A Times Boost For The Geithner Plan

Times business columnist Joe Nocera provides a plug for the Geithner plan.  However, Mr. Nocera and his editors fluff an important detail by overstating the allowable leverage in one part of the plan, claiming that the Legacy Securities program will allow 85% leverage when the real goal is 33% with 50% allowed on an exceptional basis.  Let's start with the plug:

This Time, Geithner’s Plan for Banks Makes Sense
By JOE NOCERA

Will it work?

Isn’t that the only thing that matters at this point? The big, new plan to solve the banks’ toxic assets problem, unveiled earlier this week by Treasury Secretary Timothy Geithner, has come under intense scrutiny in the blogosphere and elsewhere. The plan would create incentives for private investors to put up small amounts of equity, side by side with the government, to buy toxic assets from the banks’ balance sheets. To sweeten the deal, the government will also be putting in debt, at leverage ratios that could reach as high as six to one — and will provide guarantees against most of the potential losses.

...

Having spent the better part of this week mucking around in the details of the new plan, I concluded, somewhat to my surprise, that it might well work. By this, I certainly don’t mean that it will, all by itself, revive the economy. But I think it could put a real floor on the price of the bad assets — critically important to stabilizing the banks — and change the market psychology so that securitized assets can begin to trade again, which is important to get credit flowing. And it will give regulators a far sounder basis to ask Congress for more money to recapitalize banks — or take them over, if it comes to that.

As for the complaint that it will make rich guys richer, well, you can’t win ’em all.

If he has spent a week mucking around in the details, why does he get the detail about allowable leverage wrong in describing the Legacy Securities program (my emphasis)?

The P.P.I.P. (inside the beltway, they have already started calling it P-pip) is, in fact, two separate programs. One deals with the kind of mortgage-backed securities that we’ve all come to think of as toxic assets. The other deals with loans that have not been securitized — for things like commercial real estate, or residential mortgages or small businesses — that banks hold on their books. The former program will be run by Treasury and the Federal Reserve; the latter will be managed primarily by the F.D.I.C.

As it turns out — and this was also something of a surprise — there is a consensus, both in Washington and on Wall Street, that mortgage-backed securities have been marked down to levels that have started to approach reality. These securities come under mark-to-market rules, so they have to be marked down as they decline in value. They are the primary reason the banks have had to take write-down after write-down, decimating their capital.

Still, to get investors to buy those assets — and get a market flowing again — they still need some leverage to bolster potential returns. Critics complain that the government-provided debt amounts to a bribe to get investors to purchase the assets at inflated prices. But I don’t think that’s what’s really going on. Instead, it appears that the government is trying to return some normalcy to the workings of the market.

“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.

It makes perfect sense that the government would want to supply that leverage, though certainly not at the extreme 16-to-1 ratio that characterized the bubble. Though the government will go as high as six to one, what I hear is that most of the assets will have less leverage than that. 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?

Oh, he hears most securities will have less leverage than that?  My goodness, I haven't heard a thing but I have read, in both the Treasury description and the helpful Times graphic that for the Legacy Securities program being described here the target leverage will be 33% (i.e., 1-2) with a maximum of 50%.

Oh, well. Early leaks of the plan to the Times a weekend ago talked of leverage "up to" 85%.  Paul Krugman seized on that 85% leverage and spent the weekend denouncing the Geithner bailout plan on that basis.  The Times has been tied up on that point ever since - other than the helpful graphic, I have not noticed any acknowledgment by them of the 33% / 50% max leverage for the Legacy Securities program.  Although he praises the program, Nocera continues that misinformation campaign here.

[end of thread]

Comments

[Charlie (Colorado)]

Don't you think noticing an unimportant detail like cutting the leverage by two thirds is awfully picky for a mere week of mucking about in the details?

More seriously, I'd bet he's been writing this for the last two weeks and just failed to rewrite that sentence after the real announcement.

[clarice]

Gee Wiz, Chaco , you're in a charitable mood today. *Smack, thwack* Snap out of it!!!

[bgates]

It's the kind of thing that could happen to any Rhode Islander.

If only he could access some kind of service that was devoted to checking facts, and making changes to writing based on the results of the fact-checking....

[bad]

What about the layers of editors, etc.?

Have they been laid off?

[Gmax]

AAA rated securities = the kind of mortgage-backed securities that we’ve all come to think of as toxic assets.

Really? Not where I come from. The top of the debt stack is not the problem. Its the lower rated and unrated and unrateable securities that have no market or have mere option value.

[Rick Ballard]

Gmax,

I wonder if publication of current data regarding loan status by tranche of run of the mill MBS wouldn't straighten out the mark to market situation. The SEC requires two years of aging on every issue and it would certainly be no big deal for the loan servicers to produce accurate current reports.

