Hilson touted over Geithner

[koganbot]

While everyone's talking about the Keri Hilson album having leaked, it's worth noting that the administration's plan for fixing the financial system has also leaked. Early responses are less favorable to Geithner than to Hilson. I didn't understand the plan as reported by the NY Times, hence I don't have an informed opinion. Paul Krugman's reaction is despair (and more detailed despair). Yves Smith calls the plan an abortion and she also uses the words "crappy" (in regard to what will be bought under the terms of the plan) and "idiots" (the administration's perception or misperception of who constitutes the public). And this guy, who may not actually be an economist, puts concerns to music.

(The Hilson, by the way, is yet another interesting album (see Vanessa Hudgens', Ryan Leslie's, and The-Dream's) by someone with no presence or charisma as a singer. So far the bits of beauty and the mere gestures towards passion seem sufficient, somehow, or fairly likable half the time, anyway. Better than I'd expected, though my expectations were lower than some people's. See my reappraisal of "Turnin' Me On" here.)

EDIT: DeLong, on the other hand, seems fairly happy with it, unless I'm misreading his tone, which I may well be. Not that I understand his analysis either, obviously, but my guess is that some of you will, since he's laying things out pretty simply.

Comments

[dubdobdee.livejournal.com]

delong says the times have explained it badly (i agree, insofar as i find their story hard to follow)

the geithner plan is a banks-are-bubbles-(in-a-good-way) plan; the objectors are saying when-banks-are-bubbles-this-is-bad

the banks-are-bubbles-(in-a-good-way) plan: is essentially arguing that given enough time and returning confidence, the troubled assets will regain their robustness (example?: a foreclosed mortgage is a promised lump sun of a large size which has irrevocably collapsed to a much smaller size, and can't grow, because the mortgage holder has posted the keys thru the letter box and walked away -- but as the economy improves the property can be resold, and gradually, after some years, make as much money if not more as it would have anyway... the government has big pockets and can wait)

the when-banks-are-bubbles-this-is-bad critique: is saying that really very large proportion of the trouble assets are genuinely worthless and will NEVER accrue however long you wait, so the purchasers are just being given guaranteed loans to buys closed boxes of nothing... when they open them and find them empty, they will lose nothing, and meanwhile the bank who made the dodgy loan (or whatever) in the first place has got its money back

essentially the geithner plan is a long-term gamble on the market generating enough money to pay off the loan, one way or another -- it assumes the market will gradually recover once banks start making loans to businesses again (which currently they are not doing as they are so scared that the unplumbed hole in the vaults will turn out fatal: now that someone is buying that entire hole, sight unseen, the banks can get back to their normal processes...)

a major downside is that there is no weeding out of incompetent management: they are being kept on, subsidised, in some cases rewarded: what many are calling a "massive case of moral hazard"

[koganbot]

but as the economy improves the property can be resold, and gradually, after some years, make as much money if not more as it would have anyway...

But I don't think anyone believes this (not Geithner, not DeLong). They're not assuming that housing prices (in real prices, adjusted for inflation) will naturally return to what they were before the bubble. In fact, some people think that housing is still overvalued now. The disagreement is over what the assets will be worth once "confidence" returns, whether or not the market for the assets (which is assuming they're worth very little) is undervaluing them at the moment. But I don't pretend to understand the plan.

[dubdobdee.livejournal.com]

yes but isn't the problem that, while no one perhaps believes tins, no one in a "responsible" position can be seen to act as if they actively disbelieve it (because of the risk of the delcaration triggering a further collapse in confidence): so you're getting this super-fudgy "acting as if everything depends on the fact that there's a key 'they' that does still believe this (when we all know none of us do)"

the geithner gamble isn't perhaps so much that the assets themselves will turn all out to be salvageable, but that the market as a whole will recover (and in the process buoy the housing market up a little, even: so that in the long run some of them will deliver)

[dubdobdee.livejournal.com]

here is yglesias making a sensible point in a tidy way, about the issue of confidence; and how value in respect of a lot of these closed boxes isn't intrinsic, it's social and situational

