The Devil Is In The Details

Over the weekend we learned that based on available press leaks Paul Krugman does not think that Tim Geithner's bank rescue plan could work.  However, new details have been released that eviscerate his central objection while introducing a new one (The $1 trillion program is shrinking!  See "SIZE MATTERS, below).  Meanwhile, Krugman's preferred solution is to rely on the wisdom and forbearance of the  Congress we saw in action last week and nationalize some troubled banks.  Why does he think this will work?  Well, in the early 90's Sweden nationalized two banks on the periphery of global finance that no one has ever heard of; therefore, the US ought to be able to run Citigroup, Bank of America, and a few regional stragglers without a hiccup.  No, I'm serious:

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.

Groan - how do you say "No Mas" in Swedish?  As Justin Fox of TIME explained to the reality-based community, Citigroup has roughly $2 trillion in both assets and liabilities, of which about $400 billion come under the authority of the proposed nationalizing authority, the FDIC.  His conclusion:

But this would leave an entity (or entities) with about $1.5 trillion in assets and $1.4 trillion in liabilities to be taken over by foreign governments or fail in pretty much the same unruly manner that Lehman Brothers did.

Have fun storming the bank, boys.

Now, one of Krugman's central objections to the Geithner plan is that the Treasury and FDIC are providing attractive, subsidized financing to the private investor meant to buy toxic assets from banks.  Subsidized loans implies subsidized asset pricing, since the investors can rely on the easy credit to overpay for the assets.  Let's hear from Krugman:

Brad DeLong’s defense of Geithner

Brad gives it the old college try. But he shies away, I think, from the central issue: the non-recourse loans financing 85 percent of the purchases.

My bold view amounted to "Yes,but...".  I was taken aback by the high leverage on offer: per the leaks, Treasury would provide 85% financing via the FDIC, allowing investors to buy volatile assets with only 15% down.

However, there were easy modifications to the basic scheme that would mitigate this problem - for example, investors might be allowed to borrow up to 85% of the initial asset purchase price, but then might also be obliged to direct a significant portion of the asset income towards paying down the FDIC loan over time before distributing money to themselves.  The effect would be to reduce their leverage over the years, thereby reducing reduce the implicit subsidy.

In short, until we know the details of the plan we don't know enough to say.

Fortunately, we have moved on and more details have been released; from the WSJ:

The program has two parts. It will address both the legacy loans and the legacy securities clogging the balance sheets of financial firms.

Under the legacy loan program, banks will identify the assets they wish to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Eligible assets will be determined by banks, regulators, the FDIC and the Treasury Department.

Leverage won't exceed 6-1 (i.e., 85%) but may be less, depending on the nature (and volatility, presumably) of the asset.  [And for a Legacy Securities wing of the program leverage is targeted at 33% and capped at 50%].  Geez, that was easy!  Riskier assets get less leverage, and less of a subsidy - why didn't I, or Krugman think of that?  Oh,enough - I had supported the plan with lower leverage a few weeks back.  Obviously, until we know how much lower the allowable leverage will be, prudent observers will have to defer judgment.

Brad Delong had taken up the cudgels for Geithner and was getting cudgeled in return.  Here is his latest defense.

Eventually DeLong is going to be vindicated in this dust-up.  Right now, Krugman's central objection has evaporated and his alternative, nationalization, is a political non-starter.  Meanwhile, banks continue lending.

AS AN ASIDE:  IIRC,  wasn't one of the nationalized Swedish banks the Fältskog-Ulvaeus Group? I am sure I've heard of them...

HEDGE FUNDS OUT, BUT..:  The embarrassment of watching the House whoop through the Rage Tax on financial services made it clear that no sane hedge fund manager would dare to partner up with Treasury, rely on Federal financing, and then make an obscene profit on the back of the hard-working American taxpayer which would then be subject to a retroactive tax rate.  However, there are large pools of what I will call "sympathetic money", such as pension funds and college endowments (if the NY State Teachers or the UAW pensioners make obscene profits, can we be OK with that?).  There are also highly regulated pots of money, such as insurance companies, that are modestly sympathetic. 

This is from Treasury:

Involving Private Investors to Set Prices: A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged.

The only individuals participating will be those who can't conjure any other way to meet Barney Frank.

SIZE MATTERS:  The $1 trillion dollar program leaked over the weekend has shrunk:

Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets — with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles...

