Timmy takes to the WSJ today to explain his plan for saving banks. I’m actually glad to see this, Timmy The Invisible Boy seems to be trying to be visible. In his own words:
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.
The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.
Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.
Keep in mind when Timmy says that the government is “sharing risk with the private sector” he means “assuming 85 to 97% of the risk“. Also keep in mind when Timmy says “private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets” then the Government has put the No Right Price problem squarely on the heads of the market.
What I mean by the “No Right Price” problem is this: There’s no right price that can satisfy the two goals of the program: a price that is both high enough to make sure the banks get paid enough for their toxic assets so that they don’t suffer a massive loss, and a price low enough to make sure the US taxpayer assuming the vast majority of the risk here doesn’t lose money.
If the price is too low, then banks won’t sell their assets because they will be sold at a confirmed loss. If the price is too high, then the taxpayer is on the hook for billions in losses…and the private partners running the funds won’t buy either knowing some of their skin in the game will be lost as well.
SOMEBODY has to lose on this deal, either the banks (and they collapse), or the public-private partnership (and the taxpayer loses hundreds of billions). That is a hard and fast rule. If there was a right price, the market would have determined it by now. In fact it has, but Timmy on one hand says that the current market price for these toxic assets is too low (the market is broken) and on the other, he’s depending on the private partners in this plan to determine a market price for these assets by throwing government money at it (the market works perfectly fine).
Timmy’s plan is based off a paradox. Practically, he’s decided that the taxpayer losing several hundred billion is better than the banks collapsing. It’s a moral hazard brand bailout of the banks using these funds as the middleman, but he has plausible deniability because he’s not the one setting the price.
The practical upshot is that most likely the plan will fail miserably because the private fund managers aren’t going to pay the banks’ crazy prices for this toxic crap. The fund managers can honestly say “If I pay what the banks want, I will lose money and the taxpayer will lose money. I refuse to do that.” The fund managers will not buy unless they can make a profit. The banks can honestly say “If I sell at the price the fund mangers want, I will have to close my doors and the country will lose thousands more jobs. I refuse to do that.” The banks will not sell unless they can make a profit.
Standoff. Nothing happens…other than more time is wasted. That’s the part where we all lose.
Also available at ZVTS.
Now, having said that, I respect BooMan’s nationalization argument, which says that since taxpayers are going to be the losers anyway, this plan is at least easier and less risky politically. The diminishing returns from nationalization aren’t worth it.
But, if we had chosen to nationalize the banks two months ago instead of spending two months trying to find out which shade of lipstick to put on Paulson’s plan to make it Timmy’s plan, we might be in a much better situation now.
Plan’s not going to work. When it doesn’t, nationalization will be the only choice left. We could have saved a lot of time and energy doing it then instead of six months from now.
Actually, I favor nationalizing insolvent banks. I just am disgusted with many of the bad arguments being used to say nationalization will save us from these a,b,c bad outcomes.
Fair enough. Taxpayer will get stuck with the bill either way.
And it’s a big bill.
Perhaps I’m just worrying too much. There’s not really a hell of a lot we can do about it. Geithner is obsessed with putting new shiny coats of paint on the Paulson plan, and Obama clearly is going to keep Geithner.
What’s with the “Timmy”? All it does is reveal that you have found yourself a whipping boy. We are living through an infantile moment alright, but it sure isn’t “Timmy’s”.
Excuse me then.
May I just remark that I find Mister Geithner’s machinations to be lacking in fiduciary efficacy vis-à-vis the conundrum of profits for the financial systems versus the burden of taxation placed on the average citizen, and view an opportunity instead for the application of massive, nay, monstrous avarice on the part of Adam Smith’s Invisible hand, as it were.
It’s just much easier to say “Timmy’s plan sucks”.
“SOMEBODY has to lose on this deal, either the banks (and they collapse), or the public-private partnership (and the taxpayer loses hundreds of billions). That is a hard and fast rule. If there was a right price, the market would have determined it by now.”
Why not be honest and admit that you wish there were such a paradox, that you wish there were such a “hard and fast rule”. But there isn’t: the combination of ultra-cheap long-term credit by the Fed + restructuring and holding the debts to maturity + future inflation will very likely lead to a decent long-term return for the public private partners.