[dubdobdee.livejournal.com]

in the yglesias comments max (who may or may not be max sawicky but def knows his economic onions, which mnost of yglesias's commenters i think don't) amplifies that point, by expanding a critique of the geithner plan along the same lines

(the krugman and atrios and max critique of delong is i think that a lot of the damage to the assets is already done and the contraction is on its way unless something ELSE -- beyond the geithner plan -- gets enacted: ie "rescuing the banks" in the swedish sense, which basically means dissolving them and setting up a temporary govt bank in their place) (i'm pretty sure in the swedish example, the nationalisation was temporary)

[koganbot]

will naturally return to what they were before the bubble

I meant to write "before the bubble BURST," which is to say naturally return to the bubble prices.

[koganbot]

Krugman replies to DeLong.

The whole point about toxic waste is that nobody knows what it's worth, so it's highly likely that it will turn out to be worth 15 percent less than the purchase price. You might say that we know that the stuff is undervalued; actually, I don't think we know that. And anyway, the whole point of the program is to push prices up to the point where we don't know that it's undervalued.

(Which I don't think I understand.) And there's this:

If getting the prices of toxic assets "right" isn't enough to rescue the banks, that doesn't mean that we're doomed; it means that we actually have to, you know, rescue the banks, Swedish style, rather than rely on fancy financial engineering to make the problem go away.

(One thing I like about Krugman is that he can write. That "we actually have to, you know, rescue the banks" is good enough to be on livejournal.)

[dubdobdee.livejournal.com]

yes i think he's (on the whole) a good writer for an economist, and he's adapted well to blogging

this though:
And anyway, the whole point of the program is to push prices up to the point where we don't know that it's undervalued

i think he means:
And anyway, the whole point of the program is to push prices up to the point where we know that it's NOT undervalued... ie where we know its value and know that that the value is an appropriate and a sensible and a workable value (it's about achieving "market transparency", in other words); because at this point, normal capitalist planning and process are able to kick back in -- everyone agrees they are on the same page as everyone else

[koganbot]

Here's a clear (I don't know if correct) explanation of the Geithner Plan (and the Paulson before it, and of temporary nationalization) by Mark Thoma.

[koganbot]

And from DeLong:

At the moment "Fear of Reese Witherspoon Look-Alikes on the Pill" has 116 comments, while "The Geithner Plan FAQ" has only 89 comments. I confess this leaves me somewhat disappointed: I thought money would be dominating by this point...

[dubdobdee.livejournal.com]

galbraith the younger on geithner

[alexmacpherson.livejournal.com]

Agree on the Hilson - I get absolutely no sense of who she is, which makes sense given that she's primarily a songwriter, not a performer. R-Les is an apt comparison - V-Hudge less so, b/c her anonymity comes from a different place - and I'd disagree that The-Dream lacks presence. On the ILM R&B thread I said Keri is the new Kandi Burruss which I would stand by (though Kandi's writing track record beats Keri's handily so far).

Anyway, Keri's facelessness actually benefits her material in single-sized doses - it makes 'Turnin' Me On' and 'Return The Favor' sound like better radio/club jams, tracks which ask nothing of you. But she even sounds anonymous when she does a "controversial" rap on the 'Turnin' Me On' remix, on which she supposedly calls out a load of R&B chicks from the songwriter's perspective, à la Ne-Yo's 'A Milli' freestyle. Except she doesn't really call anyone out specifically enough for it to mean anything, and while her rap has enough attitude to be great ("MISS KERI BAYYYYBEHHHH!") it's generic R&B swagger rather than Keri-specific swagger.

[koganbot]

I remember poking around used CD stores for months back in the early '00 and '01 looking for the Kandi album. Never did find it. What's she doing these days? (Seems to be in PeachCandy, assuming that it's the same "Kandi." And here's her own MySpace. Says she's been working with Karina, David Banner, Tyra B, Fantasia, Ciara, Rich Girl, LeToya, Melissa Jimenez, Tiffany Evans; also is on "the hit Bravo show 'The Real Housewives of Atlanta.'")

