Comments on: What’s Plan B?

By: Reading Krugman - The Finance Buff

Reading Krugman - The Finance Buff — Tue, 31 Mar 2009 11:30:48 +0000

[...] Many other sharp economists view the approach favorably, including Mark Thoma (Univ. of Oregon) and Brad DeLong [...]

By: Gaming the Legacy Loan Auctions « The Baseline Scenario

Gaming the Legacy Loan Auctions « The Baseline Scenario — Sun, 29 Mar 2009 22:02:40 +0000

[...] is an upside to all of this – the “brute force Plan B.” If the Public-Private Investment Partnership fails due to a lack of participation by banks, [...]

By: adios amigos

adios amigos — Sat, 28 Mar 2009 23:03:49 +0000

Svetlana,
I was an idiot. I trusted them. Something I will never do again. I’m screwed now, because i’m an idiot that never followed history. They screwed everyone after WWII, and continue to do so. All they care about is money. Everyone in America seems to think that they have to have a big house and an expensive car to justify their “success”. Yeah….real successful. They did it with OUR dollars, and continue to hide behind their “deep concern” with world peace. What a pathetic group. It’s really about stealing money, and everybody else’s savings so they can have, what they view, as a comfortable lifestyle. I think the one person that defines what America REALLY is, is Paris Hilton. I can only be thankful that I’m not one of them. However, they have successfully stolen all of my pension fund savings. At my age, i’m not sure if I can recover. My wife and children are now terrified that we will never realize the fulfillment of our plans. But, this is Norway, so we’ll see. I continue to hope that the inherent honesty and perseverance of the Norwegian people will save us from the American greed and theft that has led several of our pension funds to disaster. Hope. It’s all we have anymore, and “honest” work ethics. Pray for us, we’re broke now. THANKS AGAIN AMERICA !!!!!!!!!!!!!

By: Svetlana

Svetlana — Sat, 28 Mar 2009 19:51:14 +0000

Instead of being angry with Wall Street why don’t we pull all our money out of it!
They will have no fuel and Ponzi scheme will stop.
I have liquidated my investments in September of 2008.

By: Nahtanoj

Nahtanoj — Sat, 28 Mar 2009 02:47:14 +0000

This makes perfect sense. The program will produce price discovery, which will make it harder for banks to carry assets at above market prices, which will make it more likely for banks to be revealed as insolvent. This will make it more likely that intervention will occur early, instead of after an extended period as a zombie.

(Of course, another effect of the program will be to push up prices of some assets, as a large amount of low-cost capital is deployed to buy them. This will benefit banks holding these assets, and will reduce their need for additional capital (whether public or private). But won’t the price get bid up to levels that result in the taxpayer losing money for sure? The sliver of private capital in the program is designed to reduce the risk of that happening — prices will not get bid up beyond the point where the bidders think they can still make a generous return.)

By: Nahtanoj

Nahtanoj — Sat, 28 Mar 2009 02:20:57 +0000

Joe Nocera, in the March 28 edition of the NYTimes, sees it much the same way: “it will be far more politically palatable for the government to recapitalize the banks — or close them down, or even take them over, if need be — knowing that we finally can value the bad assets. You really can’t nationalize a bank without being able to make an ironclad case, to the public, that it is hopelessly insolvent. The P.P.I.P. will help make such a case.”

By: Nahtanoj

Nahtanoj — Sat, 28 Mar 2009 02:04:32 +0000

That’s exactly what it looks like.

The public doesn’t want to put any more money into the banks right now, so nationalization would be hard to push through. And in any event, the legal framework for taking over a large institution like Citi and giving haircuts to its creditors just doesn’t exist.

Among other things, the Geithner plan is a gigantic exercise in price discovery. Thanks to the subsidies and the massive size of the program, the bidders will pay fairly generous prices. If the banks still won’t sell, it will be hard for them to justify the carrying values of their portfolios. Institutions with large portfolios of non-credible portfolios will be pushed to write them down, increasing the likely need for intervention.

While this process is playing out (supported by the ‘stress tests’, which will give additional data about the quality of bank portfolios), Congress can put an FDIC-type framework into place for resolution of large, systematically important financial institutions.

Then, if the results of price discovery show that certain institutions are insolvent, the public may accept the need to put more capital into banks – knowing that there really is no alternative, and that existing shareholders (and possibly creditors will be wiped out. And the legal framework for doing the deed will have been put into place quietly, without much fanfare.

There is a coherent political strategy at work here, and it’s quite encouraging to see how the pieces all fit together.

By: Pat

Pat — Fri, 27 Mar 2009 21:01:11 +0000

So much heat, so little light.