I understand the rationale behind limiting the investment pool for MBS (outside of agency MBS) to "sophisticated" buyers (snicker, guffaw) but since Uncle Sugar is now banker on the deals it would seem that making the data available is of interest to the public. If I heard of hedge fund that was going to do mezzanine tranches I'd probably take a look at it.

[Charlie (Colorado)]

Gee Wiz, Chaco , you're in a charitable mood today. *Smack, thwack* Snap out of it!!!

You know, it's kind of an interesting and unfamiliar experience to be catching hell for being too nice.

What about the layers of editors, etc.?

Sadly, bad, not only do I suspect that's part of it, but sometimes even layers of editors miss things. Especially numbers things.

I wonder if publication of current data regarding loan status by tranche of run of the mill MBS wouldn't straighten out the mark to market situation. The SEC requires two years of aging on every issue and it would certainly be no big deal for the loan servicers to produce accurate current reports.

I wonder. There's been a fair lot of chaos on for a while in this. I wonder if it's enough of a mess that they can't? It would sure explain some things, like why TARP I ended up not buying toxics and bought bank stock instead. And the "show me the note" delaying tactic seems unexpectedly effective; it goes on for months and months here in Colorado.

[bad]

AP: LUN

When a senator made passing reference to Geithner and "the Wall Street crowd where you're from," Geithner wanted the last word.

"I've been in public service my entire professional life," he protested. "Never worked on Wall Street. Never worked for a financial institution. ... Wouldn't give a penny to help a bank."

Wonder what bankers think of that....

He's been in public service his entire life yet has a $1.6 million dollar home.

We pay our "servants" too much.

The story on Geithner is very sympathetic, referring to his tax issues as mistakes and totally ingnoring the Indonesian errors from his time at IMF.

[bad]

The AP article also claims Toxic Timmy can see around corners.

[Pofarmer]

Speaking of the plan. Anybody else hearing about this.

According to the New York Post, Citi and Bank of America have been aggressively buying up Alt-A and ARM mortgage backed securities, sometimes paying more than the going rate of around 30 cents on the dollar.

[Pofarmer]

One other thing I picked up.

I heard a clip of Cuomo( I know, I know) and he was asking the exact same question that I asked a couple days ago that nobody could answer. On all these CDS contracts that AIG has paid off on, what was the counterparties actual exposure to loss?

[Charlie (Colorado)]

Sure. It's exactly what you'd predict if (a) they really are worth more than what the market is valuing them at now, and (b) you foresee an event that will revalue them upward.

Especially if (c) you can do it with essentially free money.

What's more, it's what we want them to do: A "toxic" asset, bought at the current market value, isn't toxic any more. The "toxicity" comes from the loss in balance sheet value as the market for them dropped. These are now just probably-undervalued assets.

What this would represent is basically the original TARP plan being carried out.

It comes around to the same old question: what did you expect them to do with money?

[Stephanie]

Wouldn't give a penny to help a bank

He just wants your pennies and mine to give to banks.

And somehow he thinks this makes him virtuous...

Smug Alert! I bet he owns a Pious, too.

When are they gonna learn it's their Sh*t that stanks...

[Stephanie]

According to the New York Post, Citi and Bank of America have been aggressively buying up Alt-A and ARM mortgage backed securities, sometimes paying more than the going rate of around 30 cents on the dollar

I did mention the other night that the SAD and REO accounts of some banks are swelling their "HOLD" category...

[Charlie (Colorado)]

I heard a clip of Cuomo( I know, I know) and he was asking the exact same question that I asked a couple days ago that nobody could answer. On all these CDS contracts that AIG has paid off on, what was the counterparties actual exposure to loss?

And in any state but New York, the answer would have been "it's not of your goddamned business unless you can make a plausible allegation of fraud." In any case, I'm pretty sure I did answer it: when you owe someone money, the debt doesn't change if the other party also has insurance against you defaulting.

[Stephanie]

Well, If I was thinking aloud as an evil socialist, I might have the banks buy up all the Toxic Assets and put them in the hold column with money I gave them and then I (the gov't) would soon own lots and lots of private property which I could do with as I please since I am a majority stockholder... all the while asking for the right to declare any companies as "troubled" (another euphemism for toxic) allowing me to do snap them up later, too....

But that is just me thinking evilly aloud...

[Rick Ballard]

"And the "show me the note" delaying tactic seems unexpectedly effective; it goes on for months and months here in Colorado."