There's a lot going on in The-Dream album, and I get a strong presence from the music, but the personality I'm getting is of the Mind Behind The Music (who just happens to be the singer).

[koganbot]

Oops. Botched the Kandi link. Here it is:

http://www.myspace.com/kandionline

[katstevens.livejournal.com]

I have to disagree! I've found the album to be a surprisingly coherent story of Keri's neuroses regarding relationships - she might be a beautiful, intelligent, creative adult with the world at her fingertips, but dammit she can't deal with blokes argh argh. Even when she's flirting with dudes she's not quite sure what she wants (is Lil Wayne* turning her on or off? WHO KNOWS) - compare it to Set Your Money Up where she and the girls know exactly what they want and how to get it, namely expensive booze. SYMU is the only track where Keri seems to be in her comfort zone (except, er, the intro).

So then, current faves on the album: Turning Me On & Set Your Money Up (armoured truck!); others I'll skip straight to: Return The Favour, Intuition, Alienated, Energy. The only one I really can't deal with is 'Make Love', as I said here it's too voyeurish and grimace-inducing for me to listen to properly.

*I'm not a Lil Wayne expert by any means so can someone tell me if he's made the 'Wayne's World' gag countless times before already? Because I totally lolled :)

[alexmacpherson.livejournal.com]

I remember him casually referencing Wayne's World in 'Get High, Rule Tha World' and he's probably done it lots more times that I can't remember, but I think this is the first time he's set it up so well, but the "you're just an earthling" line. His guest spot here is really good, I also love the "hope your piranha bite" line - he is up to taking on the vagina dentata which is such a staple of scary ho-rap!

I pretty much agree with you on the songwriting and the best tracks, I just don't get much from Keri's voice. Also Kanye very nearly ruins the otherwise excellent 'Knock You Down' w/that awful OMG/woe is me moment. AARGH.

btw I think you will like this Timberlee video!

[koganbot]

More from DeLong (I Think Paul Krugman Is Wrong) and Krugman (Financial Policy Despair).

[koganbot]

And the New York Times links a lot of the commentary from economic and political blogs. Interestingly, the political bloggers (Klein and Yglesias) are more favorable towards the plan, suggesting that rather than wasting "political capital," the plan sets the stage for nationalization if necessary later on, nationalization that will seem more plausible to conservatives than it does now, and that in the short run it allows the administration to throw money at the problem without needing congressional authorization and without risking congress screwing everything up. (Klein is relaying the reasoning he gleaned from off-the-record convos with administration officials over the weekend, so he isn't necessarily voicing his own opinions.)

[koganbot]

From the New York Times story on the Geithner plan:

The Treasury Department offered this example to illustrate how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. The F.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, using funds from the $700 billion bailout program; the private investor contributes the remaining $6.

Not knowing much about investment finance, I don't understand the final two sentences of that paragraph.

[koganbot]

The New York Times publishes an editorial about the Geithner plan ("a better way would be to base the rescue on current reality, not assumptions about the future") and then asks my usual suspects (Paul Krugman, Simon Johnson, Brad DeLong, Mark Thoma) whether they think the plan will work:

Excerpts:

Paul Krugman: If the banks are really in deep trouble that goes beyond lack of confidence, subsidizing investor purchases of toxic assets, many of which aren’t even held by the most troubled banks, has no real chance of turning things around.

Simon Johnson: The Geithner plan may prove to be part of the solution, but a relatively small part. If the economy continues to deteriorate, we urgently need a “resolution mechanism for large banks”; in plain English, the government will supervise their bankruptcy and had better figure out how to do this more effectively.

Brad DeLong: When assets are seen as less risky, their prices rise. And when there are fewer assets to be held their prices rise too: supply and demand. With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms.

My guess, however, is that we would need to take $4 trillion of risky assets out of the supply currently held by private financial intermediaries to move financial asset prices to where they need to be.

The Geithner plan offers only $500 billion. The Federal Reserve’s quantitative easing plan will add another $1 trillion... Why isn’t the administration doing the entire job? My guess is that the Obama administration wants to avoid anything that requires legislative action.

