Begin forwarded message:
From: dasg...@aol.com
Date: March 20, 2009 1:31:01 AM PDT
To: ramille...@aol.com
Cc: ema...@aol.com, j...@aol.com, jim6...@cwnet.com,
l...@legitgov.org, christian.r...@gmail.com, pby...@overstock.com
Subject: Geithner, "Expert" on the "Shadow Bankers," Is Playing THEIR
Shell Game on US
"Geithner could take toxic mortgage-backed securities and put them all
up for public auction. That would remove any doubt about their true
value, and it's the reasonable thing to do.
"So, why won't the Treasury Secretary do that?
"Because that would draw unwanted attention to the fact that the
banking system itself is insolvent -- its vaults are full of nothing
but garbage loans that are defaulting at a record pace.
"Instead, Geithner has cooked up a plan that would provide up to $1
trillion in [taxpayer] funding for private firms --equities and hedge
funds-- to purchase toxic assets from the banks. The Treasury plans
to offer them low-interest loans with explicit government guarantees
against any potential loss. If the hedge funds or private equity
firms don't turn a profit within three years, they can simply return
the assets to the Treasury and (promised a second-generation
"bailout") they get all their money back.
"Geithner's 'solution' to the banks' problems is to offer unregulated
private sector brokers a lavish subsidy for a totally risk-free
investment. This $1 trillion giveaway to hedge funds is just one more
sweetheart deal designed to benefit Geithner's only real constituents:
Wall Street speculators."
Geithner's Charade
Dithering on the Edge of the Abyss
By MIKE WHITNEY
CounterPunch, March 9, 2009
http://www.counterpunch.org/whitney03092009.html
The good news is that Obama's economics team understands the
fundamental problem with the banks and knows what needs to be done to
fix it. The bad news is that Bernanke, Summers and Geithner all have
close ties to the big banks and refuse to do what's necessary.
Instead, they keep propping up failing institutions with capital
injections while concocting elaborate strategies for purchasing the
banks’ bad assets through backdoor transactions. It's all very
opaque, despite the cheery public relations monikers they slap on
their various "rescue" plans. This charade has gone on for more than a
month while unemployment has continued to soar, the stock market has
continued to plunge, and the country has slipped deeper into economic
quicksand.
Paul Krugman summed up the administration's response in Friday's
column, "The Big Dither":
“There’s a growing sense of frustration, even panic, over Mr. Obama’s
failure to match his words with deeds. The reality is that when it
comes to dealing with the banks, the Obama administration is
dithering. Policy is stuck in a holding pattern....
Why do officials keep offering plans that nobody else finds credible?
Because somehow, top officials in the Obama administration and at the
Federal Reserve have convinced themselves that troubled assets ... are
really worth much more than anyone is actually willing to pay for them
— and that if these assets were properly priced, all our troubles
would go away. ...
What’s more, officials seem to believe that getting toxic waste
properly priced would cure the ills of all our major financial
institutions.”
Krugman is right about the "dithering" but wrong about the toxic
waste. Geithner and Bernanke know exactly what these assets are worth
-- pennies on the dollar. That's why Geithner has avoided taking $5 or
$10 billion of these mortgage-backed securities (MBS) and putting them
up for public auction. That would be the reasonable thing to do and it
would remove any doubt about their true value.
But the Treasury Secretary won't do that because it would just draw
attention to the fact that the banking system is insolvent; the vaults
are full of nothing but garbage loans that are defaulting at a record
pace.
Instead, Geithner has cooked up a plan for a "public-private
partnership" which will provide up to $1 trillion in funding for
private equity and hedge funds to purchase toxic assets from the
banks. The Treasury will offer low interest "non recourse" loans (with
explicit government guarantees against any potential loss) to
qualified investors. If the hedge funds or private equity firms don't
turn a profit in three years, they simply return the assets to the
Treasury and get their money back. In essence, Geithner's plan
provides a lavish subsidy to private industry on an totally risk free
investment. It's a sweetheart deal.
At the same time, the plan achieves Geithner's two main objectives; it
gives the banks the chance to scrub their balance sheets of junk
mortgages and it also allows them to keep the present management-
structure in place. The $1 trillion taxpayer giveaway to the hedge
funds is just another treat tossed to Geithner's real constituents--
Wall Street speculators.
