×
It's probably a bad sign that the administration leaked the details of their full banking plan in a Friday night newsdump. And reading it, you can see why. Most expected that the harsh reaction to the skeletal structure Geithner originally unveiled would force substantial changes. That doesn't seem to have happened. "It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago," writes Krugman. "The zombie ideas have won."Maybe so. In any case, the spin is certainly very weird. This paragraph stopped me short when I read it the first time:
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.You almost wonder if that's a typo. It seems to imply that the protection comes because private investors will accurately price the assets. After all, they don't want to lose money.But it's not their money. It's our money. The plan uses public funds to protect and subsidize private investors. As such, a private auction will not price the assets. It will price the potential upside of the assets given that taxpayers will assume the brunt of the losses. As illustration, imagine an art auction. Now imagine an art auction where Sotheby's loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby's or the private investors? As Calculated Risk says, "With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks."As for the contention that "the government will be buying the troubled loans of the banks at a deep discount to their original face value," I'm not even sure what to say about that. Their original face value was a lie. If I pretend this beautiful bic pen is worth $60 million and then sell it to you for $1.00, you're not getting a $59,999,999 discount because I've come down from the imaginary price where I started. The question is what these assets are actually worth, and whether taxpayers are paying more or less than that. We're in this mess because the original face value is wrong. One other thing: Yves Smith writes that "there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over." This public-private strategy is far more complicated than either the toxic assets strategy or full nationalization. If it goes forward, we're going to see a situation in which the taxpayer is the counterparty to an investment they don't understand and won't really have agreed to. If it goes bad -- and it really might go bad, and the details might prove galling in much the way that AIG's bonuses did -- the byzantine approach could well leave voters feeling tricked. That risk might make sense if this were the only viable path forward. But it's actually hard to imagine the set of questions you ask that ends in this particular answer. Maybe we'll find out on Monday.