Mark Thoma: The first thing to watch for is whether private money is moving off the sidelines and participating in the program to the degree necessary to solve the problem. If the free insurance against downside risk that comes with the non-recourse loans the government is offering doesn’t induce sufficient private sector participation, then it will be time to end the Geithner bank bailout.

The second factor to watch is the percentage of bad loans the government makes as part of the program. . . If the price of [the purchased] assets is increasing sufficiently fast, then the loans will be safe. But if the prices do not respond to the program, then the loans will be in trouble.

In that case, we will need to end the program as quickly as possible and minimize losses. The next step will have to be bank nationalization, though the political climate will be difficult.

Unless Paul Krugman has 60 votes in his back pocket...

[koganbot]

More from DeLong: I suspect that in the end we will be driven down the road to some form of bank nationalization — and if that is where we are going Paul Krugman is correct to say that it is better to get there sooner rather than later. But unless Paul Krugman has 60 Senate votes in his back pocket, we cannot get there now. And the Geithner Plan seems to me to be legitimate and useful way to spend $100 billion of TARP money to improve — albeit not fix — the situation.

Fear fluctuates much more than greed

[koganbot]

DeLong links another person who think that the Geithner plan has merit.

Christopher D. Carroll (Treasury Rewards Waiting): in the Wall Street contest between "fear" and "greed," fear fluctuates much more than greed (in academic terms, movements in "risk tolerance" explain the bulk of movements in asset prices).

. . .

The details [of the Treasury plan] flow from an overarching view that the markets for the "toxic assets" that are corroding banks' balance sheets have shut down in part because in those markets the degree of risk aversion has become not just problematic but pathological. The different parts of the plan reflect different approaches to trying to coax private investors back into the market by reducing their perceived degree of risk to levels that even a skittish risk-shy hedge fund manager might find tempting.

. . .

The problem with the Paulson plan was never fundamentally with the idea that there were problems in the market for toxic assets, but with the idea that the right way to fix that problem (and everything else wrong with the economy!) was simply to have the government drastically overpay to buy up the toxic assets from whoever was foolish enough to have ended up holding them. (Maybe this is not really what Secretary Paulson had in mind, but it seems the most sensible interpretation.) Instead, the new plan from the Treasury gives private investors (who know more than Treasury about the likely payoffs of these securities) the pivotal role in competing to set the prices of the securities, via a competitive auction process.

...In addition, there is no pretense now (as there was last autumn) that the resolution of the toxic assets problem is the sole remedy for our economic woes.

[koganbot]

And more from Simon Johnson and James Kwak (Geithner's plan isn't money in the bank): The Obama administration has made it abundantly clear that it will not consider [government-supervised bankruptcy], except perhaps as a last resort... The government has no way to bring down the banks' minimum sale prices, especially without the threat of receivership. So the only option is to induce buyers to pay more than they think the assets are worth in today's generally risky climate, and the only way to do this is through subsidies.

. . .

There are three reasons for concern.

First, the subsidy may not be sweet enough to close the deal...

Second, there is a "lemons" problem, also known as adverse selection. Even with a reasonable degree of disclosure, the selling banks will still know more about their assets than the buyers. The banks will be trying to dump their most toxic assets (their lemons); the buyers, fearing exactly this behavior, will reduce all their bids accordingly. This will make it harder for buyers and sellers to meet.

Third, ...for this plan to succeed, it has to offer private investors both upfront subsidies (cheap loans) and the long-term prospect of high returns. Both of these will be broadly unpopular with the public, especially given general attitudes toward hedge funds and private equity firms. Any attempt to limit the upside for the private sector has, apparently, been vetoed by potential investors. And that will make it look and feel like a taxpayer shakedown.

[koganbot]

Matthew Richardson and Nouriel Roubini gives thumbs up in the Daily News (Give credit to Timothy Geithner's new toxic asset plan): The private investors need the government because there are so many bad loans held in the financial sector that only the government's balance sheet can handle taking them over. The government needs help from private investors so it doesn't get hoodwinked by the banks.

