The Treasury seems to be one big step closer to implementing the initial intentions of TARP but with the hoped for help of the private sector. In theory it all sounds great, with private sector involvement we rid the banking system of all its troubled debt, cleansing their balance sheets and positioning them to lend freely again during a time of credit constraint. In practice will be the question of to what extent will the private sector want to be a part of this because god forbid they make money what will the repercussions be and will the rules change, whether banks will want to sell to these new SIV’s and at WHAT PRICE and is this just an act of Houdini where we’re just shifting assets to the taxpayer who will have a 50% ownership rather than seeing an extinguishment or payoff of the debt which would happen without this program over time. We need the private sector and clarity in pricing, fingers crossed.

Category: 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.

68 Responses to “TARP Part II”

  1. CNBC Sucks says:

    Ritholtz, are you going to have to add chapters to Bailout Nation? Rewrite the whole book?

    If you don’t and Geithner’s turkey comes to pass, I already told your peeps that I will write Ritholtz Nation: How Barry Ritholtz Missed the Biggest Bailout of Them All.

    This is a Rosemary’s Baby moment for me. The prevailing thought in my brain is: every man for himself.

  2. ottovbvs says:

    BR: agreed this is the bad bank plan originally envisioned by Paulson….and Vikram if I remember correctly……Are there lots of ifs, buts and maybe’s….sure, but did anyone ever say this was simple….personally I think it’s a pity this wasn’t a big part of Paulson’s original plan as he promised but I can see that it needed a lot of thinking about…..it’s basically progress and anyone working in the financial industry should be applauding it

  3. YY says:

    I am struck there is no word on exit strategy and scenarios of profit and loss. Typical of the need to hide consequences of the proposal as long as possible…

  4. BR,

    you’re kidding, right?

  5. KidDynamite says:

    people (Geithner) seem to be missing the fact that leverage only MAGNIFIES the expected value of a trade. if you take a losing trade and lever it up, you still lose. Why aren’t private investors buying the assets in question currently? because they think the assets are worth 20c, and the banks think the number is 80c. all the leverage in the world doesn’t close that gap…

    UNLESS – as i posted in my blog yesterday – the gov’t provides so much leverage that the banks can subsidize the purchase in some way (outright capital, cheap CDS, etc) and take a loss on the seed money that pales in comparison to the loss they’d otherwise take on the assets -and the taxpayer eats the difference.

    what’s my point? well, it looks like the max leverage will be 12-1 (6-1 on the debt/equity, but Treasury puts up 1/2 the equity, so 12-1), not the 30-1 that was initially reported. 12-1 is slightly harder to scam than 30-1; and thus, my guess is that the program won’t close that valuation gap that’s causing the whole problem.

    and i want to highlight again the absurdity of the role of the FDIC in this plan. the FDIC has less than $50B…. not to mention that their existence is to protect bank LIABILITIES, not to protect bank ASSETS. think about this simple point.

  6. uneekconstraint says:

    seems I held onto my FAZ one day longer than I should have…

    in the meantime people are (to quote “The American President”): drinking the sand because they don’t know the difference.

  7. call me ahab says:

    in my mind- if you need to spend trillions of dollars to fix something- maybe its not worth fixing. If it cost me $100,000 to fix my car- maybe I would be bright enough to look at other alternatives. Additionally, the banks are the “bad guys” here. We should be investigating all top management for fraud, securities violations and outright theft. I have lost all confidence in the new administration. A final note is that there must be downright terror in the minds of these bailout jockeys if they feel they need to throw around trillions to fix what must be an un-fixable nightmare of a mess.

  8. ottovbvs says:

    KidDynamite Says:

    March 23rd, 2009 at 9:37 am
    people (Geithner) seem to be missing the fact that leverage only MAGNIFIES the expected value of a trade. if you take a losing trade and lever it up, you still lose. Why aren’t private investors buying the assets in question currently? because they think the assets are worth 20c, and the banks think the number is 80c. all the leverage in the world doesn’t close that gap…

    ……But time, confidence, stabilizing markets and clarity do…..This plan gives those ameliorating factors time to exercise their benign influence…..your key word, although you don’t seem to realize it, is CURRENTLY……..And if Geithner is missing the fact so must be Summers, Romer, Orzag, Bernanke and an army of other people in the administration and the Fed.

  9. johnbougearel says:

    Peter,

    Your post lacks clarity.