Well.  If the program is otherwise sensible but too small, then We the People can expand it.  Krugman et al will need to come back with something stronger than "Too Small to Succeed" as they raise new objections...

KAUS AND DELONG IN AGREEMENT:  Mickey Kaus and Brad DeLong are in broad agreement on the politics of nationalization.  Mickey, from a post titled "Obama Too Big To Fail":

This doesn't seem like a situation where the "political capital" metaphor applies. The metaphor does apply on an issue like health care--Obama could easily fail to pass his health care plan, lose influence ("capital") and not get another chance. But Congress can't afford to not give Obama another chance to fix the economy. It would be like deciding, in the middle of World War II, that FDR's strategy wasn't working and he'd lost a lot of credibility--so we'll just have to lose the war. ...

And DeLong:

Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it's chances become.

Its a grim day for DeLong when he is on the same side of the ball as Mickey and yours truly.

[end of thread]

Comments

[Paul Zrimsek]

A møøse bit mi banker ønce...

[Neo]

The market has opened up.

At least now, with the Geithner plan on the table, the investors know that nothing will happen.

Exactly who in their right mind would volunteer to become a political target

[William Teach]

I think I am going to get a moose to move my money from BOA.

[Pofarmer]

I look at the charts on a couple of pages, and I wonder if borrowing more money is really the answer.

O.K., I actually don't wonder that at all.

http://www.federalreserve.gov/releases/housedebt/

http://mwhodges.home.att.net/nat-debt/debt-nat.htm

[Paul Zrimsek]

You may be more familiar with Fältskog-Ulvaeus' US subsidiary, the Almost Bankrupt Bank of America.

[Charlie (Colorado)]

Po, that second chart would be the same one I fisked last year; the one that compares debt with income.

It's exactly the same error as saying that someone who makes $100,000 a year, and has a $300,000 mortgage on a $600,000 home, is broke because, after all, their debt on the mortgage far exceeds their incomes.

There are really only two reasons for that kind of comparison: the person making the chart thinks he can get suckers to fall for it, or the person making the chart is a sucker and has fallen for it.

[Pofarmer]

Pretty cool map on bankcard and mortgage delenquinces.

http://data.newyorkfed.org/creditconditionsmap/

[DebinNC]

Paulson underling on why plan won't work: LUN

[verner]

Interesting piece in Slate by Eliot Spitzer (yeah, THAT Eliot Spitzer) on AIG and Goldman

LUN

[Cecil Turner]

Well, my usual Pollyannaish personality is coming to the fore again (no, really) . . . because looking at this, my first impression is "hey, at least it's a plan." Nothing in the earlier proposals merits the moniker, and this one finally addresses the root problem (I think). Might still be a dismal failure, but at least it's a shot.

The nationalization option is shudder-worthy. Or, we could always go back to dithering: spending bailout money on car manufacturers aiming to recoup their unit losses on more volume; and vilifying bank executives for spending money the way Congress told 'em they had to. Not sure I'm jazzed about this concept, but considering the likely alternatives . . .

[Charlie (Colorado)]

Grrrr.

Dear Eliot:

(1) the reason all that bailout money went from AIG to Goldman was AIG owed them the money. What did you think AIG was going to do with the bailout money?

(2) The reason AIG paid the bailout money to Goldman even though Goldman had successfully hedged most of their position was that if AIG hadn't paid, then the companies who had the other side of the hedge would have had to pay Goldman. This is why people worry that AIG defaulting would cause a cascade of losses.

Sincerely,

[Charlie (Colorado)]

my first impression is "hey, at least it's a plan."

Yeah.

Plus, having the plan actually announced reduces the worry about what damn-fool thing they might do.

[Thomas Collins]

I don't see any reverse auction procedure in anything I have read (perhaps I have overlooked it). Have the Federales given up on reverse auction and decided to take the dartboard approach in setting the prices of the assets to be acquired? Not that I'm complaining. The dartboard often works better than the best thought out auctions, procedures and mathematical models!

[Appalled]

TM:

State and union pension funds are chronically underfunded -- taking a flyer on something like this partnership does not seem especially prudent to me. And the Department of Labor has indicated through a number of advisory letters that "social investing" violates ERISA.

My guess is that there will be a union fund or two that invests in this. And some busybody legal foundation will find a participant in the fund to launch an ERISA lawsuit.

My guess is that the money going into this thing will come from overseas.

[Fresh Air]

You can't get anything by Elliot. I'm sure he'll have a great second career advising others of their moral failings. Come to think of it, that was his first career, too.