Charlie,

That's interesting. The prospectuses that I've read (all three of them) assigned the right to foreclose (actually, "take any action necessary" sums it up). I suppose that it probably depends upon the specific MBS but perhaps a given mortgage is not actually assigned to its very own tranche? In that case, who is the mortgage holder? Every tranche has its own CUSIP but that wouldn't make it a legal entity.

"what was the counterparties actual exposure to loss?"

Pofarmer,

It isn't an insurance policy. An insurable interest may not exist in any particular circumstance. It would be similar to purchasing a put. You don't have to own the stock to own the right to put the stock to the seller.

[Pofarmer]

It isn't an insurance policy. An insurable interest may not exist in any particular circumstance.

I understand that. What I understand Cuomo to be saying, is that we shouldn't be pumping money to these entities, especially foreign entities, if they didn't stand any actual loss. Yes, I know they were a contract. I think that's why a whole lot of this CDS stuff was overblown. If they had blown up, there would have been a whole bunch of Mexican Standoff's as to who would pay what, with what.

[cathyf]

Hey, folks, *smoochies* all for the birthday wishes!!!

I spent the big day scrambling about finishing off girl scout cookie business and doing laundry, and then took two girl scouts on an overnight. Birthday dinner was a small pile of french fries and a little cup of ice cream (long story). Breakfast was a bit lame, too -- we stopped and had a huge 10am lunch on the drive home! A 3-hour nap later, I woke up to try to catch up on JOM and there they all were!

Now we're having a snowstorm, and I need to load 35 cases of cookies into the car and go over to the Soldiers' Angels' Salute the Troops band party. We are having this really cool fundraiser this year where we set up a cookie booth and ask people to buy cookies for themselves and also to donate $3.50 a box for cookies for the troops. The USO is then going to ship the cookies overseas. I called up the Soldiers' Angels person who is running the event and asked if we could set up and sell cookies and collect donations. The lady is a real hoot. She is a vet, and so she understood what I meant about how we are looking for a way to get gs cookies to the troops without having them melt, or end up crumbs. We have this particular kind of cookie which has chocolate on one side, and the other is embossed with "thank you" in several different languages. If you leave them in a closed-up car on a sunny day (don't ask me how I know...) the chocolate melts into the crannies on the cookie next to it, and then when the package cools back down it melds into a solid tube. We use them as troop meeting snacks sometimes -- whack the whole tube on the table and then the girls scoop up handfuls of crumbs. The Soldiers' Angels lady laughed and laughed and told me that the troops *LOVE* girl scout cookies, and that yes, they know all about the whack-on-the-table trick!!!

So we'll brave the snowstorm and go out with the cookies. The folks coming to the event will be very happy to donate I'm sure!

[Pofarmer]

Sure. It's exactly what you'd predict if (a) they really are worth more than what the market is valuing them at now, and (b) you foresee an event that will revalue them upward.

Especially if (c) you can do it with essentially free money.

What's more, it's what we want them to do: A "toxic" asset, bought at the current market value, isn't toxic any more. The "toxicity" comes from the loss in balance sheet value as the market for them dropped. These are now just probably-undervalued assets.

What this would represent is basically the original TARP plan being carried out.

It comes around to the same old question: what did you expect them to do with money?

Hold on. I should EXPECT these companies to be speculating with hundreds of billions of dollars of taxpayer money. Speculating that hundreds of Billions MORE taxpayer money is coming there way??

I mean, really,

WHAT THE FUCK?

[clarice]

cathyf--sounds like a perfect birthday. You are so bright and do so much good--we all love you very much.

[Stephanie]

Happy birthday, Cf! And the same to any who I missed with the interference of this work thing that interferes with my being all caught up on this site. Rasserfrasser!

[centralcal]

Spent the day shopping and just now checked into the Web and was thrilled to see the hundreds of people lined up in Virgina for Mark Levin's book signing. Instapundit has a video. The line is simply amazing!

I think "our" side has awakened from their deep slumber and sure hope this kind of enthusiasm grows and grows so that we can vote out the Socialist crew - every last one of them!

[Ann]

CC,

You beat me to it by 2 minutes. I was just going to link to the amazing video: Give Me LIBERTY!

Really inspiring! I had to order his book. You can't find it in Columbus...Sold Out.

[fdcol63]

So ..... when are Democrats going to target their populist zeal against those filthy rich actors, producers, and music artists in the entertainment industry?

[centralcal]

Ann - thank you for posting the link. I am using IE right now instead of Firefox, because of catching up on email, and I was too lazy to LUN.

I guess my city is really getting all rev'd up for Tax Day Tea Party, according to local talk radio! I sure hope it is a really, really big crowd.

[centralcal]

Okay, this one belongs on the "How many enviros does it take to change a light bulb" thread . . . but, I am tired and lazy.