  10. call me ahab says:

    @ otto-

    don’t underestimate collective stupidity- also- just because certain people are on the payroll doesn’t mean they signed off on the plan- they may have had other ideas that we may not find out about until this plan fails- which I think it will.

  11. Stuart says:

    Somebody still has to take the loss. This plan is geared so that Uncle Sam takes the risk for picking up that tab with the sole purpose that the banks do NOT.

  12. franklin411 says:

    I don’t mind if the private sector gets in, but all this talk about “Oh, what if they’re too scared to get in because they’re worried about government policy?” is patently ridiculous.

    You hedgies realize that we can simply seize your assets, right? If the private sector is too timid to get in, let the government take their assets at the point of a gun. I’d be perfectly fine with that.

  13. Myr says:

    In spite of my disgust with these plans, I think we’re in a market rally that will last another 1 – 2 months. Sometimes the market just wants to go up regardless of reality and this is one of those times.

  14. call me ahab says:

    Franklin

    “let the government take their assets at the point of a gun. I’d be perfectly fine with that.”

    Wow- Franklin- tell us how you really feel!

  15. leftback says:

    “In spite of my disgust with these plans, I think we’re in a market rally that will last another 1 – 2 months. Sometimes the market just wants to go up regardless of reality and this is one of those times.”

    Especially when it is end-of-quarter window dressing time. Beware the April Showers, and the Q1 earnings.

  16. Stuart says:

    It’s a confidence game. We just didn’t fully understand. Feel better?

    “The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.”

    http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

  17. ahab,

    that was obvious from miles away..

  18. km4 says:

    JP Morgan Chase, fresh from a $25 billion government bailout, is purportedly moving forward with the purchase of two luxury corporate jets with a $120 million pricetag, along with an $18 million renovation at Westchester Airport outside New York City.

    Wall St Crooks to taxpayers – thx suckers and XOXOXO to O, G, and B.

  19. franklin411 says:

    Ahab,
    It’s not as if it hasn’t been done before. The highest tax rate in American history was 94% from 1944-1945, when the country was fighting for its life. The government is authorized to do quite a bit when the nation is fighting for its life.

  20. call me ahab says:

    km4 Says:

    “Wall St Crooks to taxpayers – thx suckers and XOXOXO to O, G, and B.”

    funny

  21. CharlesHarris says:

    Does anyone understand why everyone is saying Treasury is providing 50% to 80% of capital on the legacy loans program?

    On the press release it pretty clearly says “50%”.

  22. philipat says:

    Swedish meatballs anyone?

  23. franklin,

    you’re a “History” major, hasn’t the USGov has been operating under a permanent state of emergency, of one form, or another, since your patron saint, FDR, declared it March 9th, 1933?

  24. gmrbluee says:

    I’m amazed that there’s not one single voice on this post that supports this program!

    I happen to think it’s actually pretty good. Get a bunch of smart money managers with aligned interests to jump start this market with some real firepower.

    Most of the smartest investors I know agree that the market for these securities is inefficiently priced (undervalued). Priority # one is to get the banks lending again. so get this (cheap) junk of their books.

    In fact, I’ll bet anyone that the government ends up making some nice $$$ on this deal over the life of these SIVs. I’ll even give 2:1 odds…

  25. ottovbvs says:

    “hasn’t the USGov has been operating under a permanent state of emergency, of one form, or another, since your patron saint, FDR, declared it March 9th, 1933?”

    ……Er no…..a period when GDP has moved from about $300 billion to $14 trillion….even taking out inflation it leaves us comfortably ahead….I’d say the patron saint did a pretty good job at setting the course

  26. ottovbvs says:

    gmrbluee Says:

    March 23rd, 2009 at 10:54 am
    I’m amazed that there’s not one single voice on this post that supports this program!

    …..You cant be reading the post…I do…and I detect BR does more or less

  27. leftback says:

    The post is by Peter Boockvar. Barry doesn’t support this version of TARP VII…

  28. philipat says:

    I LIKE Swedish meatballs. Also not hearing any sensible counter proposals from GOP, except YES, NO, YES, NO, YES………. So much for partisanship. But the markets seem to like it. Yes I know, more free lunches. But how else do we get rid of the uncertainty which markets can’t live with. America is so fuc*ed up that we can’t call a spade a spade anymore and use the N word like the Swedes. SO let’s go with the flow. I thought that one of America’s great strenghts was the flexibility and rapid adjustemnt of its economy. Something wrong here?