Why will investors participate? The deal is structured so that firms will be responsible only for losses on their initial investment. The hope is that by giving this big "freebie," the government will induce investors to participate, and that competition among them will lead to higher offer prices for the loans and securities, thus encouraging banks to sell them.

. . .

But let's not have any illusions. The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks.

. . .

What happens if removing toxic assets from a bank's balance sheet at near-market prices shows it is effectively insolvent? Then we will have to face the elephant in the room. We may then have to start asking, "Why keep insolvent banks afloat?"

[koganbot]

Edmund L. Andrews and Louise Story, New York Times (Geithner Calls for Major Overhaul of Financial Rules):

But the most striking new proposals, and the ones that may provoke the most heated opposition from the industry, would regulate so-called private pools of capital — hedge funds, private equity funds and venture capital funds — and the gigantic market in financial derivatives, including instruments like credit-default swaps, the insurancelike instruments that allow investors to hedge against bond defaults.

[dubdobdee.livejournal.com]

quiggin on geithner

[dubdobdee.livejournal.com]

delong on the money supply: the money supply is an important concept which ties in with a question you asked an age ago (about something stirling newberry said, re why it matters at all what the "total amount of money" relates to, gold or housing or oil reserves or whatever...)

(i'll have to look it up exactly, but i alway meantto come back to it: unfortauntely i am right this minute/this weekend/on urgent failing deadline for my "black science fiction revisited" piece)

[koganbot]

Oops, I put my reply in "Leave A Comment" rather than in reply. So you gotta scroll down. I also use the phrase "you or all people," by which I mean "You who posted a few days ago that 'value in respect of a lot of these closed boxes isn't intrinsic, it's social and situational.'"

[koganbot]

The discussion is at "Complexity that truly is unpredictable," and it wasn't about "total amount of money" but "value in general" (money being a tool for tossing value back and forth by facilitating the interchange of goods and services). What I said was:

I see absolutely no reason why there must be "an ultimate good that society produces," any more than there must be an ultimate set of values that everybody agrees on or ultimate congruence on what people designate as good and bad. In fact, my ideas about Superwords etc. are that partial disagreement is built into the functioning of words like "good" and "bad" and "value."

This isn't saying at all that it doesn't matter what value/money relates to, any more than it's saying that it doesn't matter what people value: it's saying that there isn't and there doesn't need to be a single, ultimate thing that sets value for everything else and on which all value rests. And my saying this is just repeating a standard line from late 19th century philosophy onward, but also I don't think it's relevant to a discussion of value or money. It's more like: Newberry interrupted the discussion to ask, "What does God think?" and I'd continued the interruption with, "There is no God."

So I didn't see why you of all people thought it was worth following through on Newberry's question about "the ultimate good that society produces." It is a change of subject (i.e., a filibuster), a change from economics to philosophy.

Also don't see where the DeLong piece brings up anything like it. Saying that "money supply" is more than just money isn't the same as asking what ultimate good or service value rests on. DeLong says: "In economic reality, 'money supply' means not just cash money but also credit entries the Federal Reserve has made in commercial banks' accounts at the Fed; plus all the credit entries commercial banks have made in households' and businesses' checking accounts; plus savings account balances; plus (usually) money market mutual-fund balances; plus (sometimes) trade credit and the ceilings between credit card limits and consumers' current balances." And we could add, "which all relate to a whole bunch of other stuff." But this doesn't touch Newberry's question, since his question is the wrong one.

[dubdobdee.livejournal.com]

i'm fairly sure -- but i'll have to look it up properly -- that i (of all people) took him to mean something completely different by that phrase: i ran out abt 40 million pages of the internet to reread to explore this and then (as usual) got distracted by something trivial

keep reminding me -- bearing in mind i do actually plan to use my extension to write the bsf piece and i am from tomorrow plumb in the middle of of a typically frantic press fortnight (designer going on holiday in the middle of it yikes)

[koganbot]

If it helps, this is the Newberry piece you'd originally linked.