[Fresh Air]

Appalled is right. Most of these supposedly sympathetic funds are equity funds that have been smashed by the market downturn. Take a bunch of the dough that's remaining and stuff it into a private equity type-risk basket to try to recoup those losses? That's a serious breach of fiduciary responsibility, IMHO, and grounds for a lawsuit, not some patriotic act.

[Ranger]

My guess is that the money going into this thing will come from overseas.

Posted by: Appalled | March 23, 2009 at 11:08 AM

Ah, so that is why the Fed has to buy up a trillion in Treasurey debt, to free all that foreign money up to buy the toxic assests.

[glasater]

Geithner is going to be interviewed by Erin Burnett on CNBC's Street Signs at 2 PM Eastern.

And I really prefer Eliot spelled with two L's.

[Ranger]

And the MSM's change of heart over Obama is displayed today at the http://blogs.abcnews.com/thenote/2009/03/the-note-32309.html#comments>Note:

The stakes have risen as well: The bank rescue plan being outlined Monday morning at Treasury (not on live TV) is Secretary Tim Geithner’s best chance to prove he’s the right guy for the job. (How far are we from saying the same about President Obama?)

[Full]

The ONE HOBO isn't mad he had to tax and regulate all those bonuses. The mortgages are all fixed and now it's the capitalists that keep people on the street.

[rich]

Besides just taking some of these assets off the banks balance sheets, a major goal of this is apparently to create a market and establish prices for these assets. However, it seems clear that the same asset will be priced differently depending on whether the government is giving you cheap 6:1 leverage through non-recourse loans.

So, will this really create a market outside of the program itself?

[Ignatz Ratzkywatzky]

Take a bunch of the dough that's remaining and stuff it into a private equity type-risk basket to try to recoup those losses? That's a serious breach of fiduciary responsibility, IMHO, and grounds for a lawsuit, not some patriotic act.

I'm not sure where the risk comes in if it is constructed as TM has outlined. It looks essentially like the government is taking the risk on most of it and as long as the income covers the amount the private investors put up they have an essentially risk free investment. As usual, we the taxpayers don't.
My greater concern is that this looks rather like a slush fund for public and union pension funds and well connected insurance companies, to recoup their recent losses at the risk of the taxpayer.

[Cecil Turner]

Plus, having the plan actually announced reduces the worry about what damn-fool thing they might do.

That's definitely a feature. And to the degree it keeps 'em busy arguing, it's a significant one. Unfortunately, our fearless leaders have demonstrated remarkable multitasking skills recently (apparently enhanced by a gentleman's view of the responsibility of reviewing legislative proposals: it's a lot of reading, but it's only a lot of reading if you actually do it).

[Fresh Air]

Ignatz--

Just because the government is putting up the bulk of the money doesn't mean the equity is risk-free. In fact, if you invert the returns TM computed yesterday, it's fairly high-risk equity. The reason many pension funds got into trouble is they strayed into hedge funds, private equity, real estate, VC, etc. In effect, this is another bite of the same poison apple.

Put that aside, though. If the partnerships are any good, the smart real estate investors will get into them first. The slow-footed public pensions will waddle in for the garbage left over. If they aren't any good, then they'll get first dibs on the garbage for dinner.

[Charlie (Colorado)]

Ignatz, the whole issue here is that these prices are so low because that's what the market thinks they're currently worth including risks.

If Treasury wants people to get into these assets, get the prices up, and get a market moving in them again, they're going to have to reduce the risks to the private investors and structure a deal that shows them a return consistent with the risk.

Risk is

R=P×H
and P, the probability of the Bad Thing, is (we assume) fixed. So is H, the "hazard" or amount of the investment. So the total mount R of risk is also fixed. Its simple arithmetic, then, that if Treasury wants to reduce the risk to the private investors, it has to assume more of that risk itself.

I seem to always end up defending these schemes, and I kind of hate doing it, but if we're going to challenge them, we shouldn't do so assuming that we can change the rules of arithmetic. I'm afraid, Bullwinjle, that trick never works.

[Charlie (Colorado)]

Oh, bloody hell, what did typepad do with my blockquote?

[Charlie (Colorado)]

At least it didn't mangle the whole page like an italics mishap.

[PD]

Reminder: Mark Steyn is sitting in for Rush today.

[PD]

Charlie, your blockquote looks correct to me. I'm using Safari.

