'Tis folly to set the fox to guard the henhouse, and President Obama is about to do that in a day or two's time when he allows Treasury Secretary Geithner to unveil his three-pronged proposal to free the banks of toxic assets and to kickstart lending by the banks.
Geithner is a Wall Street whizkid, and true to the foxy nature of such ilk, his plans are complicated, somewhat obscure on details so far, and aimed at allowing Obama to buy toxic assets from the banks without doing two things which Obama is currently loath to do: be upfront and nationalize the ailing banks through a frontdoor approach, and ask Congress for more money to buy the toxic assets.
Obama is doing backdoor nationalization of the toxic assets (through his risk assumption, described below) rather than levelling with the people and nationalizing the banks. I assume the Democrats believe outright nationalization will give the Republicans a big club to beat them with through claims of socialism.
I assume that Geithner's socalled 'private public sector' solution is being adopted because Obama fears that any request to Congress and the Senate for a trillion or two more to buy the toxic assets might be refused.
So now the Obama administration will jump through hoops and hope that Americans do not realize that Geithner is proposing almost exactly the same kind of financial engineering malarkey which caused the financial meltdown in the first place.
The key to the Obama pitch will be to use sleight of hand to hide the fact that the government (that is, the taxpayers) are providing the funding and assuming virtually all the risks, with the private sector investors making huge profits.
Why is Geithner doing this? Because the banks have an estimated $2 trillion of toxic assets and the federal government does not have the money or the stomach to buy them outright.
When you read the summary of the plan from the New York Times below, keep in mind these things:
1 A non-recourse loan means the government (taxpayers) take the risks, not the private investors.
2 The scheme depends on the government guaranteeing a huge amount of the risk while at the same time funding the private investors. A guarantee is almost the same as a loan, so why does the government not simply do it all itself and pass all future profits and losses on to the taxpayer, without the private investors making money?
3 Why is the Obama administration not being realistic and nationalizing the banks, instead of just buying their toxic assets and leaving the shareholders with the now-clean assets? If you are piggybacking on the taxpayer, why not take over the good and bad parts, keep profits as well as losses for taxpayers, and later on spin off the cleansed banks, when things have settled?
The NYT article:
"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.
Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials.
Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
The government would receive interest payments on the money it lent to a partnership and it would share profits and losses on the equity portion of the investment with the private investors."
My guess? The Geithner plan is a non-starter; eventually major banks will have to be nationalized.
