You have to understand that the banking system remains unreformed. The same people who gamed it into financial meltdown are still in charge. So of course this was not going to go down as advertised. Of course, they were going to game it as much as they could. This is what they do.

Put even more simply, these guys are speculators and gamblers. Give them access to a bunch of money and what do you think they are going to do with it?

Good morning, Jane. Only slightly tangential, James Kwak, at The Baseline Scenario, has a brilliant Frog and Toad analogy to Geithner’s financial regulation proposal this morning.

Frog, Toad, Cookies, and Financial Regulation

It points out the infrastructural problem with allowing big banks to remain big and simply regulate them better.

Adjusting the mark-to-market regulation would help these banks tremendously because it would not force banks to write down losses because of a lack of a market for certain securities. These securities, investments still have value but time is needed for the value to be there again. Paulson should have went through and bought these assets in the first bailout instead of changing his mind so many times and going to a poorer less stable plan. If the government where to buy the assets then, we would not be having this discussion now. The government can afford to take short-term deficits (keynes, I’m getting it right hugh) but with them ownong these assets they would also profit in a few years when they sell them back into the private sector

These institutions must be broken up. If it is to big to fail it is to big to exist.

As Whitey, the thyroidal albino lab mouse in Flushed Away, would’ve said, “they sawr an opportunity and they seized it.”

Of course they’re gaming the system. That’s what gamblers like BofA Citi Group, AIG et al have done for 15 years. The panic that Paulson unleashed just allowed even more leveraged gamboling.

The government can afford to take short-term deficits (keynes, I’m getting it right hugh) but with them ownong these assets they would also profit in a few years when they sell them back into the private sector.

This presumes the value of these “assets” are going to rise, yes? And what happens if they don’t?

The Pollyannas who thought this would work and that we needed to give it a chance are already wrong. The MANY who predicted or pointed out the problems with the plan (the ease of gaming it) were proven right from the instant the program was announced.

Criminals and idiots throughout the Obama Administration, same as with the Bush Administration. The only difference was the Bush was secretive about stealing from the public to help his cronies. Obama is simply putting a pretty face on the very same activities, enriching the very same shared cronies.

The President is a son of a bitch.

Sigh. Defaulted (or defaulting) mortgages do NOT have value.

Scarecrow also points out that if in fact these banks have been bidding on these assets, it contradicts the notion that the market is frozen and we need a subsidized PPIP to entice buyers into the market. I’d also add that if the market only started moving when the PPIP was first announced, it suggests that what kept them frozen was the anticipation that the government would step in and buy them at a much higher price. In which case Geithner is solving a problem he created.

jaysus ! those are two rather large glaring points, aint they ? – wonder if Chuck Todd could hold his sacrificing long enough to report them

I see that Jane underscores your point:

Scarecrow also points out that if in fact these banks have been bidding on these assets, it contradicts the notion that the market is frozen and…suggests that what kept them frozen was the anticipation that the government would step in and buy them at a much higher price.

It is entirely predicated on two things: no more defaults AND a bogus reinflation of the housing bubble. Without both, those “assets” are worth dog shit.

As for banks getting to large to fail and the like, I actually agree to an extent. These big banks control a lot but they are not affecting me as much because in my area local banks and credit unions are thriving and have been and should continue on. They can service all my needs but I would say that large banks are needed if we have large corporations because they have the scale to service their needs where local banks and credit unions would not.

I would also compare this to government, our federal government is this “too big to fail” type. This seems to make good ideas get ruined as they flow to the people they are supposed to serve. America should look at that Constitution thing we have and focus more on de-centralizing government and giveing more power to the states and local governments so a policy that might be good for california and new york doesn’t destroy a place like Alaska, wisconsin or Utah.