  29. HCF says:

    > I happen to think it’s actually pretty good. Get a bunch of smart money managers with aligned interests to jump start this market with some real firepower.

    Get a bunch of “smart” money managers to leverage up on the taxpayers’ dime… If they do well, they make a crap load; if they fail, it’s mostly the taxpayer money anyways… Little wonder why I hate it!

    The priority #1 is NOT to get banks lending or getting junk off the books… It is to let the markets de-leverage to where it needs to go, while 1) minimizing total pain (especially those who were not responsible for this mess), 2) minimizing government manipulation, and 3) DO NOT DESTROY OUR CURRENCY. Point #3 is by far the most important thing. It’s pretty easy to get the Dow back to 14,000… Just keep the printing presses going! Of course, a loaf of bread will be about $50, but at least we can inflate our way to prosperity!

    HCF

  30. Marcus Aurelius says:

    gmrbluee Says:
    March 23rd, 2009 at 10:54 am

    “Priority # one is to get the banks lending again. so get this (cheap) junk of their books.”
    ________

    Lending by the banks is what got us into this mess. Who will borrow? The unemployed? The banks are, have been, and will continue to be willing to lend (check your mailbox for Important – Time Sensitive Information, Enclosed!). The demand side of the equation has collapsed. That’s a good thing.

  31. danm says:

    In fact, I’ll bet anyone that the government ends up making some nice $$$ on this deal over the life of these SIVs. I’ll even give 2:1 odds
    —————
    If you take all these toxic assets off the books and replace them with crispy freshly printed dollars, you get inflation. Why would I want any exposure to this crap (priced with low yields in the first place) in an inflationary environment?

    But it does not end there. They will need to do this again for Alt-A, CREs and credit cards…

  32. Ask not what Goldman Sachs can do for you, ask what you can do for Goldman Sachs !!!

    Every president needs a signature line.

  33. otto,

    see: Regarding what is known as a State of National Emergency, Paula Demers writes: “According to the United States Constitution, Article 1, only Congress shall make federal law. However, since the War and Emergency Powers Act of 1933, every president has usurped lawmaking powers. Their ‘laws’ are called Executive Orders (EOs). These EOs, not our Constitution, are what is governing America today. The War and Emergency Powers Act enables … the president to declare a national emergency, and thereby become a dictator.”[1]

    “Presidents can also carefully choose their words and declare a war on anything, in order to give them dictatorial control. For example, the War on Drugs makes it possible to use federal authorities, such as FBI, FEMA, BATF, and the military against American citizens. A well-known example is Waco. Another example is Hurricane Opal. After Florida was declared a nation emergency, the Federal Emergency Management Agency (FEMA) arrived on the scene and residents were placed under marshal law (restricted to the point of not going outside their door). When the federal government does this, it is going against the Constitution. The War and Emergency Powers Act is an unconstitutional act on the part of our government, created so that presidents can bypass Congress, and do whatever they choose.”[2]

    “It also makes it possible to do away with posse comitatus in cases of ‘emergency’. Posse comitatus is what protects American citizens from the military being used against them.”[3]

    Regarding what is known as a State of National Emergency, Paula Demers writes: “According to the United States Constitution, Article 1, only Congress shall make federal law. However, since the War and Emergency Powers Act of 1933, every president has usurped lawmaking powers. Their ‘laws’ are called Executive Orders (EOs). These EOs, not our Constitution, are what is governing America today. The War and Emergency Powers Act enables … the president to declare a national emergency, and thereby become a dictator.”[1]

    “Presidents can also carefully choose their words and declare a war on anything, in order to give them dictatorial control. For example, the War on Drugs makes it possible to use federal authorities, such as FBI, FEMA, BATF, and the military against American citizens. A well-known example is Waco. Another example is Hurricane Opal. After Florida was declared a nation emergency, the Federal Emergency Management Agency (FEMA) arrived on the scene and residents were placed under marshal law (restricted to the point of not going outside their door). When the federal government does this, it is going against the Constitution. The War and Emergency Powers Act is an unconstitutional act on the part of our government, created so that presidents can bypass Congress, and do whatever they choose.”[2]

    “It also makes it possible to do away with posse comitatus in cases of ‘emergency’. Posse comitatus is what protects American citizens from the military being used against them.”[3]
    http://www.sourcewatch.org/index.php?title=State_of_national_emergency
    Emergency Powers Statutes (Senate Report 93-549): In this 1973 official report, the U.S. Senate admits that the Emergency Powers given to the President (Franklin D. Roosevelt) under the pretense of the National Emergency of 1933 have remained in force and that the normal function of the Federal government has been suspended. [93d Congress, SENATE Report No. 93-549, 1st Session]. See War Powers Act.

