I hope this is a joke

Another article from Krishna Guha.  (Guha is a favorite vector for deliberate leaks from the Treasury and Fed, so I think we need to take this seriously.)

Assuming this approach is approved, the bad bank would be capitalised with equity from the Treasury’s troubled asset relief programme (Tarp) and take on debt, possibly guaranteed by the Federal Deposit Insurance Corporation (FDIC), with some Washington insiders estimating it would have about $1,000bn purchasing power.

So Treasury puts up $100 billion directly and then borrows another $900 billion guaranteed by the FDIC?  (Which is in turn de facto guaranteed by the Treasury…)  How this differs from Treasury simply borrowing $1 trillion eludes me.

It would acquire securities that had already been heavily marked down by financial institutions, probably using a valuation model rather than an auction-based process to determine pricing.

In other words, we will overpay for the assets.

The US authorities may al­so provide insurance-style guarantees on pools of problem assets that remain on bank balance sheets.

In other words, we will overpay for the assets in the guise of “insurance”.

The foreclosure relief element of the package is likely to commit tens of billions of dollars to support schemes that aim to lower monthly mortgage payments to no more than 38 per cent of income, though it will probably also include backing for loan principal reductions in cases where the mortgage is worth a lot more than the value of a home.

In other words, my wealth will be transferred to the people who took on debt they could never repay to buy houses they could never afford.  The more they overextended, the more of my wealth they receive.  All in an effort to artificially prop up house prices.  I guess I will keep my little rental unit.

I found this article via The Baseline Scenario: Transparency And Power.  Do not miss this piece!  Prof. Johnson expects Treasury’s committment to be magnified by the Federal Reserve.  This would mean, I think, that Treasury would be on the line for (say) the first $100 billion with the remaining $900 billion backed by the Fed.  (He also expects the final proposal to be twice these amounts.)

His last two paragraphs sum it up nicely:

The bigger issue is much simpler.  The banks made many bad decisions and now have assets worth much less than their liabilities.  We have guaranteed their liabilities, because we had a look at the alternative and it was ghastly.  So who pays for the losses and on what basis?

I would prefer something much simpler and more transparent: new capital in exchange for a change in control at the major banks – presumably leading to new private owners, wholesale managerial change, and the breakup of the big banks.  Instead, we are looking at the mother of all Credit Default Swaps – if things go well, we get a small premium; if things go badly, we are on the hook for a huge and hard-to-quantify amount (ask AIG).  Either way, the bankers get the greatest deal of this or any century, and they emerge more powerful than ever.

Finally, I could not help but post a comment.  To quote myself:

The “executive compensation” thing is just part of the politics. As long as Congress and the media focus their energies on that issue, they will not make any noise about the far larger transfer of taxpayer wealth to the counterparties, creditors, and shareholders of the banks. Then we get a few days of “worry” that the bill won’t pass. Then the Obama administration will “compromise” by adding some minor concession on executive comp., and the Congress will “come together”, declare victory, and give the banks their trillion-dollar handout.

This is exactly what happened with TARP I, you may remember.

4 comments to I hope this is a joke

  • mock turtle

    Krugman in a recent editorial spoke to this issue suggesting that the bad bank approach is kinda like (my words) the country song where she gets the mine and i get the shaft

    http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=2

    as Krugman points out:

    “A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

    The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.”

    seems to me the good bank bad bank approach leaves the taxpayers screwed andd the owners of banks smiling

  • Bond Girl

    What is there even to say about this anymore? It is absolutely sickening to think that they would even entertain this idea, let alone move forward with it.

  • snoopy

    The reason they have to do things like this is that if they do things like they did in the 1980s they would end up showing that the entire banking system, and the country itself, are insolvent.

    They play these games because they can’t afford to be honest. I don’t think anyone knows how big the mess is, and quite frankly, I think they know it’s bigger than can be handled in any conventional way. Hence the games. At least, that’s the only logical explanation that I can come up with.

    They probably know that the system is going down, so might as well plunder the sheeple while they can by proposing a few more convoluted schemes.

    I’m having trouble seeing how this is going to end. Let’s look at a couple of scenarios:
    – Dollar get devalued — People with debt benefit, in effect getting free houses. In other words, a lot of common (albeit in most cases irresponsible) people will benefit.
    – Deflation — This to me is the only outcome that will (a) benefit responsible people; (b) help give more power to the elite/extremely wealthy.

    I think the “we’re fighting deflation” mantra is just a facade. At this point, deflation is desireable. Not forever, but at least until some more control is transferred to the elite. Deflation will stop only after unemployment peaks and the common folk are pretty screwed (they’ve lost their jobs and homes by then and the elite folks have stepped in and bought stuff at pennies on the dollar).

    Once that happens, and common folk are completely wiped out and starting over, with no assets, that’s when inflation kicks in big time. The elite will now be in assets and those would start to appreciate along with wages.

    To get to the inflationary phase, we are talking years. It took 20 to 30 years to create this mess. It will take at least a few years to recover from it.

  • fratris filia nullius

    Lovely. Alpaca farm in Montana is lookin’ better and better….

    Hey, if me and mine are goin’ to be dirt poor anyway I rather be self-sufficient than relyin’ on the government (or the elite) for my bread…..

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