I basically don't follow how Newberry - or you, if you're with him - can square the idea that value is political and social and situational with the idea that apocalypses tell us what we ultimately value. If value is situational then apocalypses don't tell us what we "ultimately" value, they merely tell us what we value during apocalypses, which may well not be what we value during nonapocalypses - since, given that apocalypses are relatively infrequent, they may provide a particularly bad model for thinking about what we value or how "value" generally works.

If I'm misinterpreting Newberry, then just what do "ultimate" and "apocalypse" mean? But also, if I'm misinterpreting Newberry, and he isn't privileging the apocalyptic situation over all others (in which case why did he bring it up?), then I'm not sure I've raised a question that particularly needs answering; we can just continue to agree on the platitude that "value" is political and social and situational (I'd add that it's "variable" too, not just because situations vary but because people do as well, different people valuing different things, and when they value the same things they can differ in how much they value this versus that).

But on rereading the old thread from October, I do see that there is a second, different question I'd asked, and that's actually the one that's concerning you. (Which means I myself inadvertently filibustered the discussion yesterday.) Back on that October thread I wrote:

Don't see where putting some other commodity in place of oil and electricity necessarily changes the ballgame. But we'll see. The buzzwords of the day are "information" and "environmental technology." In any event, the piece ends up as the usual fakeout, since the obvious next step is to say what the new assets are, and Newberry doesn't, not at all.

This may be a question that you have to answer, since at least in this piece we're not getting guidance from Newberry.

[koganbot]

Joe Nocera (This Time, Geithner's Plan for Banks Makes Sense): "There is something called the leverage cycle," said John Geanakoplis, an economics professor at Yale. During the bubble, he continued, when the country was awash in debt, toxic assets rated AAA were leveraged at an outlandish 16-to-1 ratio. That leverage was the primary reason those assets made such big returns. Now we're in the opposite end of the cycle. There is no leverage at all available — yet without it, the return on these assets would simply be too small to make them interesting enough for investors to purchase. The only entity capable of injecting leverage in the system is the government.

...If the program works — that is, if the assets begin to make money for investors — it could draw more private lenders into the marketplace. Suddenly the market for these assets would become liquid again, and banks could mark the assets remaining on their books with some real confidence. Isn’t that what we want?

...

There are plenty of investors who would be happy to take bundles of, say, commercial real estate loans off the hands of the banks and work them out — but only if they can get them for a price that makes sense. Good money can be made both for the investors and for the government, which, lest we forget, will get 50 percent of the upside. But the banks are going to be extremely reluctant to give up those loans, because by doing so, they would have to acknowledge the losses on their books.

That is why it is so important that the F.D.I.C. is managing this program. However much banks may not want to sell into the program (and for all the government's insistence that the program is voluntary) it will be nearly impossible for a bank to resist the entreaties of its primary regulator. All indications are that Ms. Bair and her crew are going to use the program as a tool to force the banks to come clean on the health of their loans.

Please don't say dishonest. Say "creative" instead.

[koganbot]

Live Internat chat last Tuesday among Brad DeLong, Felix Salmon, James Kwak, and Mark Thoma (Live Discussion: Treasury's Bank Recovery Plan):

[Comment From Dave Van Knapp]
If it's impossible to value the underlying assets, how will bidders arrive at their bids? Sheer guesswork?

Felix: Dave, great question.

[koganbot]

John Hempton (A little bit of careful thinking – and why Krugman's despair is misplaced):

Thinking carefully there should be four broad outcomes:

• Both the bank and the Geithner fund is solvent

• Both the bank and the Geithner fund is insolvent

• The Geithner fund is insolvent but the bank is solvent

• The Geithner fund is solvent and the bank is insolvent


When both the bank and the Geithner Fund is solvent ex-poste there was no cost to the government. Sure there was an ex-ante subsidy but it didn’t cost anything. This case should not worry us.

The second case – when both the banks and the Geithner funds are insolvent the government will lose money – but it will lose less money than it would without the Geithner Plan. After all there was some private money in the fund – and that reduced the end loss borne by the government. In other words subsidy be damned - the plan reduced government losses.

The third case is problematic. If the Geithner Fund is insolvent and the bank is solvent then the Geithner plan cost the taxpayer real money.