I simply do not understand why funds aren’t simply set in escrow for the purpose of loans and only loans

loans made only to individual home owners and that is it

the bank can make a commision that is preset by us

why the hell there are “tarp funds” for them to use as they want is beyond me

Banks may be bidding on the assets in anticipation of government action (per the Geithner plan) to shore up their security and cashflow characteristics with taxpayer funds. What’s been suggested, as I understand it, involves, repackaging toxic securities with new features that’ll make them more desirable for investors (i.e., a current-interest-paying component, a better security package, partial treasury recourse, certain almost-certainly-doomed pieces excised, and so forth).

The banks want to buy assets now worth $0.30 on the dollar in anticipation of the proposal to make them worth $1.10 on the dollar, with the intervening $0.80 to come in the form of vast taxpayer subsidies. And if that doesn’t happen (a gamble they’re willing to take) they figure that might still eventually be able to unload the securities they buy at $0.35 per dollar, for a healthy profit.

OK, I made those numbers up, but you get the idea…. the liquidity this whole sordid affair is creating is not for you or me.

There is value in these products, there is simply no market for them because of the overriding fear about them. That is why the banks are taking these write-downs, because they can’t trade or sell them thus according to the accounting rules they essentially have no value. The default rate on all mortgages nicked 10% and the forclousure rate is around 3.3% so I would think buying a large mass of these type of products by the government at a large discount which the banks can do because they have already written them off would be a great idea and the government would have collateral and a valuable asset in a couple years once the fear has subsided and the economy is back on a more solid footing

Banks may be bidding on the assets in anticipation of government action (per the Geithner plan) to shore up their security and cashflow characteristics with taxpayer funds

talk about circular, they are then sythetically inflating the market again, basing their investment on a future inflated price and when that bubble bursts the wheel spins once more

It’s the private bit coming into play. Without the private bits, they will be seen as flaming communists.

the forclosure rate is going to go higher not lower

we’ve seen people walk away from bad mortgage deals because they can’t afford the rate

what we haven’t seen (too much) yet are people walking away from fine mortgage deals simply because their house is worth far less then they owe

in other words there will be foreclosures against people who CAN afford their mortgage but simply don’t want to pay it

This will not fix anything, even if the faulty PPIP nonsense WOULD work to get bad assets off the books. The problem is that Geithner and Obama think that all that is wrong with the system is people can’t go further into debt BUT THAT THEY WANT TO WITH LOANS UP THE YINGYANG. They think that easy credit set off again is good for what ails us. It is predicated on the idea that WE are all out here just DYING to go into debt to buy more and more crap, buy bigger and bigger houses we cannot actually afford, etc.

Who in their right mind wants MORE debt? Who in their right mind wants yet another home equity loan or a third or forth mortgage? No one but idiots and the insane. Easy credit fixes practically nothing. All it does is allow limping industries to temporarily fund their failing operations for a few more months (before they will then need yet another loan).

What a crock. Obama says the days of bubbles is over yet his most basic economic policies are entirely based on bubbling the whole thing up again.

They are and government policy is encouraging it. The american people are crying out that thier house is underwater and they lost so much money in equity, but if we do the same thing as Japan and artifically inflate housing prices which we are trying to do now so the people don’t hurt. This is just kicking the can down the road. In order to fully recover we need to be allowed to hit a bottom so we can grow on something solid instead of a government placed base

possibly but not necessarily. Depending on how they design the repackaged securities, the “boost” might be real (as in, you and I, as taxpayers, will be giving up real cash to make the securities worth more, through tangible commitments from the treasury). The problem is less that another bubble will be created as it is that the taxpayer dollars will be used to create value for banks that we have no guarantee (or even a reasonable expectation) will ever benefit anyone other than the banks that will profit… unless those banks are also, simultaneously, somehow required to pump those profits immediately back into the economy through new, responsible lending (credit).

In which case, why bother with any of this? Just nationalize the banks, recap them directly, and then force them to lend…

Blub, I think that’s the best-case scenario.
These ‘banks’ are economic behemoths with trading divisions, securities divisions, and traditional checking accounts (presumably you and me).