How decent I don’t know. But if coming out of this crisis the country experiences a period of above average inflation (highly likely), all parties will come out well ahead, including the banks who at this point simply don’t have the luxury of waiting patiently for long-term returns, and want/need to get rid of this paper asap.
But all of that depends on the price the private investors pay for the bank assets under this plan, doesn’t it?
Once again, too high a price, the taxpayer loses money or has to wait so long for the maturity that the money is essentially permanent national debt that will never be repaid.
Too low, and the banks collapse because they are writing off massive debt and we have to bail out the banks anyway.
If there’s a right price to pay, why hasn’t the market found it yet?
Conceding your point without conceding it. Great. You are wasting your time (and I am wasting mine answering you… unfortunately I am old enough to know that I am not “essentially” immortal, even if my death will have to wait “so long”).
let’s call this whole thing accurately: it’s the largest transfer of wealth from the poor to the wealthy class in world history.
add the multiple trillions for the financial sector bailout with the, thus far $2 trillion wasted on two illegal, unnecessary wars– it’s adding up to wayyyy too much to be acceptable by any standard.
this gigantic amount of wealth is being spent on two sectors, the financial and oil/war mongering (being honest) sectors which produce nearly ZERO benefit for the millions of us footing the bill.
for every $1 Billion the fed’s spend on infrastructure needs (whether new or maintenance) 50,000 jobs are created. jobs for architects, engineers, contractors, truck drivers– all of these are good paying, good benefits jobs.
the American Society of Civil Engineers estimates we must spend $2 Trillion to bring our infrastructure back up to an optimal level. do the job math in the context of the $2 trillion wasted on Iraq and Afghanistan and tell me this all makes sense.
for the whiners insisting the feds aren’t in the “job creation business” that is total crap. by it’s nature a “first world” nation with over 300 million people and a multi trillion per year economy has to have a first world infrastructure. that means wayyyy more money needs to be spent here, and NOT on “defense”.
China, a “third world” nation is spending $1 Trillion on their high speed rail system thru year 2020. compare this to Obama’s stimulus plan allocation for high speed rail; $8 Billion. and this is for a system that is NOT complete.
I knew Obama was in trouble as soon as I heard Timmy and Larry were coming into his cabinet; both Wall St. insiders/apologists. Summers is on record supporting bank deregulation when he was with the Clinton administration, and of course Clinton in 1999 signed the “Financial Services Modernization Act” which gutted the Glass-Steagall Act of 1933– put in place after THAT meltdown to insure that it would not happen again.
Agreed: the $1 Trillion PPIF fund is not a “partnership” with the private sector, it’s the usual corporate welfare for the private sector and agreed, it’s not going to work.
the fundamental premise of the plan is “one day the toxic paper will be worth something again” and the government and private investors will make money. really? then WHY do the banks not hold on to their paper until it’s “worth something”?
why not? because all of a sudden the banks are risk aversive, after eight years of totally running amok with CDS’s and other stupid, exotic investments we don’t even know about (yet). they did all of this without anywhere near the liquidity they needed to back up their stupid bets if the economy went south, which is exactly what happened.
the banks do not want to risk their crappy paper will one day be worth anything, so they are demanding WE the taxpayers absorb the debt created by their greedy, stupid behavior.
the fact Obama is going along with this, instead of the obvious need for nationalization, is very, very sad, and I think one can already predict a one term presidency.
coddling, kissing the asses of the wealthy investor class is not “change”. in fact, it’s hard to imagine McCain taking any action other than exactly what Obama is doing had he been elected.
There’s a faint glimmer of hope that Geithner is going to at least keep the nationalization option open.
Which is exactly what Geithner should be doing now. Perhaps Geithner is aware of the kinds of things the bank stress tests are going to reveal.
We’ll see how it shakes out.
” If there was a right price, the market would have determined it by now. “
This is an article of faith in Hayek’s America and many of us have unconsciously absorbed it, but it is totally false. “The market” depends on price of credit and expectations of people with access to capital. Since the first is infinite for these assets due to the bank panic (the banks cannot offer credit to purchase the very assets that have caused them to freeze) and there is enormous political and economic uncertainty among the capital controlling class, there is effectively no market for these assets – except in distress sales where vultures like PennyMac do very well.