The fourth case where the fund is solvent and the bank is insolvent is also problematic – but in a different way. The fourth case is where the banks sold good assets to the fund (presumably for liquidity) and kept the bad book for itself (because it could not sell it). Now in this case the subsidy to the Geithner Funds is not a problem – rather it is the desperation of the banks to sell assets, any assets and only being able to sell good assets. The more subsidy you give the Geithner Funds and the more competition between Geithner Funds you have (bidding up the price of the asset) the lesser the end problem for the banks. Either way however we shouldn’t be that stressed about the subsidy to the Geithner Fund.

Indeed the only place that we should be really stressed about subsidy to the Geithner Funds is the third case – where the fund is insolvent but the banks are solvent.

Oops. The people that are really stressed about the subsidy to the Geithner Fund (Krugman, Felix Salmon, Yves Smith of Naked Capitalism, Mike of Rortybomb) are also worried about or even convinced that the banks are insolvent. Indeed several of these people just advocate nationalisation now.

This is illogical. It is the second time I have accused Krugman of gross illogic – but it is simply illogical to believe that

(a). The banks are largely insolvent,

(b). The right or actual government policy is guarantee big banks (ie no more Lehmans) and

(c). The subsidy to the Geithner Funds is a real problem.

If both (a) and (b) applied the Geithner Fund MUST save the government money - so the subsidy is irrelevant.

(I continue not to understand this subject; I will also point out that Hempton links to a couple of posts from an excellently titled blog called Rortybomb, the Rortybomb guy's analysis running along the same lines as the Krugman analysis that Hempton is criticizing.)

(If you follow the link to Hempton's post you will see that not only does he sometimes screw up singular and plural in his verb forms, he also doesn't always get which parts of a sentence need to be outside rather than inside parentheses and dashes.)

[koganbot]

Felix Salmon (Hempton's Law of the Conservation of Subsidy):

I think John might be on to something here, but I still think there's a strong case to be made for maximizing the transparency of any government subsidy to the banking system. The critics of the subsidy implicit in the Geithner plan aren't in general critics on the grounds that it constitutes excessive government spending — we're mostly supporters of the stimulus package, for instance. Rather, my problem with the implicit subsidy is more about the "implicit" part than the "subsidy" part. If you're going to subsidize the banks, let's make it very clear which banks you’re subsidizing, and how much you're subsidizing them by.

[koganbot]

If that link goes bad, here's a more direct one:

http://blogs.reuters.com/felix-salmon/2009/04/02/hemptons-law-of-the-conservation-of-subsidy

Enron Death Star

[koganbot]

Mike at Rortybomb (Banks as Bidders and Sellers; Financial Nostalgia): Let's say you are a bidder for Bank A. You know your banking asset is worth $50, and you also know the asset Bank B has is worth $50. You call your buddy up, the trader at B, and make a deal. Happens all the time. You go to bid, and you bid $80 for B's asset. Then you wait. If B doesn't come through, you are screwed out a lot of money. And hey, isn't this wrong? Well, you are pretty sure one of those Rubin-protégé government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your asset - $80 from B. You have each bid up each other's assets and traded them. And now the government is screwed.

...

Bank A pays $6.50 for its new asset because of the leverage, and it loses all of that. It also loses the $50 from not having the asset anymore. However it gains $80, net profit - same as Bank B. The government has paid $73.50 for a $50 asset, twice...

So why did my energy trading friend get all nostalgic? "Because what you are telling me brings back some great memories from what Enron was up to back in the day. All of us energy traders back then watched with our jaws on the floor. 2000 was a hell of a year.

Felix Salmon comments (The Geithner Death Star): If the banks get a green light to do this, you can be sure that any number of greedy traders will take that as a green light to get up to as many shenanigans as they can. Many of those greedy traders will try their hand in any event — but if the PPIP is structured so as to try to stop them, then it's conceivable that they might not do a lot of damage. If the PPIP is structured on a laissez-faire system of all bids being assumed to be legitimate, then this could be an utter disaster.