One of the things that I fear is that they’re going to use their securities divisions to ‘create’ new corporate entities that they will then ‘market’ — thereby, getting:
– fees to set up these new corporate entities
– more fees to market these new corporate entities
and then –
– more fees to ‘manage the assets and securities’ of these new corporate entities they already got paid to set up, and market…k

Yes, I’m starting to repeat myself.

Can anyone explain why I’m incorrect?

it is government regardless of how it’s set up, one way invites private industry to steal, the other way does not.

there’s no marketing against the method I said

Root cause of problem again returning to idea that several hundred billions of $$ could so easily be conjured and thrown at so called toxic assets/frozen credit “crisis” by WashingtonDC.

This is same conduct of WashingtonDC borrow and spend politics harnessed now by Wall St. and Big American Finance/Banking/Insurance to create big payouts and profits capture for private sector out of public treasury.

The crooks have paid off WashingtonDC politically and are now proceeding to loot the American taxpayers with WashingtonDC politicians unlocking the doors and delaying discovery of the crime.

Again–why has no one been indicted,arrested,scheduled for trial?

President Obama? Why are you going with the same guys who made problem?

WashingtonDC is letting American taxpayers get fleeced. Time to demand WashingtonDC surrender all trappings of office. No taxpayer funded extras.

Park Air Force One. Eliminate all taxpayer provided Congressional perks.

WashingtonDC wants to give taxpayers money away then let it feel the pain of consequences as well. These bastards do not seem to be suffering as they should. Arrest the crooks and jail ‘em.

All of them from Wall Streeters to the corporatists to the WashingtonDC grafters.

They’re trying to divert our attention to the debatable validity of the subsidy to potential buyers and the possible upside to the taxpayers. The real scam is on the other side of the transaction: the benefit to the owners of the trash. They can’t mark it to market or they’ll be insolvent, and they can’t sell it except to the taxpayers.

The Bush/Obama plans assume that the toxic derivatives are undervalued by the ‘market’. But we’re not talking about finding the right price for flat screen TVs or Budweiser. The market for this paper is small and specialized; basically it consists of the very same investment bankers and hedgies whose collective informed opinion is that it is virtually worthless, but are nonetheless being subsidized to purchase it.

yes but if the government is to buy these assets at 30% of initial value and the new highest value is 80% of initial value how high would the default rate have to be for them to not even break even in lets say 3-5 years. I’d say it would have to be 50%-70% defaults on what they buy. They can afford this risk especially as there is possibility to make money when selling the assets. The stimulus package and bailouts holds no such garuntee. They can’t sell their 80% stake of AIG until it turns around and need to pump money in until it does. The natural waste in government spending alone is more risky than this. The stimulus is simply benefits and remodel work to the country we no money coming back from it (directly) just a loan with interest for $1.2 trillion. I think a purchase of $700 billion of these assets would be much more beneficial and well within the governments risk tolorance but it should have been done in the begining when it was first proposed 6-8 months ago.

The market can’t be wrong. Their religion says the market is always right, so trying to screw with/sidestep the market is heresy and must be punished with stoning.

These assets have WHATEVER value the OPEN market says. They have to die by that sword if they are intent on forcing US to “live” under that same sword.

“Easy credit fixes practically nothing. All it does is allow limping industries to temporarily fund their failing operations for a few more months (before they will then need yet another loan).”

It also reduces the income of those making loans through bank deposits by keeping interest rates artificially low giving banks another huge bonanza by redistributing cash from the depositors to the banks.

I think the trillion dollar question is: are we willing to pay $2.00 to save already-failed-institutions just because we are committed to an ideology that requires these failures to be successful, or can we just pay $1.00 to acknowledge reality and move on to a healthier, more inclusive economy.

There is nothing Keynesian about buying up non-productive assets and holding them. This is the same argument against tax cuts. If you give people tax cuts and they take them and hold on to them, save them because they are afraid of future conditions, then you have created little or no stimulative effect.

The classic Keynesian example often used is hiring people to dig holes one day and filling them up the next. (Naturally you can find more productive activities.) But the idea is this is pure stimulation. You create jobs. You get money to people and they go out and spend it. This contracts the oversupply that is fueling the deflation and sets the stage for recovery and expansion when demand exceeds supply.