[Jim Ryan]

At least it didn't mangle the whole page

Lucky. I once saw a blockquote accident in a thread. Everyone downthread was blocked, every single one of them. It was horrible. Some of the victims you could hardly even recognize as comments.

[PD]

I guess I'm just lucky, view source shows that the closing blockquote tag is indeed missing.

The spelling of the beloved cartoon character is appalling, btw. :-)

[Charlie (Colorado)]

Are you seeing it outdent again at the line "and P, ..."?

I was being slick and put the end-blockquote tag on the same line as the blockquote and the equation. It looks like TypePad was being helpful and replaced it with a br.

The spelling of the beloved cartoon character is appalling, btw. :-)

Dutch?

[Ignatz Ratzkywatzky]

Just because the government is putting up the bulk of the money doesn't mean the equity is risk-free.

As I said, it depends on how it's structured. If the return rate is great enough to cover the intital private investment in a short time then it amounts to being nearly risk free.
And it seems not unreasonable to think this crowd is also using our funds to "implicitly" guarantee the favored investors.

I seem to always end up defending these schemes, and I kind of hate doing it, but if we're going to challenge them, we shouldn't do so assuming that we can change the rules of arithmetic.

Who's changing the rules of arithmetic? In TM's initial post a day or two ago he used figures which indicated, even if losing the intital investment, an investor would show a profit. But it was a hypothetical case and since no one knows what the details are we can't really apply math too effectively as yet, can we?
I'm not making a mathematical argument. I'm making a politcal and philisophical one that I am concerned they are once again not wasting a crisis so as to help their politcal allies and entrench themselves at the levers of the economy. If they can structure this into a relatively risk free investment and steer most of it to their benefactors does anyone think they won't? If so, based on what evidence?

BTW, it seems to me the case for the necessity of any of these bailouts being necessary to preventuing catastrophe gets weaker not stronger.
GS saying it was in no danger if AIG went under is just the latest evidence. Maybe not conclusive yet but I suspect it will get there.

[Neo]

Informal advisers to Geithner are growing increasingly frustrated, they say, that Geithner is being held up as the straw man for the public anger over the bonuses. "Just over the weekend you saw a new guy added to the target list, [White House economics adviser Larry] Summers,” says a longtime Geithner colleague at the New York Fed. "You have Dodd, Geithner, Summers, but there were other, more senior political people involved in this mess, and their names aren't being mentioned. Why isn't anyone asking Rahm Emanuel, 'What meetings were you in?' 'What did you and the President know and when did you know it?' Tim has some culpability, but he's not the guy who signed off on the Dodd language. He wasn't that empowered to do something like that."

[Charlie (Colorado)]

Who's changing the rules of arithmetic?

Hopefully, no one. But if we think we can both reduce the risk on the toxics we're trying to sell, and do it without assuming risk disproportionately in the government side, that's what we're asking.

I'm not making a mathematical argument.

I know. I'm just making the point that we we try to make politics trump mathematics, it won't work.

[Charlie (Colorado)]

"You have Dodd, Geithner, Summers, but there were other, more senior political people involved in this mess, and their names aren't being mentioned. Why isn't anyone asking Rahm Emanuel, 'What meetings were you in?' 'What did you and the President know and when did you know it?'"

Gee, I wonder?

[Charlie (Colorado)]

Oh, and the last commenter on CNBC (I've got my back to the TV, didn't catch the name) was just saying that these terms are fine looking, but there's going to be a real issue of setting up the T's & C's is such a way that people feel safe against Frank, Dodd, and Rangel coming after them in a year if they make 70 percent and unemployment is over 10 percent.

[bad]

From neo's link:

So the mystery remains: who had final sign-off on the Dodd language insertion on AIG's retention bonuses? One thing seems certain, Rahm Emanuel isn't talking, and neither are Pelosi or Reid, who were also in the room with Emanuel, Orszag, and Summers when the final language was worked out.

Pelosi claimed a few days ago that no one from the house was involved.

Well, as far as I'm concerned, she's no one...

[Danube of Thought]

Back from lovely Telluride--what a great spot.

I suppose that at this point I should confess that the Danube does not meander in this paricular territory, so I really have no independent opinion whatsoever about whether this plan will "work," and in fact I'm wondering whether I even grasp the basic issues. This after a whole lot of education and decades of corporate litigation.

But I can add this: "hey, at least it's a plan." So was Gallipoli.

[Jane]

LOL bad!