  34. call me ahab says:

    Marcus Aurelius Says:

    “demand side of the equation has collapsed. That’s a good thing.”

    exactly- the USG seems to be confused on this matter

  35. franklin411 says:

    Mark,
    There have been lots of moments of national emergency since 1900. As long as thoughtful, intelligent men are elected and appointed to sit in the driver’s seat, and the rest of us pay attention to where the car is going, we’ll be fine.

    I support this plan. Frankly, Krugman is too much of an egghead to get the fact that this is not 1933. We haven’t had the kind of massively dislocating financial event that would generate the political will needed to implement the changes he wants.

  36. HCF says:

    @franklin411:
    > As long as thoughtful, intelligent men are elected and appointed to sit in the driver’s seat, and the rest of us pay attention to where the car is going, we’ll be fine.

    For once, I sort of agree with you. However, what if we aren’t paying attention and the drivers are neither thoughtful, nor intelligent, but rather, money grubbing, power seeking, drunken whores? I would say your optimism about the people in government far exceeds mine…

    HCF

  37. call me ahab says:

    So . . . franklin- if the bush admin had proposed this same plan you would be on board right? It’s the plan you like- not necessarily what political party proposed it? Remember- “the truth shall set you free.”

  38. franklin,

    re: Krugman, I’ve long thought it was every Keynesian’s most fervert wish to get another bite at cobbling together a new “New Deal”..

    though, past that, I appreciate your answer, but, would you answer my Q: ? Haven’t we been under continuous states of ‘national emergency’, since 3/9/33?

    I will say that you “Car/Driver” allegory is backwards..and, dare I say, we’ve, already, been taken for too many ‘rides’..
    http://www.thefreedictionary.com/allegory

  39. philipat says:

    “America will always do the right thing, but only after exhausting all other options.” But bankruptcy faces?

    Chuchill.

    Sorry to repeat

  40. Rajesh says:

    More Placebo Economics.

    Bank can handle the bad assets, that is part of their core competence: handling risky illiquid assets. After a brief lull, bank lending is growing again, and if the bank CEOs can be believed it is growing strongly. The problem is the disappearance of the shadow banking system, the hedge funds and foreign banks that were strong buyers of asset back securities. They are the ones that need to get rid of the toxic assets because they are no longer able to fund them through commercial paper or the inter-bank market. The last thing the Obama administration needs now is another government program funnelling taxpayer money to foreign banks.

  41. danm says:

    The last thing the Obama administration needs now is another government program funnelling taxpayer money to foreign banks
    ————-
    When you’re a net importer of money and energy, the first thing you should do is to keep on funnelling more money to foregin banks.

  42. DL says:

    One question I have is how this will be financed. By the issuance of 2- and 5-year notes? If inflation and interest rates are a lot higher in 5 years, the cost of financing this operation will be far greater than bailout advocates are suggesting.

  43. call me ahab says:

    @ philipat Says:

    “America will always do the right thing, but only after exhausting all other options.”

    Well . . . there is always a first time for everything- options are being exhausted at a fast clip- but whether we ever reach the “right thing” is another question- I am beginning to think no.

  44. broker1 says:

    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.

    Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don’t want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.

    Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they’ll sit there and say they are lending while waiting for the economy to bottom.

    Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today’s 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don’t have room to take on more debt, even if the banks are willing to give it to them.

    The real problem: An explosion of debt relative to GDP. Both Nonfinancial Debt To GDP and Total Debt To GDP.

    In Geithner’s plan, this debt won’t disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

    -businessinsider dot com

  45. franklin411 says:

    @Mark,
    Yes, lots of emergencies, but it’s been a dangerous century. In fact, the 19th century was dangerous too, but not as dangerous as the 20th or 21st. I think there is too much pandering to this imagined past in which the gov’t was essentially non-existent. The government has always played a major role in national development, and it has to.

