hebrews got the second prize in terms of the Ten Commandments) be restored.
TARP was almost analogized as a sort of life preserver to be thrown to the
banks, preventing them from going over the roaring Niagara of insolvency right
in front of them. OK, but what if the banks would rather face the rapids than
the government's rescue?
TARP called for the banks to sell the loans to the government. That implied a
sales price to be agreed on to "clear" the market, a price to which both buyer
(the government) and seller (the banks ) could, and would agree.
No, they wouldn't.
It soon became obvious that there was a huge, unbridgeable yawning chasm
separating what the banks were willing to sell the toxics for, what they
thought they were worth, and what the private market was pricing, and what the
government was or could afford to pay for them. The banks thought that, since
these securities were made from American mortgages, which were still
overwhelmingly being paid on time, the securities should be marked down only
modestly, if at all; at worst, going for no less than 80 cents on the dollar of
The markets, in frequently pricing the assets at marks far below the prices
desired by the banks, 20 cents on the dollar or less, noted that many of the
toxic securities in question here were not directly derived from home
mortgages, but were leveraged securities once, twice, sometimes three times
removed from originals. As with any margined investment, it did not take a
whole lot of price depreciation of the original security to produce near total
losses in what had been derived from it.
In short, the banks wanted 80 and the government wanted to pay 20, or maybe it
was 75 to 30, or 85 to 25. There the issue stood, as the George W Bush crowd
went through government paper and ink cartridges with their resumes, and the
Barack Obama types started looking for the "greenest" white private schools
they could find for their kids.
From the first hours in office, the Obama administration knew that this was an
issue it must address sooner rather than later, for the salvation of the banks,
and along with the $800 billion economic stimulus program, these were the key
points of their entire economic recovery initiative. At first, there were
reports that Paulson's TARP would just be given new shoes and makeup with the
establishment of something called The Aggregator (see
Back to the woodshed, Asia Times Online, January 28, 2009). Finally,
when Geithner had his fingernails and ears clean enough to win Senate approval,
the outlines of the current plan emerged.
As the bare bones frameworks of the new Geithner plan were leaked in
mid-February, the early reviews were not auspicious. The rough outline, to set
up public-private private equity and hedge fund partnerships to try to generate
prices sufficient to coax the toxics out of the bank's vaults, was derided as
vague and lacking in specifics; the 350-point decline in the Dow Jones
Industrial Average just while Geithner was introducing the plan kicked off
another down leg in stocks that culminated on March 9 with the Dow at 6,440,
down almost 23% since the Obama inauguration of January 20.
That, and the flat-footedness over the AIG bonuses had many of the bloodthirsty
screaming pundits in the Washington Coliseum calling for Emperor Obama to cut
off Geithner's head - it was generally agreed that one more slip up and he
would be history.
But Geithner is the new American Idol after the release of his fleshed out,
complete toxic assets plan spurred a 500-point, almost 7% one-day rise in the
Dow Jones Industrial Average on Monday. "If this is what we get from
socialists" the multitudes of the finance industry's free-market ideologues
must have thought, their ideology never inhibiting them from going after every
loose government dollar on the floor, "who needs conservatives?"
The market's hope is that, at long last, the Gordian knot of pricing toxics has
been cut. But has it?
By firmly and repeatedly taking the possibility of bank nationalization off the
table, Geithner and Obama assured that the banks would have little incentive to
lower the price of their toxics down to where the market wanted to pay for
them. If the offer couldn't be lowered, then the bid had to be brought up, but
it was absolutely obvious that there was no stomach in Congress for the
political bloodletting sufficient to loosen up the hundreds of billions to
trillions of new taxpayer funding that would be needed for a TARP 2.
In essence, what Geithner had to do was get hundreds of billions to the banks
without anybody actually seeing the money passing to them from government. At
least for now, the markets are thinking that Geithner may have found a way.
Ironically, for a crisis that had at its roots the excessive employment of
borrowing-leverage, especially in the real estate sector, the core of the
solution seems to be the same thing.
If the plan sounds familiar, it might be because it's essentially the same
mechanism by which unemployed pizza deliverers wound up with million-dollar
seaside mansions during the great boom. A private equity/hedge fund group joins
with the Treasury to form what will be called a Public Private Investment
Partnership (PPIP). The private concern brings, from the example in a fact
sheet released by the Treasury that described how the program will work, $6,
which will get matched by the government out of what's left of the TARP money.
Armed with $12, the PPIP approaches the institution almost universally
considered the hero of the entire financial crisis, Sheila Bair's Federal
Deposit Insurance Corporation (FDIC).
Bair has managed to achieve and maintain her agency's status as the one sweet
smelling rose among all the dungheap of public and private actors in the
financial crisis. Her backstopping of the commercial paper market during the
worst part of last autumn's financial crisis went a long way towards defusing
the most acute aspects of the calamity that befell the financial markets on the
fall of Lehman Brothers. When frightened Americans plead for a safe place to
hold their money, both the media and politicians, in good conscience, can point
to the safety of deposits held at an FDIC-insured bank.
Mostly, it's Sheila Bair, alone among the talking heads Americans watch on TV,
searching in vain for a messiah to deliver them from their current calamity,
who actually seems to give a heartfelt damn about what's actually happening to
middle-class Americans these days.