[DebinNC]

According to NY Mag: Inside Obama's Econ Braintrust Volcker likely wasn't in the room...or anywhere else involving decision making.

[MayBee]

M + HF = W

where:
M = Maybee
HF= High Finance
and
W = WTF?

[DebinNC]

lol...ditto, MayBee. It all sounds like Charlie Brown's teacher to me.

[Pofarmer]

Hopefully, no one. But if we think we can both reduce the risk on the toxics we're trying to sell, and do it without assuming risk disproportionately in the government side, that's what we're asking.

Well, that' the thing. You're not reducing the risk. You're reducing the apparent, and probably actual, risk to the private investor. Therefore encouraging them to bid the underlying asset above it's presumptive market value. Intentionally distorting markets is generally not a good thing.

[bad]

Hey DoT, glad you had a good time.

Me too, Maybee!

My only venture into the plan is to speculate that it is politically motivated, in one way or another, because everything this administration does, is.

[Pofarmer]

The implementation will determine the politics.

[bgates]

It would be like deciding, in the middle of World War II, that FDR's strategy wasn't working and he'd lost a lot of credibility--so we'll just have to lose the war.

I honestly can't even imagine the nation undercutting a Democratic president during a war like that.

[clarice]

Chaco:"Oh, and the last commenter on CNBC (I've got my back to the TV, didn't catch the name) was just saying that these terms are fine looking, but there's going to be a real issue of setting up the T's & C's is such a way that people feel safe against Frank, Dodd, and Rangel coming after them in a year if they make 70 percent and unemployment is over 10 percent."

And how will you do that with people who write an exception into thelaw for the AIG bonuses and then scream and rail about them and impose a confiscatory tax?
Will Pelosi put one of her grandchildren up as hostages?
Will Frank promise to reveal the name of the patrons of the gay whorehouse in his basement?
Will Dodd forfeit his Irish "cottage"?

[bgates]

IIRC, wasn't one of the nationalized Swedish banks the Fältskog-Ulvaeus Group?

TM, it was during the 90s.

Berggren/Ekberg and Gessle-Fredricksson.

[GMax]

Well I am skeptic by nature, so no surprise that I too think this plan is quite doubtful that it will get done. The WSJ had not only the leverage down, and the private equity up but the size was cut in half, only $500 mm not $1 trillion.

But the sympathetic funds, are so institutional and this is so far from the conventional, that I just dont see them playing here.

You want a potential player? Look at either JE Roberts ( if it can be viewed as mostly a fee play with some upside ) or Blackrock, if it can be structured so that "extraordinary" results yield extraordinary returns ( meaning that a some point the cashflows go from 50/50 to something greater for the partner doing the work.

Being the partner of the govt is fraught with peril, and most of these assets are just not worth what the banks have written them down to, so no amount of structure is going to reduce the bid/ask spread to a deal that can be done. Perhaps Goldman and MS have taken larger marks and then will be able to bridge the gap. Where does that leave the Citizombies and Busted of America Banks? On the outside looking in?

[GMax]

And didnt Napoleon have a plan at Waterloo? How did that work out?

What about General Lee plan to send Pickett right at the center of the Union line and get them caught in a crossfire? How did that work out?

Having a plan, means only that they will be spending time figuring out if it will work. Nothing more.

If you throw a party, it is possible that no one shows up. Just saying.

[daddy]

MayBee,

When HF = W I recommend eating ice cream out of a bucket over the sink. Butter Pecan generally works well with such equations.

[Old Lurker]

...and most importantly...the exchange between Chaco and Clarice about the private partners not being able to trust the government after the stunt with the AIG bonus tax. Everyone here knows, but once you throw out the rule book there is little difference between us and Chavez. That's not to say there is no price (return) at which private money will play, but when the rules are unreliable, the cost is much much higher than otherwise. Too bad that pesky Constitution was such a flawed document that they had to work around it.

[bad]

Old Lurker, Rahm can run around and offer private assurances behind the scenes. Hush, hush and all that.

[MayBee]

Daddy- you put me in the mood to buy an ice cream maker.

[clarice]

Like Holbrooke offered Karadzic? Pass.

[Patrick R. Sullivan]

Friend of JOM, Jim Glass, has a simple question for the bonus taxers (including Andrew Samwick):

Hey, just what is the benefit of this 90% tax supposed to be, anyhow?

To let Nancy Pelosi and the Democrats gain a percentage point in the polls by playing up to the ignorant resentments of the populist mob?