    @Ahab,
    I’d support it if it came from Bush as well. I supported TARP I, and I support TARP II. It’s kind of like doing an engine overhaul. The mechanic tells you you need to overhaul your engine or the rings will bust and you’ll melt the block. So you spring the $$ and have the overhaul done. Then your engine doesn’t blow, and so you say “My engine never blew, so therefore I didn’t need to have an overhaul!” It’s the same with the TARP–we’ve already forgotten the panic of September and now we’re acting as though the TARP was unnecessary, when actually it probably prevented something much, much worse.

    @HCF,
    I agree, but let’s face it…it’s our job to pay attention, and if we don’t do our job, we deserve to pay the price. I didn’t like G. W. Bush, but I believed then and now that America deserves every bit of suffering we’ve had. People voted for that clown, and votes have consequences. If Obama turns out to be a disaster and people blindly reelect him in 2012, then we’ll deserve what we get too.

    I love this quote from Theodore Roosevelt: “We are the government, the government is us, you and I.”

  46. DL says:

    Mish sums it up nicely:

    “Somehow, Geithner …believes that igniting a bidding war between hedge funds and private equity over a bag of cow manure will inspire confidence that there’s gold in the bag. Such insanity cannot possibly work…”

  47. fatcatbanker says:

    gmrbluee Says:

    “I’m amazed that there’s not one single voice on this post that supports this program!”

    Gmrbluee,

    I for one support the plan. With all the hoopla around the AIG bonuses, it is getting very difficult to support an opulent lifestyle with the govt trying to tell us what to do with your money. So, we need to find a way to take the money from your left pocket to pay back the debt we owe to your right pocket.

    What is really going to happen, is we are going to use some of the TARP Pat I money we already have to buy some of these collateralized obligations, which we have cleverly renamed Corporate Restructuring Act Paper (CRAP). But since we only have to put up 3% or so in real equity, if we bid up the price by 30% using intermediaries we should be able to get the CRAP off our books at a profit to actual real value. Then, we can use the cash from the sale to pay back the TARP loans. And presto we are no longer on life support and things can go back to normal, at least for us.

    Now, you may have a slight burning sensation in your right pocket as the CRAP re-sets to real value. Don’t worry and just ignore it. If you cut back on food, clothing and move into a cardboard box under a bridge for a couple of years you will be back on your feet just in time to work through your retirement.

  48. Marcus Aurelius says:

    I don’t think the same people who filled the bag with BS will suddenly forget what’s in the bag. A bag o’crap by any other name . . .

  49. Mannwich says:

    @fatcatbanker: Don’t think any more needs to be said about this issue. Thank you for making me feel even worse about it.

  50. philipat says:

    Trading account looks great. So, sell on the news?

  51. linuswilson says:

    My paper “The Put Problem with Buying Toxic Assets” at http://ssrn.com/abstract=1343625 suggests that the gap between the price at which banks are willing to sell toxic assets and the price at which the private sector is willing to buy toxic assets may be large. The bid-ask spread will be larger for banks that are more insolvent. It will also be larger for banks that have more distressed or volatile toxic assets. My research shows that it is much better to buy toxic assets from troubled banks in receivership than before their assets are written down.
    http://www.linuswilson.com

  52. Kyle says:

    DL Said:
    “One question I have is how this will be financed. By the issuance of 2- and 5-year notes? If inflation and interest rates are a lot higher in 5 years, the cost of financing this operation will be far greater than bailout advocates are suggesting.”

    That’s what I’ve been wondering…. I was betting (lightly) against the dollar earlier today, thank god I got out in time. I thought for sure whatever Geithner proposed the dollar would weaken, but it’s up a LOT today.

    The markets up 5% I can understand. Free money to any financial company, who wouldn’t want that?

    @FatcatBanker thanks for making me laugh :)

  53. williams says:

    @CNBC Sucks:

    BR should just publish it online and keep it up to date. He could have a new edition everyday!

    But as an iced tea imbiber spewed: we are not to hate BR, just his avarice… apparently (maybe in his faux Sam Clemens: “tell me where a man gets his ‘pone, I’ll give you his opinion.”)

    It is indeed a ‘wasteland’ here, mr. eliot

  54. If you cut back on food, clothing and move into a cardboard box under a bridge for a couple of years you will be back on your feet just in time to work through your retirement.

    Or a van down by the river !!!

