Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.

His most recent discussion on Bank Nationalization is quite interesting


I often wish I were Mark Thoma. If I were Mark Thoma, I could be smart and paying attention without being bitter.

So I am not wedded to a particular plan, I think they all have good and bad points, and that (with the proper tweaks) each could work. Sure, some seem better than others, but none — to me — is so off the mark that I am filled with despair because we are following a particular course of action.

Unfortunately, I have a darker temperament, a spirit less generous and optimistic than Mark’s. I am filled with despair, not because what we are doing cannot “work”, but because it is too unjust. This is not my country.

The news of today is the Geithner plan. I think this plan might work very well in terms of repairing bank balance sheets.

Of course the whole notion of repairing bank balance sheet is a lie and misdirection. The balance sheets we should want to see repaired are household balance sheets. Banks have failed us profoundly. We want them reorganized, not repaired. A world in which the banks are all fixed but households are still broken is worse than what we have right now. Too-big-to-fail banks restored to health are too-big-to-fail banks restored to power. The idea that fixing legacy banks is prerequisite to fixing the broad economy is a lie perpetrated by legacy bankers.

I think that critics of the Geithner plan are missing some of its tactical brilliance. My guess is that behind the scenes, Geithner has arranged a kind of J.P. Morgan moment. You know the story. During the Panic of 1907, J.P. Morgan locked a bunch of bankers in a room and insisted they lend to stave a panic. We’ve already seen one twisted parody of this event, when Henry Paulson locked a bunch of bankers in a room and insisted they borrow money from the Treasury. This second one is more clever. I don’t think the scandal of the Geithner plan is going to turn out to be the subsidy to well-connected investors embedded in the non-recourse loan put option. On the contrary, I think that Treasury has already lined up participants for the “Legacy Loans Public-Private Investment Fund” and persuaded them to offer prices so high that despite the put, investors will expect to take a major loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the world, the asset managers who do well by “shaking hands with the government“, will agree to take a hit on relatively small investments in order first to help make banks smell solvent, and then to compel and provide “good optics” for a maximal transfer from government to key financial institutions.

Consider a hypothetical asset manager, PIMROCK. PIMROCK reviews a pool of loans held by the bank J.P. Citi of America, and its analysts determine they are worth 30¢ of par value. The bank holds them at 80¢ on its book. PIMROCK agrees to put down $10B to purchase loans from the pool at 82¢ thrilling stock markets everywhere. It was all just a bad dream!

Under Geithner’s plan, PIMROCK’s $10B permits a $10B equity investment from the Treasury. Then the FDIC levers the whole thing up, providing $6 of debt for every one dollar of equity. So, $140B of bad loans are lifted from J.P. Citi of America, nearly $90B of which is sheer overpayment to the bank.

Of course, as cash flows evolve, PIMROCK’s $10B is wiped out entirely, as is the Treasury’s investment. The FDIC gets repaid in a bunch of securities worth about $50B, taking a $70B loss. But, as Calculated Risk, likes to say “Hoocoodanode?” These were real market prices, Geithner or his successor will argue. Our private partners lost everything. There was no subsidy here.

Meanwhile, taxpayers will be out around $80B.

Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they’ve received assurances that if we can get the nation out of the financial pickle it’s in, there will be no haircuts on those bonds. “Shaking hands with the government” means that nothing ever has to be put in writing.

Welcome to America, 2009. Change we can believe in.

The scenario I’ve presented is a variation on this by Karl Denninger (ht Tyler Cowen).

I liked this post today by Matt Yglesias:

My biggest concern about the PPIP approach to the banking system is that even if it works, what it does essentially is return us to the pre-crisis status quo — banks that are so large that they’re too politically powerful to regulate effective and too systemically important to be allowed to fail. That’s a recipe for dishonest transactions that produce short-term profits at the cost of blowups. One appealing element of nationalization is that it can easily be made to end in a world in which there is no institution named “Bank of America” or “Citi” and no such gigantic institution.

On the bright side, I’m thankful that we have people like Paul Krugman, Simon Johnson, and Willem Buiter, who fight the good fight while being too eminent to ignore.

On the dark side, try here, here, and here.