Unfortunately, markets don't like uncertainty, which is why Geithner's
circuitous plan has put traders in a frenzy. Wall Street has gone from
scratching its head in bewilderment, to a stampede for the exits. In
the last month alone, the stock market has plummeted 18 per cent,
indicating ebbing confidence in the political leadership. Geithner is
now seen as another glorified bank lobbyist like his predecessor,
Paulson, who is in way over his head. His lack of clarity has only
added to the widespread sense of malaise. Markets require transparency
and details, not obfuscation, gibberish and Fed-speak. Geithner is
putting the interests of the banks before those of the country.
The "public private partnership" is just a convoluted way of avoiding
the heavy-lifting of rolling up the banks, wiping out shareholders,
separating the bad assets, and replacing management. The same is true
of Bernanke's Term Asset-Backed Securities Loan Facility (TALF), which
is another futile attempt to restart Wall Street's failed credit-
generating mechanism, securitization.
It was securitization (which is the conversion of pools of mortgages
into securities) which got us into this mess to begin with. It doesn't
do any good to restore an inherently crisis-prone system that only
works properly when the market is going up. There are more efficient
ways to recapitalize the banks than the PPP, just as there are better
ways to promote consumer spending than the TALF. Treasury should be
looking into debt relief, jobs programs and higher wages.
There are solutions that do not involve artificially low interest
rates, government subsidies for toxic waste or lavish handouts to
hedge funds. They simply require a commitment to rebuild the economy
on sound principles of hard work, productivity and fair distribution
of the the profits.
Even industry cheerleaders, like the Wall Street Journal, are
skeptical of Bernanke's TALF and have denounced it as just another
boondoggle.
There is another part of Geithner's plan that is even more troubling.
After the banks sell their dodgy assets to the hedge funds, what will
they do with the money? Consumers are retrenching, so the pool of
creditworthy customers will remain small. And businesses are trying to
work off existing inventory, so they won't be borrowing to increase
investment or retool anytime soon. If the opportunities for lending
dry up, the banks will be forced to seek unconventional means for
generating profits. My guess is the <otherwise regulated> banks will
put a large portion of their money into <unregulated> hedge funds for
commodities speculation -- which will push the price of oil, natural
gas and other raw materials into the stratosphere just like they did
last year when oil shot up to $147 bbl. The banks really have no
choice -- 65 percent of their business was securitized investments,
and that door has been slammed shut for good.
“Too Big to Fail”?
The Financial Times economics editor Martin Wolf warned in Friday's
column of the dangers of our present course. He said:
"If large institutions are too big and interconnected to fail... then
talk of maintaining them as “commercial” operations... is a sick joke.
Such banks are not commercial operations; they are expensive wards of
the state and must be treated as such.
The UK government has to make a decision. If costly bail-out must be
piled upon ever more costly bail-out, then the banking system can
never be treated as a commercial activity again: it is a regulated
utility – end of story. If the government does want it to be a
commercial activity, then defaults are necessary, as some now argue.
Take your pick. But do not believe you can have both.”
Citigroup is now officially a "ward of the state," although CEO Pandit
and his band of pirates are still allowed to collect their paychecks
and hang out by the water cooler. Citi's survival depends on the
reluctant generosity of the US taxpayer who is now its biggest
shareholder. The mega-bank has slumped from $58 per share to $1 per
share in less than 2 years. It's now more expensive to buy a grande
latte at Starbucks than it is to buy three shares of Citi ... and, at
least with the Starbucks, the buyer gets a buzz on. There's no upside
to the Citi deal. It's a dead loss.
Wolf is correct to draw attention to the myth of "too big to fail".
In fact, the Kansas Federal Reserve President, Thomas Hoenig made the
same point in a PDF released this week:
"We have been slow to face up to the fundamental problems in our
financial system and reluctant to take decisive action with respect to
failing institutions. ... We have been quick to provide liquidity and
public capital, but we have not defined a consistent plan and not
addressed the basic shortcomings and, in some cases, the insolvent
position of these institutions.
We understandably would prefer not to "nationalize" these businesses,
but in reacting as we are, we nevertheless are drifting into a
situation where institutions are being nationalized piecemeal with no
resolution of the crisis."
Hoenig and Wolf are smart enough to know that the problem is not as
simple as it sounds. They know that the largest financial institutions
are lashed together in a net of complex counterparty contracts--mainly
credit default swaps (CDS) -- which run into tens of trillions of
dollars, and, that if one player is allowed to default, it could pull
all of the others down the elevator shaft along with it. The problem
could be resolved with proper regulation which would force all CDS
onto a regulated exchange so that government watchdogs could make sure
that they are sufficiently capitalized to pay off whatever claims are
levied against them.
