Q: What is the Geithner Plan?
A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world’s largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off–in either case at an immense profit.
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
Q: Where does the trillion dollars come from?
A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program’s operations.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?
A: So that they have skin in the game, and so do not take excessive risks with the taxpayers’ money because their own money is on the line as well.
Q: Why then should hedge and pension fund managers agree to run this?
A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested–which is leveraged up to $1 trillion with government money. …”
More on the bank plan
“…But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.
Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.
But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog]” …”
Goh Eng Yeow on the latest US plan to manage toxic bank assets.
The bank gets its $100 million back while the JV becomes the owner of the doubtful debt.
But here is the catch: If the doubtful debt cannot turn “good” and turns bad, with the borrower refusing to pay a single cent at all, all the JV will lose is the $10 million. It will not have to repay the $90 million loan it owes the FDIC.
It is a “heads you win tails I lose” situation for the pension funds and insurance firms if they come up with the small outlay to participate in Tim Geithner’s programme.
Most borrowers would love to be in such a situation – you get to keep the money you make, but the bank takes the bulk of any losses you may incur.
But doesn’t it remind you of the mess which caused the the world to plunge into this credit crunch crisis in the first place? …”
“…What needs to be done?
At the kernel of the credit crisis are hundreds of billions of dollars of unsuitable mortgages handed out to subprime borrowers in 2005, 2006 and 2007. These loans, parcelled up into mortgage-backed securities and derivatives called collateralised debt obligations, are already going sour in large numbers, as borrowers default and their foreclosed homes are dumped on the market at low prices.
Investors have shunned these securities and derivatives for more than 18 months now, fearful that the US housing market will keep getting worse. When these assets do sell, it is at depressed prices, far below face value. Banks, believing that the housing market will eventually stabilise and most borrowers will not default, do not want to sell in these circumstances.
A similar stalemate has been reached in the market for commercial mortgages and other types of credit derivatives, such as parcels of credit card loans. In all, perhaps $2 trillion of impaired assets is sitting on bank balance sheets. The government hopes that offering taxpayer money to buy them will kickstart the frozen markets and restore confidence more widely. …”
Geithner’s Plan “Extremely Dangerous,” Economist Galbraith Says
“…In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit
Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has been trying to get approved since last fall?
In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms. He views the crisis the same way Wall Street does–as a temporary liquidity problem–and his plans to fix it are designed with the best interests of Wall Street in mind.
If Geithner’s plan to fix the banks would also fix the economy, this would be tolerable. But no smart economist we know of thinks that it will.
We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:
The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren’t lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.
The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity. …”
Gibbs on Geithner: “Uhhhh….uhhhh…uhhh”
By Michelle Malkin
“…The Robert Gibbs Live Comedy Hour WH press briefing is on. Press corps is actually pressing Gibbs on Tim Geithner.
A journo asked Gibbs about the Geithner date discrepancies (March 10? March 3?) Gibbs replied, and I quote: “Uhhh…uhhhh…uhhh…uhhh.”
After having made snarky remarks about “his friends on cable TV” in response to a question about Obama’s rotten week, Gibbs then dismissed Geithner questions by offering to give one of the questioning journalists a dollar to read the latest newspaper accounts of the actual chronology today.
Another journo asked why Gibbs himself used the erroneous March 10 date that Geithner is sticking to even now despite the House hearing video that exposes that lie.
More deflection and uhhhs.
It’s all cable television’s fault! …”
“…Vampires are mythological or folkloric revenants who subsist by feeding on the blood of the living. In folkloric tales, the undead vampires often visited loved ones and caused mischief or deaths in the neighbourhoods they inhabited when they were alive. They wore shrouds and were often described as bloated and of ruddy or dark countenance, markedly different from today’s gaunt, pale vampire which dates from the early Nineteenth Century. Although vampiric entities have been recorded in most cultures, the term vampire was not popularised until the early 18th century, after an influx of vampire superstition into Western Europe from areas where vampire legends were frequent, such as the Balkans and Eastern Europe, although local variants were also known by different names, such as vampir (вампир) in Serbia, vrykolakas in Greece and strigoi in Romania. This increased level of vampire superstition in Europe led to mass hysteria and in some cases resulted in corpses actually being staked and people being accused of vampirism.