Category: Bailouts, BP Cafe, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Dark musings, 2009-03-24”

  1. leftback says:

    The history of Japan shows that these problems are long-lasting, as the hot potato is passed around.
    Ultimately we will be faced with a choice between the future of GS and the U.S.

  2. DL says:

    “Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices”.

    There may be other deals as well. Like money “under the table” from the bank it is buying assets from. The whole thing is a sham set up to fool the sheeple. And there’s a good chance that the sheeple won’t realize that they’ve been “had”, until after the 2012 election.

  3. DL says:

    There is another question to be posed here, and that is, what course of action should Obama take with regard to the banks that would ALSO maximize his chances of re-election in 2012…?

    Looking at it from a purely POLITICAL point of view, I’m sorry to say that the Geithner plan has merit.

  4. Moss says:

    We’ve been ‘had’ since 2000 in more ways than one.
    The validity of this theory will depend on the price of course.

    BTW – 2nd mortgage pools which are in default are going for 2-3 cents per dollar of outstanding balance.

  5. leftback says:

    For the Obama team, Geithner and Bernanke are Plan A. (Whip deflation, mop up the banking excrement).
    Plan B will be 2010-2012 (Control inflation, rebuild energy, manufacturing and infrastructure).

  6. Avl Dao says:

    As BofA’s “Rosey” put it last summer, and as Waldman explains in the blog posting, the consumer’s household balance sheets are in tatters.
    Was this critical point roped off and whisked away to some obscure corner when the conversation turned to Geithner/Bernanke or Obama ‘succeeding’ at something in 2010 or 2012?
    Politically, can there really be a credible Plan B in the head of anyone in Obama’s inner circle where households remain financially distressed while where newly regulated ‘fixed’ banks stand ready to offer credit to creditworthy consumers only to find none exist en masse enough to make a dent on the decline in consumer consumption and its impact on GDP?
    To leave the consumer with a U-6 unemployment rate near 20%,and with banks that wont lend to them due to their deteriorated creditworthiness, while attention is focused on rebuilding energy, mfg and infrastructure, might be a credible political game plan for winning in 2016 or 2020, but not 2012.
    Here’s some history on inertia and superpower economics:
    It took the better part of 1973-1984…11 years (and 4 presidents) for the US to kick its mfg base to the curb, to battle stagflation & inflation, to weather 2 energy shocks, and to attack double-digit i-rates, before finally emerging in 1984 with signs of employment growth in a brand spanking new economic model consisting of a Service Economy with a GDP 70% driven by Consumer consumption.
    That process took 11 years, folks, for a country that in 1973 was only 2/3rds the size of the flabby 300+ million person nation we have today.
    I know many of today’s young politicians have admitted to past pot-usage (our ‘wild youth’) but I doubt Obama’s inner-crew are hitting bongs and coming up with delusions of rebuilding anything in such short time frames that fly in the face of inertia and history.
    I still believe Warren Buffet: “No one’s ever seen this before, so we’re all simply making it up as we go along”. There are no worldly Plans a or b, just crap-shot A and crap-shot B

  7. Jojo says:

    @leftback said: …Ultimately we will be faced with a choice between the future of GS and the U.S

    Maybe the new patriotic mantra is “What’s good for Goldman is good for the USA”?

  8. leftback says:

    “There are no worldly Plans a or b, just crap-shot A and crap-shot B”

    Ha. I agree. I didn’t say Plan B would be over in two years, or that it would succeed (see Japan, 1990s). Anyone who thinks the excrement will be cleaned up completely is definitely hitting bongs. But even when faced with an insuperable problem, there must nevertheless be a plan. As Buffett points out, the plan is changing every day.

  9. KidDynamite says:

    i liked this post at first, but isn’t there a flaw in the PIMROCK logic?? both PIMCO and Blackrock are asset management firms right? They own bonds in the big banks for their funds… they can’t create a new fund to bail out the marks and valuations of their other funds – that’s pretty illegal in the mutual fund world isn’t it?

  10. johnbougearel says:

    Pimrock, hmmm

    Yes, This would be a good name for a company from the Flinstone era. PimRock could be a neighboring town to Bedrock USA.