Frankly I've been kind of shocked by some of the normally reasonable and well-considered bloggers I read who've joined call for mob justice, as unjust and self-defeating and plain, yes, stupid, as it is -- such as at Econbrowser and Capital Gains & Games.

If anyone from either of those sites or anywhere else can tell me one good thing about this 90% tax, I'd like to hear it.

[Cecil Turner]

Having a plan, means only that they will be spending time figuring out if it will work.

Love the historical examples. But I think the main thing here--and a pleasant change from Administration dithering--is that they've offered a proposal that might work. Hand-wringing over executive compensation certainly wouldn't, nor would the piecemeal approach to money pumping in evidence so far at Treasury. And if I were looking for an historical plan parallel, I'd choose Anaconda . . . because it's remarkably similar to one that was deemed too hard, but at least addressed the main event . . . and now we've come back to something remarkably similar.

[Fresh Air]

OT: The idiots at EPA are planning to regulate tax CO2 air. Every new plant built in the U.S., not to mention all existing ones, every automobile, locomotive and generator is now subject to the Clean Air Act. I guess every Depression needs its Smoot-Hawley.

The absolute imperviousness of these sanctimonious socialists to facts, logic and reason never ceases to amaze me.

[Charlie (Colorado)]

Po, the whole reason for this mess is that the market was intentionally distorted long ago. That trolley has left the barn.

[Charlie (Colorado)]

And how will you do that with people who write an exception into the law for the AIG bonuses and then scream and rail about them and impose a confiscatory tax?

Aye, there's the rub.

[Charlie (Colorado)]

It is worth remembering that the AIG tax hasn't passed yet. I agree that it's a dumb idea, but this might be a good time to do what we can to stop it, instead of taking it as done.

[Danube of Thought]

Looks like I was wrong about the prohibition against bills of attainder applying only to those that impose criminal penalties. However, it also looks like the congress can easily get around that prohibiton if it really wants to screw the AIG bonus recipients. LUN

By the way, if they were called anything other than "bonuses," would we even be talking about this?

[Pofarmer]

Po, the whole reason for this mess is that the market was intentionally distorted long ago. That trolley has left the barn.

Oh, absolutely, no doubt about it, but, I think I remeber some old saying about "Two wrongs" or something.

[ben]

I love this quote from Mike Shedlock, who thinks the Geithner plan is a "giant confidence game":

"Somehow, Geithner (and Obama by implication) believes that igniting a bidding war between hedge funds and private equity over a bag of cow manure will inspire confidence that there’s gold in the bag. Such insanity cannot possibly work, which means it won’t."

[clarice]

Why did the market soar today? Are we the only people who aren't crazy?

[clarice]

I'm less confident than Tribe that it'll pass muster, DoT.

[pagar]

The absolute imperviousness of these sanctimonious socialists to facts, logic and reason never ceases to amaze me.

American Thinker tells about their newest plan to send American jobs to China.

Notice that is was our Congress that stuck in the language costing Americans 300 jobs. And that it was “gallows humor” Obama who signed the bill.

[RichatUF]

clarice-

Why did the market soar today? Are we the only people who aren't crazy?

The chartists are in charge and the downside risks of the coming disaster (Obama has 3 years and 10 months left) haven't been fully priced in.

[PeterUK]

"The absolute imperviousness of these sanctimonious socialists to facts, logic and reason never ceases to amaze me."

You are endeavouring to straighten the pretzel mind of the post-modern thinker.

Almost divination by chicken entrails.

This is also the answer to the Church of Algore Latter Day Environ Mentalists.

[Thomas Collins]

Oh, no! I have to disagree strongly (but respectfully, of course) with clarice! And I am forced to agree with Tribe on this issue!

I am substantially certain that, if passed in any sort of decently (or even indecently) dressed up form, the bonus tax will be upheld. Now, I realize, clarice, that you, Cecil Turner and other JOMers have argued forcefully and persuasively against the constitutionality of these types of "rage taxes." You may well have the better view of the Constitution. But the federal courts give the Federales so much sway in the exercise of the taxing power that it is tough for Congress to draft a tax bill that the federal courts would strike down. One of the reasons is that the taxing power is one of the three essential elements of the sovereign (the others being the eminent domain power and the police power), and courts are reluctant to mess with essential elements of the sovereign's power (although the Warren Court didn't seem to have much compunction with messing with the police power).