The mark-to-market law makes these banks take write-offs because the market has evaporated for certain assets.

Like a house, my house is worth more than it was 2-3 years ago garunteed. I wouldn’t sell right now because the market is not in my favor but the value is there. This is similiar to these assets the economy needs to recover in order for there to be a market for these assets again. The government is the best entity to profit off this but the banks will also do just find after the slow recovery especially considering the mark-to-market laws will atrifically boost banks balance sheets just as they artificially slashed them.

Doesn’t surprise me at all that BofA and Citi are already trying to game the system.

Shameless OT Plug:
Jane — thanks for doing The Nancy Skinner Show today at 4 p.m. ET. If anyone wants to listen and doesn’t get the show on a local affiliate, there’s a “Listen Live” link at Nancy’s Web site at http://www.nancyskinnerlive.com. Archives are available after about 8 p.m. ET at http://www.whiterosesociety.org. (Jeffrey Feldman will be on the show at 3:30.)

In the UK they create government jobs like community coaches, and social worker types and yes it creats jobs but they are temporary. I think there was some truth to your job example in that creating jobs quickly on a large scale can lead to unnessasary jobs that create no true value and just waste money. There needs to be incentive to create value producing jobs in order for it to be sustainable.

I did read more on Keynesian therory last night but I see it stressed that it needs to be global or else it doesn’t work.

In the UK they create government jobs like community coaches, and social worker types and yes it creats jobs but they are temporary.

sorry they are NOT temporary

The idea of globalness is precisely why digging holes and filling them in is justifiable during a depression. People will always argue about what is a good use of money or not. But the point is that in times like we are in now, no money that creates lots of jobs is wasted. As for the longer term, that depends on what kind of country people want to have and build. But the important thing is that once started you need to continue with deficit spending for as long as necessary. You don’t (as Roosevelt did in 1937) cut back on stimulation just as the economy was improving. Roosevelt’s decision to reduce deficits had the effect of extending the Depression to WWII.

One thing that you have not noted is that BoA and CitiBank may have, in effect, been performing these transactions based on insider information: absolutely clear indications from the Obama team, and firm commitments, as to the exact structure of the bailout — information and commitments to which they alone were granted access.

I don’t know if trading in these toxic assets is in any way subject to the sorts of insider trading rules that the SEC oversees, but I should think that the underlying principle here is the same, most especially because it is information that derives from the government.

Thanks for another great post, Jane.

This was inevitable. Whatever enhanced powers Geithner is requesting from congress today, Obama’s rebranded Paulson plan for public private partnerships de facto neuters government regulation as it’s being sold — as protection for the whole economy.

To Greenspan’s feigned shock, partners can’t be trusted to regulate each other beyond maximizing their own interests within their agreement. And make no mistake, this is a unabashed takeover of our government by Goldman Sachs, etal. where Wall Street and Fed/Treasury are the partners — not the taxpaying public in the real economy.

Obama’s rhetoric aside, capital formation for the benefit of Main Street with its modest rates of return is dead until derivative profiteering is curtailed.

George Carlin must be looking down on us and laughing at how toxic assets have been transmuted into legacy investment opportunities.

This would make sense if and only if the assets actually had some value and were merely underpriced due to lack of confidence in the markets. While this is certainly the story we are being fed, the facts–things like the degree of leverage and the naked CDSs–suggest otherwise. I doubt that there are any assets at all, except on paper.

This is a Ponzi game. Like Ponzi’s original, there may have been some theoretically valuable stuff involved at some point (in Ponzi’s case, it was International Postal Reply coupons). But the real money was all in the trades, not in the assets, which were cashed out when the first players took their cut. Those that wait out the short term fluctuations in a game like this are called “suckers”. They are the last in when all the smart players have cashed out and gone to the Caymans leaving no forwarding address. Mr. Geithner and his pals have set us all up as the suckers.