(Note: Marcy’s liveblog coverage of the Financial Services Committee continues here.)
I asked Yves Smith (Naked Capitalism) what she’d ask Geithner and Bernanke today if she had the chance:
I am told by someone close to Barney Frank that the details of the public-private partnership plan are still very murky, I get the sense mechanics will not be discussed.
The comments get geeky, but you might have a look at this post (problem is someone will need to brief questioner a bit on retort). Basically, it looks like there would be TONS of ways to game a public private partnership plan. And even if they put rules in to try to prevent chicanery (doubtful, it’s a feature, not a bug), if there is no oversight mechanism, the provisions are empty words.
I would like to give a hypothetical example to Geithner on the public private partnership and make him explain how it works. Who gets what, profits to each. If he can’t do it live, say the Congressmen will submit hypotheticals in writing, want details.
For Geithner:
NYT says many assets carried at 60 cents on dollar, market value now 30 cents.
For purpose of illustration, say bank carries assets at $60 million, market only $30 million, assume value that can be realized over time is $45 million. How does process work?
Banks presumably will not want to show a loss. How do you see this working? If they sell $60 million of assets for $50 million, even if it is over what the true value is, they still show a $10 million loss. How will the loss be made up? Or will banks be permitted to set a reserve or submit anonymous bids to prevent assets from being sold at less than their book value?
Will the investors be permitted to pledge the assets acquired to TALF now that TALF will accept existing, not just new loans? Is this how the investors will realize a profit?
Will banks be prohibited from subsidizing or insuring the public private partnership investors’ equity, such as through non-recourse loans to them, total return swaps, or credit default swaps? There is big time opportunity for collusion here.
I need to think more re Bernanke, a bit too fried now, but basically, it isn’t clear what the intent of the FOMC move last week to purchase up to $1.1 trillion in assets is about. The FOMC statement made it sound as if the objective was a concern about inflation being suboptimal, which means they want to create inflation, hence the goal is quantitative easing. But in December and in Friday’s speech, Bernanke kept talking about getting the credit markets working and lowering spreads. That suggests the real objective is to prop up asset prices.
Either way, it doesn’t seem to be working Ten year and thirty year Tbond rates have gone most of the way back to pre-announcement levels. The markets have largely shrugged off this move. So is BB prepared to do more? How will he measure success? How far is he willing to go in ballooning the Fed’s balance sheet (he will NOT answer that one!).
The Japanese did QE and most economists think their effort was not successful. Why should we expect a different outcome?
Sorry if this is a bit meandering…..
There is also a Geitner hearing later in the week on the stability reg plan.
I am highly skeptical. The place is full of guys who know about monetary policy and not much else. It has no interest in regulating. Why would you ask an organization to be an uber regulator when it doesn’t believe in it?
And the Fed technically is a private organization, so the role isn’t exactly appropriate either.
So the question may be, why not have a new organization be the uber-regulator, like the UK’s FSA, and let the Fed continue to do monetary policy? The Fed’s regulatory history is so poor (Greenspan disavowing any interest in derivatives oversight, the Fed lacking competence to understand complex instruments and any risk management tools beyond Value at Risk, which has SERIOUS flaws, failure to take ANY interest in enforcing HOEPA) that I see NO justification for relying on them.
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It’s like the rich people on the Titanic, on their way to the lifeboats, realized their jewels had turned to anvils.
So they said to the people in steerage, “Here; you take these
anvilsjewels while we go get in the lifeboats. After all, civilization can do very well without you, but we are necessary!”What I think Yves is saying that even weeks after Geithner first announced his buy up program he still can’t answer simple questions about how it will work. This should raise red flags all over the place.
With Bernanke we have more of a record in place. He has engaged in repeated injections of trillions of dollars (quantitative easing) into the banking system and yet his efforts have had no effect on the re-establishment of credit. So why does he keep doing this?
As for regulation and the Fed, under Greenspan and Bernanke, it has all been about not regulating.
I’m listening to Bernanke and Geithner testify before Congress. Taxpayers have already covered many of the bank’s toxic assets at 100% through the AIG payouts. Can’t someone ask these men if there is anything in the TALF program to prevent these banks from now selling taxpayers these SAME assets, which we have already paid for, through the troubled asset program?