    PPIP is a misnomer. We must do our patriotic duty and give it a more honorable name like we did with TARP.
    Geithner’s Welfare for the Uber-Rich Scheme (GWUR) mightbe more appropiate

  11. rktbrkr says:

    Geithner ain’t no JP Morgan!

  12. usphoenix says:

    @KidDynamite: “That’s pretty illegal in the mutual fund world isn’t it?” You’re being facetious right? Probably once was, probably should be. Wait and watch.

    Read today where Lewis is being sued for deceiving board members/shareholders about ML acq.

    Should prove interesting.

  13. rktbrkr says:

    These private investors are Tim’s stalking horse to try and conceal the magnitude of the cost of this Big Bank bailout. There are still a lot of unidentified details and the banks and the vultures will be extracting more concessions from Tiny Tim as time goes by and we have new waves of foreclosures pushing prices in the bubble states ever lower as the logjams created by the moritoria break.

    The basic problem is that Tim wants to do the deal worse than the buyers or the sellers, it’s obvious to all and they’re going to take advantage of the US without remorse. The US has been weak since day #2 (Day #1 Paulson John Wayne’d us deeper into this mess).

    The vultures have paid about 7%-30% for this kind of trash and the banks figure it’s worth 50-80% so Tim has to make up the difference in a convoluted enough way so the taxpayers don’t know that it’s Johnny Wadd behind them with his hands on their shoulders until it’s too late.

  14. ben22 says:

    yeah this is interesting.

    I keep hearing they are going to do a dutch auction, how much would that juice the market bidding this stuff all the way to this .80 + example.

  15. Avl Dao says:

    @ leftback “Ha. I agree. I didn’t say Plan B would be over in two years, or that it would succeed (see Japan, 1990s). Anyone who thinks the excrement will be cleaned up completely is definitely hitting bongs. ”

    Never liked the tune but I guess we’re all “Turnin japanese, We’re Turnin japanese”.
    We’ll be bloggin about this shape-shiftin mess…and bloggin about our slew-footed ‘dollar-short’ response s, from 2007-2017. We’ll likely cycle thru a bunch of presidents too while we’re at it.

  16. some_guy_in_a_cube says:

    A little sympathy for the Fed and Treasury. All they know how to do is to defend the rentier class. They are very good at that, and they have always succeeded at that in the past. Every single time.

    Until now.

    Too bad for them that it has completely failed this time. Humpty Dumpty is in tatters. The global financial system is hopelessly insolvent, and I’m afraid that even the Fed and Treasury aren’t bigger than the universe.

  17. rktbrkr says:

    Stiglitz: “Quite frankly, this amounts to robbery of the American people”
    (Tell us what you really think Joe!)

    Toxic assets plan a robbery: Stiglitz


    The US government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, according to Nobel Prize-winning economist Joseph Stiglitz.
    “The Geithner plan is very badly flawed,” Stiglitz said on the sidelines of a Credit Suisse Asian investment conference in Hong Kong yesterday.

    US Treasury Secretary Timothy Geithner’s plan to wipe up to US$1 trillion (HK$7.8 trillion) in bad debt off banks’ balance sheets, unveiled on Monday, offered “perverse incentives,” Stiglitz said. Washington is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside to private investors, he said.

    “Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

    Even if the plan clears banks of massive toxic debt, worries about the economic outlook mean banks could still be unwilling to make fresh loans, while the prospect of a higher tax burden to pay for various government stimulus plans could further undermine US consumers, he said.

    Some Republican lawmakers have also expressed concern over the incentives offered by the government, which could end up providing private investors with more than 90 percent of the funds to buy the troubled assets. But President Barack Obama has said the plan was critical to economic recovery.

    Barclays Capital, meanwhile, says the success of the Geithner plan depends on a recovery in house prices.

    For the plan to work, house prices need to stop declining, said Chotaro Morita

  18. danm says:

    Since Pimpork is loaded with bonds yielding a big 2%, they probably don’t have much to lose by putting the toxic waste on their books.

    If they believe inflation is coming and rates are to shoot up, why not? They’re stuck between a rock and a hard place anyway and getting VIPs on their side will surely earn them some brownie points.

    And when inflation hits, it’s usually the first ones with the money who win… they’ll definitely be the 1st ones with the money.