By: adios amigos

adios amigos — Fri, 27 Mar 2009 01:52:29 +0000

The plan may, or may not work – short-term. It will fail long term, and that is without a doubt. America is doing what it always does – go for the quick fix / feel good solution. Your economic problems in America are massive. For decades, your politicians and CEO’s have always defaulted to the short term solution to an issue. And their key concerns were NEVER the long-term health of your economic future. They always did what was right for themselves first, their special interest groups, their political party, and then……way down the list…..came doing what was best for “the people”. You have borrowed yourselves into oblivion for decades, subsidized your lives beyond comprehension with borrowed funds, and relentlessly made financial promises you, and even your children will NEVER be able to re-pay. I think what amazes us all watching this mess unfold from far away places, is how shocked you all are that this is happening now. Your own government refuses to go by the laws it passed regarding accounting standards. Because, if your government had to show exactly how much their real liabilities were, it might awaken the american people as to exactly how broke you really are. To many of us outside looking in, we now see exactly what the American economy really is: the biggest Ponzi scheme in recorded history. Your broke, in fact your past broke. Broke would be a step up for you right now. Your Social Security system is a Ponzi scheme, your Medicare ‘ Medicaid system is also. A few weeks ago, you folks, the alleged “Titans Of Finance” had to send Hillary to china hat in hand begging them for more loans. By the way, they said “NO”. “Big Ben” Benanke’s solution? Start the presses!! I don’t think we’re in Harvard School of Finance and Economics anymore Toto. Welcome to The United States of Banana Republic. What is absolutely amazing all of us, is that your leaders solution is to do the same thing all over again THAT GOT YOU TO THE EDGE IN THE FIRST PLACE !!!!!!!!!!!! You all deserve whats coming. I’d sell that BMW if I were you. In about 18 months it’s going to be worth zero….the value of your dollars. Good job, Titans Of Finance !! You seem to have out smarted yourselves. Enjoy starvation. It’ll be good for your waist lines.

By: Erich Riesenberg

Erich Riesenberg — Thu, 26 Mar 2009 23:14:51 +0000

I am more curious about what happens if the plan works. Like last fall, I am curious to know the goal of the plan. Is it really to induce banks to lend? Are we really giving them taxpayer money so they will be cajoled into lending to insolvent taxpayers? That seems roundabout. Unemployment insurance and food stamps for all would be a better bet.

By: Erich Riesenberg

Erich Riesenberg — Thu, 26 Mar 2009 23:13:18 +0000

Why would the fact that they may be zero sum equate to them not being a problem? Some will win some will lose.

By: Mike Rulle

Mike Rulle — Thu, 26 Mar 2009 22:26:39 +0000

Simon and James,

Have you read the study by William Lucy of UVA? I am oversimplyfying, but he basically is saying that MBS are hard to value, but their prices are substantially lower than implied by the underlying value of the mortgages. He uses foreclosure data, home values/family income ratios, “stress testing” home values to 2000 levels, and concludes that mortgage losses are less than $150 billion. The remaining losses are due to mark to market declines from lack of transparency in MBS. Do you have any comments on this study?

By: Linus_Wilson

Linus_Wilson — Thu, 26 Mar 2009 19:41:05 +0000

The toxic asset plan proposed by the U.S. Treasury on Monday, March 23, 2009 is a double subsidy. First, it is a subsidy to banks and their shareholders and creditors. This first subsidy increases moral hazard. The second subsidy is to hedge fund managers who profit at taxpayer’s expense.

By: Mike Rulle

Mike Rulle — Thu, 26 Mar 2009 19:31:27 +0000

I am a broken record on this. We all discuss these mortgage assets the banks own as if we know what they are. They have collectively taken a trillion dollar plus writedown but we are currently at an 8% default rate and a 3% foreclosure rate. There are $10 trillion of domestic mortgages. Yet we continue to assume these assets are massively over valued. Assuming a 15% foreclosure rate (pretty extreme I think) and a 10% recovery rate (historically at 50%)) that adds up to $1.35 trillion in losses. I realize i am missing something, but what? Please don’t say “credit derivatives” because they are zero sum. The banks are all making happy music about the first quarter. Why are we assuming these assets are “toxic”. Can some one please describe these assets and why we are assuming losses even greater than I am hypothesizing? My point is, this seems as if we have past the worst point.

By: Tommy

Tommy — Thu, 26 Mar 2009 15:50:47 +0000

Wow, that would be great. I second the motion of sitting down with a big bucket of popcorn — watching that unfold. However, armies of freshly laid-off Wall St. Talent tend to have big mouths, which would have exposed that plan by now.