Isn’t it bizarre that we, the people, have to come up with questions for the perps that both let it rot, helped it to fester, and are now trying to sell us the repackaged garbage?
There have been no meaningful questions or answers so far. Is this what we should expect from our new government?
Hi Yves. I love naked capitalism – as the economy has gone south it’s become a must-read for me. It and other financial blogs like Baseline Scenario, Calculated Risk, etc. are doing for economics reporting what political sites like FDL started doing a few years ago: providing analysis from outside the fonts of conventional thinking that dominate the large outlets. Keep up the great work and good luck with your book!
CR had a similar example to Yves’s, but with the bank being able to create a sub[sidiary, possibly off-shore], with enough initial capital to cover its 3 percent contributions to any purchases it makes under the plan, to do the bidding. If the sub bid something between the book value of $60M and the par of $100, then the bank’s loss could disappear, apart from the funding pittance; they could even make money.
Since the whole technology of derivatives involves a lot of trading back and forth between subs, it’s not clear that one would want any of them involved in bidding on these assets; I think they know how to beat a simple prohibition on self-bidding subs in their sleep. And that should probably be the beginning of the end of the whole idea.
CR’s example is in the comments of this post, on the second page at 8:39:09PM yesterday (March 23), beginning “How to game the system …”
Yves also said:
Amen, even though not all Feds historically have been philosophically opposed to any regulation. That it happened during one era should disqualify them. What would be wrong with a dedicated body like FDIC? I suppose business does not want to be assessed premiums for any insurance fund that the body might adminster, so that seems to create a rationale for a body that could create its own funds and basically do what the Fed has been doing, but with clear legal authority.
Maybe some of the businesscritters would come around if the choice were between the special body/industry-contributed funding and the present situation where they could have two outcomes, either Lehman or AIG.
Not completely true, I liked this one:
++++++++++++++++
Bachmann: Leveraging on PPIP? Will American peopel be receiving 90-95% of benefit.
Frank: Time expired.
Bachmann: Can I get answer.
Frank: No. I explained this.
++++++++++++++++++++++
Of course it didn’t get answered because BF Asshat didn’t want to get off into “real” answers…
I’d say it’s even worse.
It’s not that he can’t answer the question, it’s that he would rather not/doesn’t intend to answer the question.
If he’s honest, he’d have to admit that built into the plan is a ‘feature’ that would allow banks to goose the price of the garbage, thereby reducing their losses and tranfering them to the taxpayer.
Since the ‘private’ buyers are being
givenloaned the money for their portion of the purchase, their loses are minimized also.Once again, the only party in the deal who’s not protected and can’t game the system is the taxpayer.
He’d rather gloss over those little details.
Stiglitz & Krugman are right.
Geithner’s rebranded Paulson zombie bank plan is outright robbery. It leaves everyone else at the mercy of unregulated capital. Few people in power will ask Smith’s questions because this threatens the system of perverse incentives with no oversight controls or accountability.
When Pimco, Blackrock & Carlyle love this new version of Greenspan’s put, it can mean only one thing — another speculative bubble that obscures their past abuses and creates new opportunities for the same predatory behavior at the expense of Main Street.
It recalls the climax of one of Rod Serling’s best episodes:
“Mr. Chambers… Mr. Chambers. Don’t get on that ship. The rest of the book, ‘To Serve Man’… It’s a cookbook!”
@#9:
I remember that episode of the Twilight Zone.
Here are the members of the House Financial Cmte; note how many Democrats are from New York.
So glad Yves posed these questions; from a diary posted at Oxdown, you can go here to ask the President a question for tonight’s press conference.
A lot of people were asking questions,just not so much here in the US,but the European financiers-for some time now,most particularly in Nov.2008.
For a chronology of events ,a terrific compliation on naked short selling,including links and timeline ,is over at deep capture.Lots of source references to substantiate the thread content.
This site has some truly thought provoking compilations.
Deep Capture naked short selling | The Story of Deep Capture … A story of greed and corrupt journalists, regulators, hedge funds, and investment banks. Stock market manipulation. Naked short selling.
http://www.deepcapture.com/the-story-…..-mitchell/ – 134k – Cached – Similar pages
watt4 @ 8:
Isn’t that called “pump and dump”, or a hybrid, thereof?