This is a short, inspiring video at Malkin's place LUN - please, please check it out.

[Ignatz Ratzkywatzky]

If mark to market is suspended or modified simultaneously with Timmy's plan isn't that going to muck things up a bit?
If a bank can value a security at its cash flow value, either the sales price is going to go up significantly or the bank simply won't sell it at a price anyone will pay.
I suppose for the worst of the worst the cash flow may be low enough to not effect its value much, but the two ideas certinly seem to be at cross purposes.

I'm still with Seidman, Forbes, Wesbury, Kudlow, Bill Isaac and others on this; why not try the easy, taxpayer free way first? Why the hell didn't we try it a year ago when Bear was sinking?
No. In DC it's, "let's spend two trillion in convoluted, stupid unworkable programs first, then we'll try the cheap easy way afterward".
Kind of like throwing a drowned person a life preserver after you build a lifeboat from scratch that sinks half way to him.

[PaulL]

Human beings cannot truly appreciate numbers in the trillions. The Republicans should stress what such numbers mean on an individual basis. Something like, out of every dollar you make a week in your paycheck, X percent of it will be taken from you and have to go to paying just the interest.

[Ann]

Sheesh CC,
What does everyone here say?..."Get Out of My Head"!

I leave for a few minutes to prepare food for the grill and come back here to remind everyone to light up their house like a Christmas tree tonight and you beat me again. :)

[Pofarmer]

I'm still with Seidman, Forbes, Wesbury, Kudlow, Bill Isaac and others on this; why not try the easy, taxpayer free way first? Why the hell didn't we try it a year ago when Bear was sinking?
No. In DC it's, "let's spend two trillion in convoluted, stupid unworkable programs first, then we'll try the cheap easy way afterward".

Because this is less about Stimulus and bailouts than politicians protecting their buds. At least that's what it looks like from here, when you start to look at who's worked with who and where and etc......Look at Goldman and AIG buying MBS and etc before the Treasury is supposed to come in with all this taxpayer money to buy them out of it? Are we winding these guys down or is it business as usual? I'm guess I'm confused.

[TCO]

I hope every good conservative leaves this blog. JOM, you're a bailout lover. You sent us down this slippery slope. Anti bailout types predicted it. You haven't fessed up for your error. You've lost all credibility and shouldn't even be posting on this topic any more. Hang your head.

[DrJ]

TCO apparently is not a good conservative, since he still infests this blog.

[boris]

Here's hoping you leave and never come back TuCO.

[centralcal]

See Ya TCO!!!

Can't say you will be missed.

[Extraneus]

I heard Levin the other night, I think maybe Friday, mention that he tried and tried to get the book out before the election, but wasn't able to meet the deadline, and that he worried that it would be too late after the election. He claimed to be pretty happy with how that worked out so far.

[PD]

I hope every good conservative leaves this blog.

TCO, there is only one person whose presence on this blog you have control over.

[PD]

He claimed to be pretty happy with how that worked out so far.

He was on Rush the other day and Rush told him the timing was exactly perfect, given how things have been going.

I have noticed an uptick of the word "statist" here on JOM. Is that because people are reading the book?

[centralcal]

Ann, great (?) minds think alike? Nah - we're just simpatico in our hearts and minds, doncha think?

And ya know what? I think one of these days we're gonna see that there are more of US, than of THEM. YOU included, TCO! Actually, no one wants to claim you and your foul mouth, I am sure.

p.s. Ann, I already forgot how to make hearts or else I would have left one for ya.

[Extraneus]

What's with the protest babes? Cedar or Orange, they're front and center at very recent protest. Did they have protest babes in the Vietnam days? Was that what the Jane Fonda thing was all about? (I was a little too young to notice at the time.)

[narciso]

You know the thing about trolls and uruk hai orcs, this new species of internet communications, I wasn't around in the glory days of usenet, so I can't recall
but I do recall something called GIGO and even the posters on Intellectual Conservative,which I used to frequent. Is the emergence of commenters who are proud
of their ignorance, based on some snippet
of Huff Po, or the Daily Show or SNL, who
you know of which I speak; or some half baked segment on Youtube. People that when faced with the facts, just reinforce whatever talking point they just absorbed
by osmosis ,and they do so withbelligerence.
I came across that with one or two segments
on the Politico, whose campaign coverage was so cloyingly slavish to toward Obama, but I must admit has been good outing the
'Get Rush' strategy and discovering the Journolist, give credit where credit is properly due. So they had one post about
the Scientology nonesense, and the last referring to the Good Governor's defense
of her action's with regards to the stimulus funds, the former was laden with
"Tourette's" or Rage virus type invective, the latter was more moderate, but after one makes the comment, it's as if no one really
acknowledges the point.