Boy, do I feel dirty being in Tribe's pig pen (at least DOT is with me (I think)) :-))

[GMax]

Let me give you a real life example of a "toxic asset" that someone is holding and the difficulty in valuing it. A group bought the Sears Tower from its lender ( Met Life ) when the previous owner lost it. The loan on the building was chopped up into several pieces and some of those pieces were securitized. There is a B piece that was not securitized but its at the bottom of the debt stack.

The current owner used very high leverage and has little real equity in the building. There is about 20% vacancy now and there are several tenants who have subleased their space and thus wont be renewing and its unknown if the sublessees will renew either.

That B piece is probably at least partially equity right now. It therefore is endangered of being caught up in a default and being foreclosed out by the superior notes.

What do you pay for the note, which BTW is not in default and has received all of the interest it is due so far?

How much risk is anyone going to take on that note, and do you see a pension plan taking risk on that north of anything more than nominal? The seller probably wants near 50 cents of face. That is a huge bid/ask spread which is not likely to be bridged even with financing.

[clarice]

The question it seems to be devolves about whether or not you think Congress was sufficiently specific in their targetting. I think considering all the public statements and the clear terms of the Dodd exception the AIG bonus babies were specifically and therefore unconstitutionally targetted.

Except for listing them by name--which I expect Frank would do if he could get his name on such a list.

[rse]

Clarice -

Do you remember a quote from Tribe about how it would have seemed inappropriate to ask Obama to do the ordinary grunt law review work so they didn't ask and how BO always seemed more like a peer than a student?

[bad]

The question it seems to be devolves about whether or not you think Congress was sufficiently specific in their targetting.

They were specific enough to add the "$5billion codicil" which exempted Chrysler from the 90% bonus bill.

[Thomas Collins]

I agree, clarice, that even a moderately decent litigator could make a case that underlying the perfume is a smelly unconstitutional rage tax. I think, however, that the courts will look to the class of folks to which the statute applies on its face, which class I think will be broad enough to pass constitutional muster.

Perhaps the JOM lawyers can get TARP money to put on a seminar about the scope of Congress's taxing power! At a lush resort, of course!

[Charlie (Colorado)]

Oh, absolutely, no doubt about it, but, I think I remeber some old saying about "Two wrongs" or something.

There's also the old saying about "you broke it, you bought it."

[Charlie (Colorado)]

Why did the market soar today? Are we the only people who aren't crazy?

Possibly, but it's not usually the way to bet.

It's usually, I think, a mistake to say anything too strongly about what "the market" does on any one day, but if I had to guess, I'd guess at this being a relief rally: it's not nearly as dumb as it could have been.

[Charlie (Colorado)]

"Somehow, Geithner (and Obama by implication) believes that igniting a bidding war between hedge funds and private equity over a bag of cow manure will inspire confidence that there’s gold in the bag. Such insanity cannot possibly work, which means it won’t."

The problem is that we know there is gold in the bag. The houses involved haven't disappeared, the housing market surprised on the high side again, and people need places to live. The question is, are these securities worth 40 cents on the dollar, or 20, or 60, or 80? Rough numbers suggest it's between 60 and 80, on average. It's just the only "company" with the cash to buy up all of them, and thereby get the good average, is the Fed.

[clarice]

Look upthread--TM has a new post--Tribe has changed his mind..HEHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

[clarice]

rse, of course I remember that. I also remember no classmates could be found to attest to his brilliance. Which is why I've argued, Tribe and others gave him a pass and he never took or passed the ordinary courses, but probably was given "independent studies" to cover for the fact that he was not well-prepared or well-equipped for HLS.

[Jim Glass]

Those dang Swedes keep saying they didn't nationalize their banks, no matter how often Krugman and other American ilk repeat that they did.

As per Anders Aslund (which sounds Swedish enough for me):

Having lived through the Swedish banking crisis in the 1990s, I am struck by how poorly the American public understands...

Sweden did not nationalize its banks. It was Norway that did ...

In Sweden ... the banks were forced to write off their bad debts and transfer them to bad banks. Sweden had no aggregator bad bank and the bad banks were not nationalized.

Each big bank set up its own bad bank ... The private bad banks, however, remained the property of the private banks from which they were removed.

Nobody traded toxic waste at the height of the crisis in Sweden. Such trade is an unnecessary complication. A bad bank is not a bank but a private equity fund, which does not need much capital or recapitalization. Its task is to isolate the rotten apples so that they do not contaminate the good loans in the cleansed banks.

