Even I am getting tired of this topic but I think it’s important to offer counterpoints to the common wisdom I’m seeing in Left Blogistan. There is a huge amount of criticism about the Geithner Plan and a lot of it has to do with things that really are no different than they would be under nationalization schemes. Now, let’s consider a real case of nationalization: IndyMac. What kind of deal did the investors get?
1. They were able to buy $20.7 billion in loans and assets for $16 billion.
2. They obtained a $9 billion loan from the FDIC (I presume that it came at a very favorable interest rate).
3. They “assume[d] the first 20% of losses from borrowers who default. The [FDIC] will cover most of the remaining losses.”Anticipated loss to the taxpayer: $10.7 billion
Size of IndyMac: approximately 1/50th the size of Bank of America and CitiGroup
Now, if we go over to Open Left and read Paul Rosenberg, we’ll see that he is quoting Krugman and making the following complaint about the Geithner Plan.
First off, what should be clear from these two exchanges is that [Austan] Goolsbee is telling the truth, but he’s being deeply deceptive at the same time. Sure it’s true that tax payers both win or lose together. But the question is, “How much?” And the answer is simple: taxpayers take on much more risk, while investors stand to pocket much more profit, as Krugman explains with his more detailed explanation. And it’s precisely that more detailed explanation that’s being sidelined in the mainstream political discourse.
Let’s start with a simple premise. If you are being critical of the Geithner Plan and calling for nationalization in its stead, the criticisms that you have about the Geithner Plan should not be equally true of what happens when you nationalize. There should be things that turn out more favorably or that involve less risk in nationalization. Nationalization should be a better deal in some sense. If all the criticisms you have about Geithner’s Plan are basically true for what happened with IndyMac, then there’s a problem with your analysis.
Now, in the case of IndyMac, the taxpayer took an anticipated $10.7 billion haircut because, in part, they are on the hook for 80% of future defaults on shitty mortgages. Under Geithner’s Plan, the taxpayer is on the hook for 85% of the toxic assets. So, that’s a five percent difference. In the case of IndyMac, the taxpayer provided (presumably) some sweetheart financing in the form of a $9 billion loan. We hope, but are not guaranteed, of getting that money back.
We nationalized IndyMac and we have no potential upside at all. There is no scenario where the taxpayer doesn’t lose billions of dollars on the IndyMac deal. In the Geithner Plan, we make money if the investors make money. In both cases, we assume most of the risk and we provide most of the capital, and we give extremely favorable terms to the investors.
Now…you might complain about both scenarios. You might argue that IndyMac was done wrong and we can do future nationalizations in a way that doesn’t lose the taxpayers $10.7 billion dollars. But if we nationalized a bank that is fifty times bigger than IndyMac and we lost the same percentage as we did on IndyMac, that would be a $535,000,000,000,000 loss. You can double that if we nationalized two banks of that size.
I don’t want to make a false argument that we will necessarily lose that kind of money by nationalizing or that we couldn’t have done better with IndyMac, or that everything would move according to scale, but we have to think about these things more carefully. There could be perverse incentives built into the non-recourse loans that are provided in the Geithner Plan and those incentives could result in a loss of money to the taxpayer. There’s risk involved in this plan. But to suggest that there isn’t staggering risk and unfairness in any conceivable nationalization plan is just wrong and I will keep pointing that out as long as I see the same arguments coming out of Left Blogistan.