[PeterUK]

TCO,isn't a conservative nor is he a free marketeer,TCO is an absolutist.No better than the absolutists that have wrought devastation down through the ages.
"Let them sink", says TCO,never enunciating what the results of his policy would be.Come on TCO,you share the blame,gobbing off with foul language is hardly persuasive.So come on sunshine lets hear what might have happened your way.You hav been asked often enough.

[Extraneus]

I was against the bailouts, too, but I admit I didn't have a clue what would have happened without intervention. Regardless, as to the political situation, Bush should have called for immediate emergency tax cuts, holding out the prospect of a protracted recession and possibly worse if he wasn't heeded. The Dem-controlled Congress would of course have balked at the suggestion, but if he had done that, the high ground would have its own zip code right now.

[Ann]

♥s and minds, CC. That's it!

P.S. (& hearts ;) no spaces

[Pagar]

Was that what the Jane Fonda thing was all about?

Jane Fonda was no kind of a protest babe, IMO. She was simply giving Aid and Comfort to America's enemies.

[Porchlight]

That Levin book signing video is amazing! Thanks so much for linking to it. I had no idea.

It's 8:30 in Central Tx and the lights are blazing in my house!

[Jane]

♥

Just trying

[Pofarmer]

So, rather than throwing all this govt money at these "toxic assets" what would happen if you just declared "No capital gains taxes" on any assets bought at OPEN AUCTION. Anybody bids. Small enough lots that your local bank can if they want.

[Daddy]

OT, but here">http://www.adn.com/volcano/story/739733.html">here comes the ash cloud. Still complete daylight, but starting about 10 minutes ago it turned brownout, my white snow turned dirty, and the sun is now totally obscured with visibility down to just a few hundred yards. Still plenty of ambient light, so not at all like nighttime or like an eclipse, but just a very dirty and very hazy afternoon. Happily we are all inside with the windows shut. So far not a very thick ash cloud, so nothing to worry about. Oh, and some new great pictures on the linked ADN site. Just click on the the attached photo of Redoubt ball lightning. Then, at the bottom of that lightning photo, if you click on "Thumbnails" scroll to picture number 21. It is an amazing shot from space looking across the top of the atmosphere, and you can see Redoubt's dark plume pushing up through the the stratosphere. Sorry I can't get that picture to link.

[clarice]

Those lightening shots look like the wrath of God, daddy.

[Ann]

Goodness, take care of yourself Daddy and your family. I think this is the picture link:
Redoubt No Longer Doubtful

[mel]

Daddy-

Keep an eye on your roof's load, and be prepared to rake it, if necessary.

Gotta go, prayers to your family, and mind that "missing" ingredient from Roman cement.

Night all.

[Jane]

Daddy,

Gorgeous pictures. Stay safe!

[Ann]

Clarice, (Since we are OT anyways....)

I thought this was interesting considering the wanton takeover of financial and private companies by the current opague administration:
If You Can’t Beat ‘Em, Audit ‘Em

According to FRB: FAQs:

The Federal Reserve's ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act. Legislation requires that the Fed report annually on its activities to the Speaker of the House of Representatives, and twice annually on its plans for monetary policy to the banking committees of Congress. Fed officials also testify before Congress when requested.

I am sure it has a snowball chance in heck of passing but it sure could be used as a call to arms for Tea Party Transparency.

Anyways, just wanted to know your thoughts on the matter, if you get a minute. Thanks.

[clarice]

Night,Mel.

[Jim Ryan]

'Lanch yonder.

Oh, and Fleetwood Mac is on tour. I'm just sayin'.

[Ann]

Daddy,

We know one of the biggest single sources of air pollution is a volcano. That is right, it isn't a power plant, pulp mill, SUV, or anything else created by man.

With that in mind, isn't it hilarious that while "Earth Hour" was taking place in the lower 48, Redoubt was making fun of Al Gore and all the morons that turned off their lights.

I believe it was an act of God.

[clarice]

Ann, I haven't given the matter any thought.

[glenda]

Amen, Ann!!!
Those lightning pics remind me of Mt. Doom in Lord of the Rings--daddy--you are in heaven, God's heart, there in Alaska; I am so sorry some pristene country and great Americans are in danger. Mother Nature!! pfft!

Come and be safe(from volcanoes)here in Texas--we just have hurricanes, flash floods, and drug lords and terrorists crashing our borders..but you and yours are always welcome! That goes for all you JOM's
(real ones-no gargoyles or trolls)

[Ann]

Clarice,

That's alright. I am now more worried that Daddy will not realize I was joking about the act of God comment I made. Yikes.