The bad banks sold off their assets at a leisurely pace over several years to maximize their value, avoiding excessive depreciation of assets through fire sales. Any gain was to the benefit of its owners. In this way, Sweden avoided the problem of trading undervalued assets. In the end, [they] made a small profit...

the common American idea that the Swedish bank resolution involved major nationalization is a sheer misunderstanding. Only one failing private bank, Gota Banken, was merged with an equally bankrupt state bank. Sweden avoided private-public partnerships...

In sum, in Sweden bad debts were not taken over by the state or transferred to any aggregator state bank; but each bank, private or state-owned, established its own bad bank. The Swedish model avoided the trading of depressed assets in the midst of the crisis, while they were internally valued at their low market value. If nobody can assess the value of an asset, it is probably not worth much. Only one bankrupt bank was nationalized.

What Sweden did do is give a govt guarantee of its banks' debts, so the sources of the funds that the banks were lending at a positive spread to earn their way back out of trouble would not dry up.

THe US has implicitly done this by saying "No more Lehmans" -- but as John Hempton has pointed out, the US implicit guaranteee incurs the cost of an explicit one without the benefits.

Hey, Sweden? Norway? ... all the same to us English-speaking rubes.

[caro]

M + HF = W

We are all Georgians Joe the Plumber Maybee now.

[MayBee]

Ha, caro!

[bgates]

Jim - Sweden can join China and Russia in telling Obama and Congress to quit being such f**ing socialists.

[Patrick R. Sullivan]

Well, Sweden told Saab to drop dead.

[RichatUF]

The more I look at Geithner's plan the less I understand it.

In other good news, China, having taken measure of the pigmys of the Obama Administration has decided that they will join in with Russia to call for "replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund", which sounds suspiciously like the good ole days of the gold standard. Just in time for the London G20 conference in which not only will Obama be outclassed by the dictatorships represented, but he has also managed to piss off Brown and Sarkozy (hope Obama's staff keeps a good lock on the Teleprompter).

Wow ambitious plan: surrender to the Iranians, cave to the Russians, and wreck the US and world economies. And to imagine he isn't even finished with his first 100 days.

[Jim Glass]

DeLong makes you read it here!

My comment above about the "Swedish Model", that is.

I posted basically the same thing in his comments on his Krugman-wants-to-use-the- Swedish-Model thread, and he deleted it in minutes.

Now I remember why I hadn't been there in six months.

No .. actually it was because I saw him opening people's comments, re-writing them, and mocking the commenters in his own comments. Yeah, that was it.

The guy has gone frothing mad.

[Jim Glass]

"mocking the commenters within their own comments"

That's what it was. Me, I have an eye-hand coordination problems. That's better than being frothing mad.

[Charlie (Colorado)]

and most of these assets are just not worth what the banks have written them down to,

... and you know this how?

[Pofarmer]

and most of these assets are just not worth what the banks have written them down to,

... and you know this how?

Because, if they were fairly valued they could SELL them.

[Charlie (Colorado)]

Because, if they were fairly valued they could SELL them.

Po, back around the first of the year I received a set of "Wedgewood" hybrid golf clubs in a raffle. I've got a bad back that's prevented me from playing golf for years, so I'd like to sell the clubs. I put them on craigslist at about half the list price -- brand new clubs, never even out of the plastic.

They didn't sell. Why? Because by 1 November people aren't playing a lot of golf here, and on 1 January not many people are buying Christmas presents.

Does that mean they're not worth anything? Nope. It means that in January in the mountains people aren't buying a lot of golf clubs.

Could I have given them away, or sold them for, say, $10 each? Probably, but doing so would be stupid. Now that golf weather is coming back,they should be much easier to sell.

Now think about some of these securities. Right now it doesn't seem to be mortgage-backed security season; they're hard to sell. Doesn't that mean they're worthless? No. In fact we know they're worth something and in fact the studies we looked at a couple of weeks ago suggested they were worth something more that 60 cents on the face dollar.

The banks etc, not being idiots, know this, and thanks to FAS 157, the paper loss they'd realize if they sold them now is already on the books. Selling them into the current market wouldn't help them, clear the balance sheets, anything. The only thing it would do is ensure that they could never ever realize any more of the value.

The short form of this answer would have been "that's a silly notion," but I thought expanding a bit might help. But the notion that they must still be overvalued because they aren't selling is just dumb.