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Geithner's plan

Treasury Department Releases Details on Public Private Partnership Investment Program
Treasury Department March 23, 2009

My Plan for Bad Bank Assets
The private sector will set prices.
Taxpayers will share in any upside.

Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

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PPIP is a risky effort to buy time while the Obama administration tries to find a way to convince an immensely hostile Congress to supply
another $1 trillion, or more, to remove toxic assets from bank balance sheets.

John H. Makin, American Enterprise Institute, April 2, 2009

It would be far better to move directly to the endpoint in all successful resolutions of financial crises. This would entail acknowledging the $1.5-2 trillion in lost asset values on financial-institution balance sheets while closing down the weakest institutions, making sure to protect depositors in the process.

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This /The Geithner plan/ is a recipe for the insolvency of the FDIC and
an attempt to bail out bank bondholders using funds that have not even been allocated by Congress.
The whole plan is a bureaucratic abuse of the FDIC's balance sheet, which exists to protect ordinary depositors, not bank bondholders.
John P. Hussman, at John Mauldin, 6/4 2009

Meanwhile, in a bizarre convolution of reality reminiscent of Alice in Wonderland, the Financial Times reported last week: "US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn plan to revive the financial system." And why not? They can put up a few percent of their own money, and swap each other's toxic assets financed by a bewildered public suddenly bearing more than 90% of the downside risk. The "investors" in this happy "public-private partnership" keep half the upside while ordinary Americans take the downside off of their hands

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The politics of bank rescue are toxic.
A former European finance minister reminded me that, from a political perspective, there is nothing in it for a rational politician.
Handing over hundreds of billions of euros to the banks is akin to political suicide, no matter how you do this.
The real problem with the US bank rescue plan is that it may exhaust the public’s sense of fair play.
Wolfgang Münchau, Financial Times April 5 2009

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"The Geithner plan, among the many ways you can get rid of these bad assets, is one of the better ones,"
"It still is not going to solve the problems of those institutions that are effectively insolvent.
If you buy the assets at true long-term value, they're still going to be under water, so those institutions will still have to be taken over, worked out, and then, eventually, re-privatized."
Nouriel Roubini, in an interview with CNBC, 31/3 2009

A thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks,
by buying toxic assets from the banks at far above their market value.
It is no surprise that stock market capitalisation of the banks has risen about 50 per cent
Jeffrey Sachs, Financial Times March 25 2009

It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.

It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.

The banks could be saved without saving their shareholders – a better deal for taxpayers and without the moral hazard of rescuing shareholders from the banks’ bad bets. Most simply, the government could provide loans to buy the toxic assets on a recourse basis, therefore without the hidden subsidy. Alternatively, the plan could give the taxpayers an equity stake in the banks in return for cleaning their balance sheets.
In cases of insolvency, the government could take over the bank, the much dreaded nationalisation, albeit temporary

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The U.S. economy is spiraling downward into recession and gargantuan budget deficits.
Jeffrey Sachs, November 5, 2008

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Of course the largest risk, as always, is to the taxpayers.
Don't be fooled because Treasury isn't going to Capitol Hill for more cash.
Wall Street Journal 23/3 2009

In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers.
This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar.

The feds and private investors would each put up six cents in capital.
If the asset rises in value over time, the taxpayer and investors share the upside.
If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses.
Better hope the recovery really is, as the White House says, just around the corner.

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Mr Geithner aims to have markets establish prices for assets now burdening banks’ balance sheets.
His plan assumes buyers and sellers will agree on a price if the government is willing to subsidise them enough.
But this implies that assets are not trading today mainly because of a lack of liquidity.
The plan may just work. If it does not, much more than the US banking system is at risk.
Financial Times editorial 23/3 2009

If, instead, the cash-flows behind the assets – such as subprime mortgage payments – have deteriorated too much, disposing of them at fair long-term values would crystallise heavy losses.

Banks will avoid this unless forced to sell, no matter how liquid the market. The plan’s success thus depends on the stress test – only vaguely defined – banks are supposed to undergo.

No one knows whether the market malfunction is due more to long-term losses or short-term liquidity risk.
A virtue of this plan is that it should help us find out

But this is a gamble, which could fail in two ways.
Even with subsidies, too few trades may take place, leaving the assets with the banks.