But, so far, no one in Congress has taken the initiative to propose
the necessary regulation. Thus, the taxpayer continues to pay off
hundreds of billions of dollars of insurance claims against AIG, which
was so grossly under-capitalized, it couldn't meet its own obligations.
The AIG fiasco provides a window into the real motivation behind
financial engineering and the alphabet-soup of complex debt-
instruments. Wall Street knew that the fastest way to fatten the
bottom line was to circumvent minimum capital requirements and expand
leverage to unsustainable levels. In other words, a system of debt-
fueled capitalism with only specks of capital. It worked beautifully,
until it didn't.
Nobel prize-winning economist, Myron Scholes, who helped invent a
model for pricing options, added his voice to the growing chorus of
angry reformers who think the CDS market should be scrapped
altogether. According to Bloomberg News: Scholes said "regulators need
to ‘blow up or burn’ over-the-counter derivative trading markets to
help solve the financial crisis. The markets have stopped functioning
and are failing to provide pricing signals... The “solution is really
to [eliminate] the OTC market, the CDSs and swaps and structured
products, and let us start over.” (Bloomberg)
Treasury and the Fed have taken the position that they will not fix
the system until they are forced at gunpoint. This is a prescription
for disaster, not just because of growing public frustration or the
free-falling stock markets, but because the banks are just the tip of
the iceberg. The other non bank financial institutions are brimming
with mortgage-backed sludge that will require emergency treatment,
too. MarketWatch gives us a glimpse of the magnitude of the problem
in last week's article "Banks fall out of bed, Citi shares under a
buck":
"Market strategist Ed Yardeni's latest research shows that 80.6%, or
$7.4 trillion, of the assets held by the S&P financials companies were
Level 2," he said in a research report. Level 2 assets are so-called
mark-to-model, which are carried at a value based on assumptions, not
true market prices."
What does "Level 2 assets" mean? It means that the financial giants
are short on liquid assets -- like cash or US Treasuries -- and loaded
with mortgage-backed paper to which they have arbitrarily assigned a
value that no one in their right mind would ever pay. The entire US
financial system, including the pension funds and insurance companies,
is one debt-bloated time bomb that is set to blow at any minute.
Surprisingly, Bernanke thinks he can simply wave his wand and restart
the moribund credit markets. That's what the TALF is all about. The
problem is that even if the Fed buys all of the AAA securities held by
the respective financial institutions (most of them are non banks),
that's still only accounts for 20 per cent of the bad paper on the
books.
Here's what Tyler Durden said on Zero Hedge web site:
"Unfortunately for Geithner, who apparently did not read too deeply
into the data, the bulk of the $1 trillion decline in securitizations
came from home equity lending and non-agency RMBS (Residential
Mortgage Backed Securities), which reflect the "non-conforming"
mortgage market, i.e. the subprime, alt-A and jumbo origination, loans
which are the cause for the credit crisis, and which are rated far
below the relevant AAA level. The truly unmet market, which the
Treasury is addressing is at best 20% of the revised total amount."
That leaves Geithner and Bernanke with few good choices. Either they
expand TALF to include crappy AA (and lower) graded securities --
putting the taxpayer at even greater risk-- or they devise some
totally new lending facility that will bypass the financial
institutions altogether and issue credit directly to consumers and
small businesses. There is no third option.
The problem with the TALF is that it ignores the new economic reality,
that consumer demand has collapsed from the massive losses in home
equity and retirement accounts. When credit markets froze last year,
housing values dropped sharply raising havoc with household balance
sheets and forcing a radical change in spending habits. That cutback
in spending created a negative feedback loop to the financial sector
which made it impossible to re-inflate the credit bubble. The ultimate
size of the financial system will be determined, to a large extent, by
the capacity of people to borrow again, which depends on many factors
including job security, savings, and optimism about the future.
Needless to say, the growing worry over a 1930s-type Depression will
not help to lift spirits or improve the chances for a speedy recovery.
That said, there are positive steps the administration can take now to
restore confidence in the markets. These measures fall under three
main headings: debt reduction (forgiveness), regulation, and
accountability. Confidence is not built on inspiring oratory or
personal charisma, but concrete actions to reestablish a rules-based
system that penalizes crooks and fraudsters.
Recovery isn't possible without a strong commitment to these basic
changes.
Feeling the pinch at the grocery store? Make dinner for $10 or less.