Another Giveaway? The Sad Truth about the Geithner TALF Plan
Posted in: Financial Crisis
This may sound a little hyperbolic, but my jaw did drop when I read SEIU Treasurer Anna Burger’s succinct description of Geithner’s plan for convincing private investors to buy up assets:
Secretary Geithner’s proposal for the Term Asset-Backed Securities Loan Facility (TALF) would enable private equity firms and hedge funds to buy up higher quality loan securitizations, including auto, consumer, student and small business loans. The Federal government would provide low-cost financing for up to 95% of the purchase price, with private firms putting down as little as 5% and the securitizations as collateral. The hope is then to expand this proposal to include toxic mortgage-backed securities.
Each of these programs could cost taxpayers up to $1 trillion. If the private firms make a profit from the deal, they keep all of it. If they end up losing money, they are only on the hook for the nickel or two of equity they put in. The taxpayers would then assume the rest of the losses. Even worse, subsidizing the purchase up to 19-to-1 will drive up the price of the assets…
There is no reason to do this. If the government is providing 95% of the money, the government might as well provide 100% of the money and just take the profit as well as the risk. Under Geithner’s plan, the government accepts all the risk and none of the profits and puts up almost all of the money?
This is ideology run rampant at the cost of common sense. What conceivable reason would Geithner have to pitch something like this? Could it be because he doesn’t believe government should make a profit, or that private investors should take losses? Or, worse than that. . .
Burger is right when she says that this plan will lead to yet another bubble. Ultra-cheap financing with no risk for the investors is exactly what investors thought they were getting with collateralized debt obligations. They were wrong then, but this time they’ll be right, because Geithner is giving them the money. And the result will be artificially high prices, which taxpayers will have to pay off when they crash. True, this will give some relief to banks, but the cost will be much higher than it needs to be, and the problem will only be pushed onto the future, and onto the government.
This is, thus, in the end, simply another bailout. It could wind up costing taxpayers $2 trillion. Kind of makes one long for the old days when the bailout was $700 billion, doesn’t it?
I confess that I find it difficult to spot the difference between the actions of the Treasury Department under Bush and Paulson, and those under Timothy Geithner. In both cases, job one seems to be to bail out bankers and give money to private investors, not to fix problems in a sustainable fashion which looks after taxpayers.