In modern times, however, the vampire is generally held to be a fictitious entity, although belief in similar vampiric creatures such as the chupacabra still persists in some cultures. Early folkloric belief in vampires has been ascribed to the ignorance of the body’s process of decomposition after death and how people in pre-industrial societies tried to rationalise this, creating the figure of the vampire to explain the mysteries of death. Porphyria was also linked with legends of vampirism in 1985 and received much media exposure, but this link has since been largely discredited.
The charismatic and sophisticated vampire of modern fiction was born in 1819 with the publication of The Vampyre by John Polidori; the story was highly successful and arguably the most influential vampire work of the early 19th century. However, it is Bram Stoker’s 1897 novel Dracula that is remembered as the quintessential vampire novel and provided the basis of the modern vampire legend. The success of this book spawned a distinctive vampire genre, still popular in the 21st century, with books, films, and television shows. The vampire has since become a dominant figure in the horror genre. …”
“…An investor who attempts to profit by buying debt of bankrupt or credit-impaired companies. Vulture investors are generally interested in the debt of problem companies that hold substantial tangible assets. …”
“Social Darwinism refers to various ideologies based on a concept that competition among all individuals, groups, nations, or ideas drives social evolution in human societies. The term draws upon the common use of the term Darwinism, which is a social adaptation of the theory of natural selection as first advanced by Charles Darwin. Natural selection explains speciation in populations as the outcome of competition between individual organisms for limited resources or “survival of the fittest” (a term in fact coined by Herbert Spencer) (also refer to “The Gospel of Wealth” theory written by Andrew Carnegie). The term first appeared in Europe in 1879 and was popularized in the United States in 1944 by the American historian Richard Hofstadter, and has generally been used by critics rather than advocates of what the term is supposed to represent.
While the term has been applied to the claim that Darwin’s theory of evolution by natural selection can be used to understand the social endurance of a nation or country, social Darwinism commonly refers to ideas that predate Darwin’s publication of On the Origin of Species. Others whose ideas are given the label include the 18th century clergyman Thomas Malthus, and Darwin’s cousin Francis Galton who founded eugenics towards the end of the 19th century. …”
“…Herbert Spencer’s ideas, like those of evolutionary progressivism, stemmed from his reading of Thomas Malthus, and his later theories were influenced by those of Darwin. However, Spencer’s major work, Progress: Its Law and Cause (1857) was released two years before the publication of Darwin’s On the Origin of Species, and First Principles was printed in 1860. In regard to social institutions, there is a good case that Spencer’s writings might be classified as ‘social Darwinism’. He argues that the individual (rather than the collectivity) is the unit of analysis that evolves, that evolution takes place through natural selection, and that it affects social as well as biological phenomena.
In many ways Spencer’s theory of cosmic evolution has much more in common with the works of Lamarck and Auguste Comte’s positivism work than Darwin. …”
Federal Deposit Insurance Corporation (FDIC)
“The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. Funds in non-interest bearing transaction accounts are fully insured, with no limit, under the temporary Transaction Account Guarantee Program. However, not all banks are participating in the TLGP/TAGP.
On January 1, 2010, the standard coverage limit will return to $100,000 for all deposit categories except IRAs and Certain Retirement Accounts, which will continue to be insured up to $250,000 per owner.
Insured deposits are backed by the full faith and credit of the United States.
The vast number of bank failures caused by runs on the bank in the Great Depression spurred the United States Congress to create an institution to guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF).
The FDIC insures accounts at different banks separately. For example, a person with accounts at two separate banks (not merely branches of the same bank) can keep funds up to the insurance limit in each account and be insured for the total deposited. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) are considered separately for the insurance limit. Under the Federal Deposit Insurance Reform Act of 2005, Individual Retirement Accounts are insured to $250,000. …”
“…The two most common methods employed by FDIC in cases of insolvency or illiquidity are:
- Purchase and Assumption Method (P&A), in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank’s loans (assets). There are several types of P&As:
- The Basic P&A: assets that pass to acquirers generally are limited to cash and cash equivalents.