  55. DL says:

    Given that the private investors only have to put up $7.00 for each $100 of assets, it seems to me that this could invite shenanigans.

    If I were one of those private investors, I would make a secret deal with a bank to overpay for the assets, then get reimbursed for the $7.00 that would be lost as a result. As a consequence, the investor would lose nothing, the banks would come out ahead, and the taxpayers would be left holding the bag.

    If I can figure this out, it stands to reason that the sophisticated, wealthy investors can, too.

  56. batmando says:

    @FatcatBanker
    Succinctly put. Between that and linuswilson at 12:41 pm
    “… it is much better to buy toxic assets from troubled banks in receivership than before their assets are written down”
    If these are ever comprehended by Taxpayers/Voters, their recent ‘unhappiness’ over AIG bonuses will pale in comparison.

  57. choiway says:

    This is the Keystone Cops version of the Swedish plan. Geithner, go home.

  58. leftback says:

    YA, INGA FROM SWEDEN….

    Anyone seen Beeks?

  59. vaughn says:

    from naked capital….
    “Does anybody remember that the last people who brought in 3% equity partners to take control of an off-balance sheet hedge fund in a no-loss deal designed solely to absorb toxic assets at inflated prices, were sent to jail by the government for misleading the public? Their names were Andrew Fastow, Jeffrey Skilling and a raft of other managers, at Enron.

    The goal of their off balance sheet partnerships was to conceal where and when the real losses had occurred and thus who was responsible for them, until some later date when they could either be transferred back onto the public (Enron’s shareholders) in a way they would not notice, or at least after the Enron managers had a chance to unload their shares.

    Now we have a virtually identical scheme, but this time it’s being promoted jointly by the banks and the US Treasury. Once again the effort is to construct a vehicle into which toxic assets can be transferred at inflated prices, positioning the public to take the losses while disguising them in the short term, and giving the managers of our biggest banks a chance to both profit now and then sell out ahead of the public.

    Perhaps Lay, Skilling and Fastow should be hailed as innovators in the field of public finance.”

    How ARE they planning on blocking self dealing by the “private” investors(banks) btw?

  60. Pat G. says:

    After all the song and dance these last six months it’s finally good to know “The Treasury seems to be one big step closer to implementing the initial intentions of TARP”. In the meantime, how many trillions has that cost us in futile efforts? And they say we have the best government money can buy. IQ is a variable.
    Remember that eventually we’re all going to pay for this. For that matter, so will generations to come.

  61. Ken H. says:

    Exactly DL! Smart investors in the “circle of trust” will cherry pick and leave the bag of dog shit for the taxpayer.

    Simply keeping fuck tards who created this mess in control and rich. No risk in the “circle of trust”.

    Broker1 had a good summary of why their little plan still isn’t going to work other than fill their pockets with more toilet paper than they will ever need.

  62. rktbrkr says:

    I thought the plan was to leverage federal funds with private money but with a 1:12 ratio obviously I had it backwards. All it does is leverage up disproportionate private profits on gains and disproportionate public costs on losses. It is intended to embolden the hedge funds to take wild risks and overpay for some of the banks toxic assets. A government designed and funded MORAL HAZARD.

    Without setting up the private money as a profit seeking stalking horse the true intent of the Treasury to overpay for the banks toxic assets would be obvious.

    The problem has always been the pricing of the toxic assets. The banks would either not sell or be forced into bankruptcy if they sold these assets at the market price and there would be a political uproar if the government grossly overpaid for the assets in a clear way the public would understand, hence the convoluted design of Tiny Tim’s Toxic Plan for Assets.

    The current TARP funds aren’t nearly enough to buy up all the banks bad loans so this auction needs to be declared a rousing success and trillions more funding be rushed to approval before the losses are recognized. We are so screwed.

  63. rktbrkr says:

    I have a prediction:1) This plan will take longer to pull together than the early summer forecast,2)The plan will have to be sweetened further to accomodate the continuing tumble in real estate prices, particularly in the bubble areas – especially if the various foreclosure moritoria are eased

  64. rktbrkr says:

    The stock market may have soared after Treasury Department detailed its program to buy up toxic financial assets, but some economists and pundits weren’t sounding nearly as upbeat.

    Many had questions about how the program’s auctions would work, and whether public-private partnerships would offer prices high enough to entice banks to sell their troubled loans and other securities. Banks will probably balk at prices so low they would be forced to take further write-downs, and investors will be very leery of overpaying.