And if private investors do take the subsidised risk, the assets may yet cause large losses for Congress to pay.

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The sceptical economists led by Paul Krugman does not like the plan
because he regards it as a mere reshuffling of the original Tarp plan suggested by Hank Paulson last autumn
On the other hand, the plan is quite cleverly structured to split the equity returns
John Gapper Blog, Financial Times March 23, 2009

He points out, rightly, that it involves a government subsidy to private investors in the form of guaranteed debt.

On the other hand, the plan is quite cleverly structured to split the equity returns between the government and ensure that the private sector asset managers bid for the assets, rather than the government trying to establish the right price.

The most significant thing to have been missed is the distinction the plan makes between legacy loans and
legacy securities.

In the case of legacy loans, the government will provide FDIC-backed debt to create up to a six-to-one debt to equity ratio for the funds that buy the assets.

It is providing much less leverage for the funds that will buy legacy resident and commercial mortgage-backed securities.
The Treasury is promising to lend only an additional $100 in debt alongside the $100 of equity it will provide and the $100 private sector fund managers will invest to buy the securities.
The Treasury might lend another $100 but, even then, the debt-to-equity ratio would only be one-to-one.

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If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.
It won’t work.
PAUL KRUGMAN March 22, 2009

Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.
As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries.
And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure.

It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts.
At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s.
It’s also what we ourselves did after the savings and loan debacle of the Reagan years.
And there’s no reason we can’t do the same thing now.

But the real problem with this plan is that it won’t work.

Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

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The “cash for trash” plan proposed by then-Treasury Secretary Henry Paulson

"Toxic waste" = Bad loans utan marknadsvärde
Rolf Englund blog 2009-03-23

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The plan will rob American taxpayers by exposing them to too much risk
and is unlikely to work as long as the economy remains weak,
Nobel Prize-winning economist Joseph Stiglitz said
CNBC 24 Mar 2009

"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives", Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

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US bank rescue plan
The government has decided that it cannot afford to fund entirely by itself the purchase of all the "toxic assets"
It also wants private sector help in deciding how much such assets are worth
- something that has bedeviled previous plans.
BBC 23/3 2009

RE: The Devil is in the detail.

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Under the new so-called "Public-Private Investment Program", taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans.
The goal is to buy up at least $500 billion of existing assets and loans, such as subprime mortgages that are now in danger of default.
Treasury said the program could potentially expand to $1 trillion over time
CNN 23/3 2009

Reaching the $1 trillion level without seeking new funding from Congress will depend on investor interest in the program and which parts of it prove more popular. The plan relies on existing legal authority,
so the Obama administration does not need congressional approval to start it.
CNBC 23/3 2009

By bringing in private investors, the government hopes to jump-start market mechanisms to establish benchmark prices for these assets.

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Geithner's plan falls flat
The Treasury Secretary's financial stability plan is underfunded and woefully short on details, experts said.
Colin Barr, senior writer, Fortune Ferbruary 10, 2009

The Treasury has $320 billion available under the Troubled Asset Relief Program, but the administration said it won't ask Congress for additional money at the current time.

While that judgment may be astute politically - Republicans in Congress have blanched at the administration's $800 billion-plus stimulus program - it only defers the need to repair the damage at banks whose capital levels have been crushed by falling asset prices.

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This is not a true market mechanism, because the government is subsidising the risk-bearing.
Prices may not prove low enough to entice buyers or high enough to satisfy sellers.
Martin Wolf, Financial Times March 24 2009

The scheme may improve the dire state of banks’ trading books.
This cannot be a bad thing, can it?
Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody – certainly not the Treasury – thinks this scheme will end the chronic under-capitalisation of US finance.

Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down.

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The new plan seems to make sense if and only if the principal problem is illiquidity.
Two contrasting views have been held on what ails the financial system.
The first is that this is essentially a panic.
The second is that this is a problem of insolvency.

Martin Wolf, Financial Times 10/2 2009

Martin Wolf

The politicians are making it worse, not better, and you know why they're making it worse?
They want to support their friends on Wall Street and the bankers so they can all keep their Maseratis or their Ferrari's or whatever they're driving.
Jim Rogers 11/2 2009

Full text via Tim Iacono