- The Loan Purchase P&A: the winning bidder assumes a small portion of the loan portfolio, sometimes only the installment loans, in addition to the cash and cash equivalents.
- The Modified P&As: the winning bidder purchases the cash and cash equivalents, the installment loans, and all or a portion of the mortgage loan portfolio.
- The P&As with Put Options: to induce an acquirer to purchase additional assets, the FDIC offered a “put” option on certain assets that were transferred.
- The Whole Bank P&As: Bidders were asked to bid on all assets of the failed institution on an “as is,” discounted basis (with no guarantees). This type of sale was beneficial to the FDIC for three reasons. First, loan customers continued to be served locally by the acquiring institution. Second, the whole bank P&A minimized the one-time FDIC cash outlay, and the FDIC had no further financial obligation to the acquirer. Finally, a whole bank transaction reduced the amount of assets held by the FDIC for liquidation.
- The Loss Sharing P&As: these use the basic P&A structure except for the provision regarding transferred assets. Instead of selling some or all of the assets to the acquirer at a discounted price, the FDIC agrees to share in future loss experienced by the acquirer on a fixed pool of assets.
- Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank. These are straight deposit payoffs and are only executed if the FDIC doesn’t receive a bid for a P&A transaction or for an insured deposit transfer transaction. In a straight deposit payoff, no liabilities are assumed and no assets are purchased by another institution. Also, the FDIC determines the insured amount for each depositor and pays that amount to him or her. In calculating each customer’s total deposit amount, the FDIC includes all the interest accrued up to the date of failure under the contractual terms of the depositor’s account. …”
Receivership Management Program
“When an insured institution fails, the FDIC is ordinarily appointed as receiver. In that capacity, it assumes responsibility for efficiently recovering the maximum amount possible from the disposition of the receivership’s assets and the pursuit of the receivership’s claims. Funds collected from the sale of assets and the disposition of valid claims are distributed to the receivership’s creditors in accordance with the priorities set by law.
The FDIC seeks to terminate receiverships in an orderly and expeditious manner. Once the FDIC has completed the disposition of the receivership’s assets and has resolved all obligations, claims, and other legal impediments, the receivership is terminated, and a final distribution is made to its creditors. Receivership creditors may include secured creditors, unsecured creditors (including general trade creditors), subordinate debt holders, shareholders of the institution, uninsured depositors, and the DIF (as subrogee). The FDIC is often the largest creditor of the receivership.
In addition, the FDIC works closely with other regulators and with the industry to stay abreast of capital markets and financial markets developments to be prepared for potential resolutions involving complex financial instruments. Further, with growing globalization, international outsourcing, and the interconnections of financial markets, the FDIC enters into international agreements, through cross border memoranda of understanding, to facilitate closer cooperation with key foreign authorities on the analysis of emerging issues, improved understanding of national legal and policy structures, and contingency planning for potential resolutions. …”
The David Copperfield School of Economic Recovery, Pt. II
By Michelle Malkin
Last week, the Obama administration brought us a $1 trillion Federal Reserve magic trick hatched by the David Copperfield School of Economic Recovery — printing up a trillion bucks and “pumping it into the U.S. economy”…by buying up bonds and mortgage securities…sold and backed by the government.
Today, hapless, truth-challenged tax cheat Treasury Secretary Tim Geithner officially unveils another $1 trillion magic trick. Instead of letting failed banks fail, we’ll have another desperately massive and massively desperate attempt to prop them up through a “public private partnership investment program.” Eager to get the still-unfolding Bonus-gate behind them (see “Geithner Aides Worked With AIG for Months on Bonuses” and “AIG paid over $218 million in bonus payments”), Team Obama leaked details of the plan over the weekend. World stock markets were up this morning, full of audaciously blind hope.
Geithner ’s WSJ op-ed this morning lays out some of the details he failed to deliver when he first unveiled his non-plan plan a month ago: …”
Can Geithner Sell New Bailout Plans After the AIG Fiasco?
Comments on the latest Geithner Plan
DN! Paul Krugman (2\2) on $1 Trillion Geithner Plan to Buy Toxic Bank Assets
The Geithner plan = The Paulson plan
Geithner Plan I
Geithner Plan II
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House Of Cards – Part 2
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