I was just reading about the tsunami effects (for lack of a better word) a volcano can have on the area around it.

Keep safe Daddy!

[Elliott]

Happy birthday, PD!

[Ann]

Glenda,

Thanks, I have thought about "Remember the Alamo" and all you Texans lately. It is good to remind ourselves of our history. "Those of you prepared to give their lives in freedom's cause, come over to me

"To the people of Texas and all Americans in the world --

Fellow Citizens and Compatriots

I am besieged by a thousand or more of the Mexicans under Santa Anna - I have sustained a continual bombardment & cannonade for 24 hours & have not lost a man - The enemy has demanded a surrender at discretion, otherwise, the garrison are to be put to the sword, if this fort is taken - I have answered the demand with a cannon shot, & our flag still waves proudly from the walls - I shall never surrender or retreat. Then, I call on you in the name of Liberty, of patriotism & everything dear to the American Character, to come to our aid, with all dispatch -- The enemy is receiving reinforcements daily & will no doubt increase to three or four thousand in four or five days. If this call is neglected, I am determined to sustain myself as long as possible & die like a soldier who never forgets what is due his own honor & that of his country -

Victory or Death.

William Barret Travis"

[cathyf]

Happy birthday, PD!!!

[MayBee]

Happy BD,PD!

[MayBee]

Thanks for the pictures, daddy. My kids loved them.

[AL]

Correct me if I am wrong.

The plan was quite obvious to me from the first reading. It is a trick to game mark-to-market rule.

Government will bribe some private investors to purchase SOME toxic MBS assets in open market, at artificially inflated prices. Immediately, according to m-to-m rule, re-pricing of such assets will boost book value of banks and other holders of these “toxic” assets, alleviating their insolvency problem. No need to get ALL these assets from bank books into government/private receivership.

Again, correct me if I am wrong.

[daddy]

Thanks everyone for all the good wishes but I truly feel fortunate living up here because it is so interesting, especially recently. The summertime moose and eagles and salmon runs are always fascinating, and the occasional earthquake keeps you on your toes, but this last month has been like living in a National Geographic Special. We put some tupperware bowls out on the porch for the kids tonight, and they now have about a eighth of an inch of sulpherous smelling black powder in them. It is astonishing that a volcano can erupt, send pulverized rock 65,000 feet into the stratosphere, and 3 hours later that same ash will be raining down on communities more than 100 miles distant.

And Ann, I haven't seen a single news story yet discussing the makeup and amount of pollutants that have so far been boosted into the atmosphere by Redoubt, nor any discussion of their potential effects on the local or regional climate. If this AGW climate change business was a topic of such massive interest and importance world wide, it would seem to me that stuff like that would have at least earned a mention on our nightly news shows or local paper. Curious.

Anyhow, I will keep my head down tomorrow as another JOMer, PD is having a birthday, so naturally Redoubt will be blowing up all day long. Night everyone.

[Jane]

Happy Birthday PD - You can't escape Elliott's list!

[PD]

Thanks, folks!

Daddy, sorry for making the volcano go off again. I didn't know I had it in me. :-)

[clarice]

Happy Birthday, PD!!

[Pagar]

Happy Birthday, PD! May you celebrate many more.

[jimmyk]

Immediately, according to m-to-m rule, re-pricing of such assets will boost book value of banks and other holders of these “toxic” assets, alleviating their insolvency problem.

I am not an accountant, but if the rules are sensible they wouldn't allow you to mark up one asset based on the sale of another if the sold asset's value is artificially inflated by a taxpayer subsidy. On the other hand, if rules and regulations were sensible we probably wouldn't be here in the first place.

[PD]

You can't escape Elliott's list!

Yes, he's like a human cron job.

I mean that affectionately, of course.

[Jane]

Geithner is nothing short of creepy (He's on with adorer Stephanopolus right now.)

[Jane]

Biden's daughter was caught snorting coke.

I;m sure she will get the Bristol Palin treatment, immediately...

LUN

[centralcal]

Best wishes for a very happy birthday, PD.

Yep, Jane, I am sure Biden's daughter will get the full tabloid coverage that Bristol had to endure nonstop. /snark

[centralcal]

Jane: About Geithner - he is very creepy. Makes me think there is something else hidden in his closet besides unpaid taxes.

[cathyf]

I am not an accountant, but if the rules are sensible they wouldn't allow you to mark up one asset based on the sale of another if the sold asset's value is artificially inflated by a taxpayer subsidy.