    Writing on his blog, Paul Krugman of The New York Times said the plan looked great for the private buyers of these troubled assets, but not so much for the taxpayers supplying much of the money.

    A significant part of the program involves the use of government or F.D.I.C.-guaranteed loans, which limit the downside for the equity investors.

    “By financing a large part of the purchase with a nonrecourse loan,” Mr. Krugman said, “the government is in effect giving investors a put option to sweeten the deal.”

    “Administration officials keep saying that there’s no subsidy involved, that investors would share in the downside,” he wrote, “That’s just wrong.” He goes on to give a numerical example of how the government is essentially providing a subsidy and taking much of the downside risk.

    Felix Salmon of Portfolio calls the plan “doomed” and “needlessly expensive.” He also looks at the quandary of how to induce banks to sell their toxic assets (which the government more politely calls “legacy” assets).

    “Private-sector investors want to pay as little as possible for these ‘legacy assets,’ in order to maximize their returns,” Mr. Salmon writes. “But the banks will not sell any of their legacy assets unless they can do so at a price close to the level to which they’ve already been marked down.” He continues:

    Is there any reason to believe that there’s a private-sector bid out there for legacy assets at their current marks? Not really. But if there isn’t, the banks will simply refuse to sell, and there won’t be any money or assets changing hands at all.

    Henry Blodget of the Business Insider blog expressed deep skepticism about the plan, asserting that the government was taking on far more risk than it was letting on. He calculates that the maximum leverage ratio is not 6-to-1, as the government says, but really 12-to-1, because the government is supplying half the equity.

    – Cyrus Sanati

  65. vfsv says:

    Get the pitchforks, or at least contact your congressperson. Here’s a template:
    (http://www.viewfromsiliconvalley.com/id488.html)
    * * * *
    Hello:

    We are outraged at the latest Treasury Department plan. It effectively sets up hedge funds and other speculators to make bets on mortgage-backed bonds and gives them government guarantees. They keep the gains but any losses will fobbed off on the taxpayer!

    This is a ridiculous risk of taxpayer funds to further enrich speculators, Goldman Sachs, JPMorgan and AIG.

    In the end, it will have no effect on the root problem of over-priced and over-indebted houses. Only the free market will “fix” this problem.

    If you worried about the anger over $165M in AIG bonuses, wait until the public figures out the hundreds of billions in giveaways that will emanate from this latest plan.

    Please stop this plan!!!

    Regards,
    Concerned Citizen
    * * * * * *
    Please write today. Like the political “machine” in old Chicago, we recommend complaining early and often:
    Senators – http://www.senate.gov/general/contact_information/senators_cfm.cfm

    Congressman – https://forms.house.gov/wyr/welcome.shtml

    Nancy Pelosi -americanvoices@mail.house.gov -or- http://www.speaker.gov

  66. dunnage says:

    The idea that investors are worried about making money on this stuff is ludicrous. The Treasury is Wall Street to date. Congress is righteously indignant about bonus pennies while billions are being funneled to the Money Centers: Goldman, Chase, Morgan Stanley etc. To hell with our commercial banks and people underwater. And screw the UAW while your at it.

    Paulson was gonna buy a Trillion from the Investment Dudes, but hell, such a mess — just take this money for now guys. Scare the Investor: Paulson destroys the implicitly backed Preferred Stock. Wake up in the morning and gone. As far as I can figure, they’re taking another trillion, plus chance to make some billions by the by and waiting. Like for Godot. What scares me is that this is the best that Wall Street can come up with — I guess the idea is for Goldman, Chase, and MS to suck up deposits as institutions down below are taken by the FDIC. Take frickin forever.

  67. todddeluca says:

    Rigging the Market Price of assets with Non-recourse Loans:

    We all know that the market price for a coin flip that pays a dollar on heads is 50 cents or less: payoff = 0 = 0.5(1 – price) + 0.5(0 – price) = 0.5 – price. So break-even price = $0.50.

    What if the government gives you an 85% non-recourse loan? payoff = 0 = 0.5(1-price) + 0.5(0 – (0.15*price)) = 0.5 – (0.575 * price). So the break-even price = ~$0.87, of which you only put up 15% or $0.13.

    The secret sauce is the non-recourse loan. Banks win, private investors win, and the government loses. Good idea.