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Jeffrey Sachs, worrying about the same thing that Mike at Rortybomb is (The Geithner-Summers Plan Is Even Worse Than We Thought): Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.

[koganbot]

Peter Boone, Simon Johnson, and James Kwak (Baseline Scenario, April 7, 2009): We also do not expect the PPIP to meet its stated objective of starting a market for toxic assets (both whole loans and mortgage-backed securities) and thereby moving them off of bank balance sheets. In essence, the PPIP attempts to achieve this goal by subsidizing private sector buyers (via non-recourse loans or loan guarantees) to increase their bid prices for toxic assets. Besides the subsidy from the public to the private sector that this involves, we are skeptical that the plan as outlined will raise buyers' bid prices high enough to induce banks to sell their assets. From the banks' perspective, selling assets at prices below their current book values will force them to take writedowns, hurting profitability and reducing their capital cushion.

As long as the government's strategy is to prevent banks from failing at all costs, banks have an incentive to sit the PPIP out (or even participate as buyers) and wait for a more generous plan. Again, the key question is how the loss currently built into banks' toxic assets will be distributed between bank shareholders, bank creditors, and taxpayers. By leaving banks in their current form and relying on market-type incentives to encourage them to clean themselves up, the administration has given the banks an effective veto over financial sector policy. There is a chance that the PPIP will have its desired effect, but otherwise several months will pass and we will be right where we started.

This is part of The Baseline Scenario's general assessment, which is pessimistic ("While most forecasters expect positive growth in most parts of the world in 2010, those forecasts seem to reflect expected reversion to the mean rather than any identified mechanism for economic recovery").

In other happy news, Barry Eichengreen and Kevin H. O'Rourke (A Tale of Two Depressions) think that, if anything, the world's economy is doing worse than it had at the beginning of the Great Depression: "The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the U.S. leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column." Hah!

(But I'm not quoting at length from their analysis, as that would take this thread beyond its mandate.)

[koganbot]

Andrew Ross Sorkin ('No-Risk' Insurance at F.D.I.C.): These loans, while controversial, were given a warm welcome by the market when they were first announced. And why not? The terms are hard to beat. They are, for example, "nonrecourse," which means that if an investor loses money, he owes taxpayers nothing. It's the closest thing to risk-free investing — with leverage! — around.

But, as we've learned the hard way these last couple of years, risk-free investing is an oxymoron.

So where did the risk go this time?

To the F.D.I.C., and ultimately, to us taxpayers. A close reading of the F.D.I.C.'s statute suggests the agency is using a unique — some might call it plain wrong — reading of its own rule book to accomplish this high-wire act.

. . .

The F.D.I.C. is insuring the program, called the Public-Private Investment Program, by using a special provision in its charter that allows it to take extraordinary steps when an "emergency determination by secretary of the Treasury" is made to mitigate "systemic risk."

Simple enough, but that language seems to bump up against another, perhaps more important provision. That provision clearly limits its ability to borrow, guarantee or take on obligations of more than $30 billion.

. . .

So how is the F.D.I.C. planning to insure more than $1 trillion in new obligations? This is where things get complicated and questions are being raised.

The plan hinges on the unique, and somewhat perverse, way the F.D.I.C. values the loans. It considers their value not as the total obligation, but as "contingent liabilities" — meaning what it expects it could possibly lose. As the F.D.I.C's charter dictates: "The corporation shall value any contingent liability at its expected cost to the corporation."

So how much does the F.D.I.C. think it might lose?

"We project no losses," Sheila Bair, the chairwoman, told me in an interview. Zero? Really? "Our accountants have signed off on no net losses," she said. (Well, that's one way to stay under the borrowing cap.)

By this logic, though, the F.D.I.C. appears to have determined it can lend an unlimited amount of money to anyone so long as it believes, at least at the moment, that it won't lose any money.

First Do No Harm

[koganbot]

Oh, I'm a little late at posting this one, but a man with some interest in the Geithner plan alluded to it in these remarks:

Barack Obama (Remarks on the Economy): There have been some who don't dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we've made about government involvement in banks, and it's certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.