Well, if the rules were sensible, when it turns out that all the MBS ratings were wrong because of a hosed-up study done by the taxpayers (who fund the Boston Fed), they wouldn't force you to mark your whole book to zero and force the bank into liquidation bankruptcy before having a chance to untangle the securities and re-do the ratings calculation.

[Pofarmer]

they wouldn't force you to mark your whole book to zero and force the bank into liquidation bankruptcy before having a chance to untangle the securities and re-do the ratings calculation.

Dang it cathyf, comments like that keep pushing me from cataclysm to conspiracy. Who does Soros know in the Boston Fed(just a slight hint of sarc)

[Pofarmer]

I mean, it's almost like there were ways to handle this without spending TRILLIONS of taxpayer dollars.

[DrJ]

Happy Birthday, PD!

[Pofarmer]

Or, would it be Dim's on the Finance committee refusing to go along with a temporary rule change knowing A) it would precipitate a crises and B) they could shovel a bunch of money to their bud's.

[clarice]

On one of these threads we discussed home schooling the other day--porchlight was considering it. Thom Lifson's youngest child used this program and liked it very much--apparently lots of young athletes and actors use it.Thom said it was excellent:
http://www.laurelsprings.com/history

[Pofarmer]

If Geinther is as understaffed at Treasury as it looks like he is, who's helping him analyze this stuff?

[michaelt]

Joe Biden was key in creating the position of Drug Czar, according to Bill Bennett.

[Caro]

Badger birthday wishes, PD!

[MarkJ]

Okay, this one belongs on the "How many enviros does it take to change a light bulb" thread..."

Question: How many enviros does it require to change a lightbulb?

Answer: None, because in their world, lightbulbs already been outlawed.

More to the point of the aforementioned Times story....

Question: What will Joe Nocera and the NYT think of Tim Geithner's plan by the end of next year?

Answer: The question is irrelevant, because the NYT will have folded by then and Joe Nocera will be too busy cold-calling for job interviews.

[narciso]

Ironically, the only good piece of
legislation, Biden has signed onto,
As for this controversy we are supposed to feel schadenfreude, but I can't say that I
am, Ashley's stupid choices should not reflect on her father, who has a third of a century of bad policy decisions. Of course, none of this reticence ever applied to the Bush twins or Bristol Palin. Of course, lazy journalism isn't just on the sensationalist side of the spectrum, the Politico engages in it too, three guesses and the first two don't count who the subject is LUN. Where does one get 'the skinny' on when everybody's birthday is, really I want to know. By the way, this is not a new observation, but Geithner does look a lot like the mentat, human computer,
Piter DeVries from the Dune series.

[Old Lurker]

"Or, would it be Dim's on the Finance committee refusing to go along with a temporary rule change knowing A) it would precipitate a crises and B) they could shovel a bunch of money to their bud's."

Po, so c) they can use A&B to increase government's (F,S,&L) share of the US GDP from the historic 34% to the present 40% to the projected 48-50%. (I say projected because I assume the Obama outyear spending WILL occur, but the Obama projected GNP growth will not.)

Like Euro socialists, having the state control about half (48%-54%) of the productivity of the citizens is about right for these guys. Settling for just a third is SO old, tired thinking.

Oh. Good Morning!

[Jane]

Makes me think there is something else hidden in his closet besides unpaid taxes.

CC,

It's not typical of me to infer sexual things to people - but Geithner's creepiness comes across as sexual to me - so I agree with you.

[Rick Ballard]

Altri cento giorni così, PD.

"pushing me from cataclysm to conspiracy"

Pofarmer,

Could be neither. It could be just the result of adding bells and whistles to something that was a little complicated but functional to the point that "functional" no longer applied.

Cathy provided a fine description of why MBS was initially a decent mechanism for distributing the risk of geographic concentration of mortgage pools. The Texas oil bust of the late '80's provides an excellent illustration of the danger of such concentration. The bust finished off a number of S&Ls in Texas and contributed greatly to the "S&L crisis". By the same token, the CDS market had a true value until it became known as a fire insurance market for arsonists. Destroyers such as Soros are always looking for a new playpen but his investment in Lehman shortly before its collapse suggests that if a conspiracy existed, he had his nose pressed against the window looking in while it was being executed.

Although I have nothing against hanging a few investment bankers pour encourager les autres, I believe that a relatively brief period of suspension for the entire board of directors of several notably large failed enterprises would prove more efficacious on a long term basis.

Lemming like behavior deserves a lemmings end.

[Fresh Air]

I believe that a relatively brief period of suspension for the entire board of directors of several notably large failed enterprises

Let's start with Fannie & Freddie, only I do think Jamie Gorelick needs to be up the scaffold. For her "Master of Disaster" part in September 11 and her repeat role in The Great Depression II she earned, IIRC, $26 million.

Plop! Goes the trap door...

[Old Lurker]

"Lemming like behavior deserves a lemmings end."

Bumper sticker of the week, Rick.

[Jim Ryan]

Rick, Cathy, and any other JOMer, if you have a moment, I'd appreciate your opinion of this Barone essay. Does it get things anywhere near right? I'm guessing at this point that government meddling (FMs, CRA, Fed's low interest rates), and private-sector underscrupled credentialed moronitude should get about an equal share of blame, with a smidgeon of blame left over for government failure to regulate AIG's concentration of risk. Barone doesn't seem to recognize that the concentration of risk in AIG should have been addressed by government regulation.

[narciso]

And of course, "if it's Sunday," it's time to publish the Gitmo detainee's brief as a news piece, tis time about that poor mis
understood Abu Zubeydah. Leaving out the comments for Kirikaou, except for his capture, that other fellow who was his interrogator, who the NY Times Scott Shane,
burned, for no good reason. Or they could have interviewed Gerald Posner, who has gone a little crazy on the Saudi takeover
of the country, funny he hasn't commented on Freeman, or closing Gitmo

[Jim Ryan]

Yes, if we had come (or if we still do come) to a depression in which millions perish, it's hard to imagine an appropriate punishment for such gross negligence and embezzlement.

[glenda]

Happy Birthday PD, and many more!!

Jane, CC : Geithner's nose does remind me of Cyrano DB's!

Narciso--another thing we have in common--appreciation of good sci-fi!

[Old Lurker]

"depression in which millions perish"

Jim, the Greens in Europe would welcome that.

[sbw]

Porch: Persistence-->Virtue and Character

Me again, Porch. I've though more and think it is simpler to explain it this way:

Character-->Virtue-->Persistence

The only tools you have are sense experience and rational skills to analyze that experience [i.e. pattern recognition.]

Character is manufactured from extracting from your sense experience what worked and what did not, and projecting continuing such behavior into the future to consider consequences of it.

You embrace such processes as stand up to scrutiny. When you exercise those processes, the answers you get are called virtues.

Then, like mathematics masters you, because you see the value of those processes, they become compelling. You can say 2+2=5, but you know it equals 4 and no threats will convince you otherwise. Perseverance -- Courage and resolve -- come from understanding what is important and why.

So: Character-->Virtue-->Persistence

[Charlie (Colorado)]

Hold on. I should EXPECT these companies to be speculating with hundreds of billions of dollars of taxpayer money. Speculating that hundreds of Billions MORE taxpayer money is coming there way??

Po, you've really got to work on your understanding of the basic process here. EVERY business puts money at risk in the hope that it'll make more money. That means that EVERY investment is, in some sense, speculation. "Speculating" as a pejorative, as you're using it here, means "investments that I don't like."

So let's go over it again. When someone buys up a "toxic asset", it stops being "toxic." The "toxic" quality came from the combination of an illiquid market driven by uncertainty, and the peculiar version of mark-to-market that forces these illiquid assets to be marked down to fire-sale prices if anyone has a fire sale, and arguably by the loss of the uptick rule and the ability to make a naked short pay off. That combination forces values down and hits the balance sheets. That's why they're "toxic".

If someone else buys them at the fire sale price, no one gets hurt, at least more than they have been. They're now on someone else's balance sheet at the current value. They've turned into cash on the other party's balance sheet. This is a good thing.

Since we want that good thing to happen, it needs to be something that someone, acting rationally, would do. Sure enough, they set that up. Now, these big firms -- that we have an investment in, remember, since the original TARP money ended up going into warrants and such, apparently -- are using that money to pick up these undervalued assets and detoxifying them.

Next thing, they get a market going in some of these assets, moving more of them and further detoxifying them. Since they're apparently undervalued, a more liquid market should lead to them moving up -- that's what markets do, find appropriate values. When they do, the people who have already been buying up the toxics will make money. We like this: it's not only part of making the market in the toxics open up, it means that toxics that are still held by someone become less toxic too; mark-to-market now works in their favor.

So yes: the people who got the TARP money are "speculating" that something good will happen, making their investments worth more. Just like when you buy seed corn, you're "speculating" that you'll be able to sell the corn for enough money to pay for time and fertilizer and so on. Just like if you take out a seed loan, the bank pretty well expects that you'll "speculate" by buying seed, not just keep it under your bed so you can look at it.

There's plenty of room to argue that this might have been done better, and certainly room to argue (although I think it's wrong) that doing nothing would be better. But getting exercised over banks using the TARP money to invest in the very securities that TARP money was supposed to make liquid again is just silly.