by John Holbo on March 29, 2009

Suppose Obama came out and said, roughly:

My fellow Americans, the thing about the Geithner plan is this. Experts disagree about the nature of the crisis. Either it is a liquidity problem or an insolvency problem. That means: either the market values of these so-called toxic assets are depressed because of a kind of market failure; or the market has priced these assets more or less correctly and many institutions holding these assets are, as a result, insolvent. If we are indeed in a liquidity crisis, the Geithner plan should solve it as well as any alternative plan could. If it is an insolvency crisis, however, as many experts believe, the Geithner plan will do nothing – or not nearly enough.

If the Geithner plan fails, we will confront another either/or: either nationalize these too-big-to-fail institutions, at great cost, or allow them to fail, collapsing the global financial system and, very likely, the world economy. This is no true choice, however. Hard as nationalization will be, if it comes to that, the alternative would be far, far worse.

We do not need to take this daunting step of nationalization yet because, first, we’re trying the Geithner plan. What you should know about the Geithner plan is that, if it fails, it will still have been worth trying. We will have determined that the problem is indeed insolvency. We will have clarified the path to be taken, laid to rest any reasonable skepticism about the strict need for nationalization. And we will have paid no more for this knowledge than we would have had to pay in any case. If the government effectively transfers money to distressed financial institutions, under the Geithner plan, and later those institutions have to be nationalized for a time, there is no need to ‘pay twice’.

This obviously stinks as a speech, but what about the content? Does it address the Krugman critique? Does it prepare the public adequately and face up to the real problems and likely costs?

Is it plausible? Specifically, is it really plausible that Geithner, then nationalization, shouldn’t be harder than just plain nationalization? What could go wrong? 1) The auctions are a flop. No buyers, even with that sweet government go-halfsies plus loan guarantee deal. Now we nationalize. But running a failed auction didn’t cost so much. 2) The auctions are an apparent success, but the buyers end up losing their shirts. All the toxic assets are actually toxic and the Fed is on the hook for those loan guarantees, which are now revealed to have amounted to a huge giveaway to the banks. But it isn’t enough. We still have to nationalize the banks. Well, that just means we own the institutions we gave the money to. So, again, this option doesn’t cost more than just plain nationalizing. Hell, we even get to keep the 6 cents on the dollar that those stupid private investors kicked into the kitty, insofar as it has been transferred to those banks we now own. 3) The auction is an apparent success. All the toxic assets are actually toxic. The investors lose their shirts. The government is on the hook for the loan guarantees. And the banks just barely squeak through, having managed to toss the hot potato to the taxpayers at the very last minute, who burn their fingers to a crisp. Well, that really sucks. Because there’s no justice and no accountability. But you could at least still regulate to avoid such problems in the future 4) The auction is a wild success and the liquidity crisis is solved. The fat cats who created the problem are off the hook. Other fat cats are enriched, thanks to the government having leveraged their bets on 4) out the wazoo.

3) is seriously depressing, admittedly.

Honestly, what do I know? I’m so confused. What do you make of my strictly amateur analysis? (Don’t even bother critiquing my speech writing. That was just a nod to the Krugman point that Obama needs to get out there and use the ‘N’ word – nationalization – in a forthright manner.)



joel turnipseed 03.29.09 at 5:06 pm

Is 3) also the option where everything fails, but the private equity guys negotiate (possibly back-door) with sweet preferred deals that allow them to take a few billion in crumbs out before the world economy gets held hostage again? Isn’t this a recursive function?

That’s my worry: there’s so little backbone for saying “dude: we gave you more than your market cap already: you are nationalized…” that you think, “well, I guess we really are completely screwed in this country.”


KCinDC 03.29.09 at 5:11 pm

Maybe he should avoid the “N” word and instead use “receivership”, since that’s the word Republicans use when they’re trying to pretend that they’re not calling for what they were previously denouncing as “nationalization”. Of course it won’t stop them from ranting about socialism, but it could make the messaging a little trickier for them. Then again, it’s only tricky if the media pay attention.


KCinDC 03.29.09 at 5:13 pm

Hmm, maybe using “the ‘N’ word” causes your comment to trip the moderation filter just like using the “N” word does.


joel turnipseed 03.29.09 at 5:14 pm

Also, I’m not tracking very closely, but is anyone considering that part of the Geithner plan is to keep existing banks in place just to prevent the possibility of the few remaining powerhouses (I’m thinking Wells in the U.S. or RBC in Canada, either of which could probably write a check for Citi/BoA) from becoming “private national banks?”


KCinDC 03.29.09 at 5:14 pm

Oh, no, it was the dreaded “soci*lism” that did it.


politicalfootball 03.29.09 at 5:14 pm

It’s possible that this reflects Obama’s thinking, but that he’s understandably reluctant to say this. It’s probably important to denounce nationalization right up until the moment the banks are nationalized.


The Raven 03.29.09 at 5:48 pm

Why is it worth trying, when it has already failed? There’s no reason any more to believe there’s a liquidity crisis, and only the Administration, the bankers who stand to benefit from the bail-out, and the winguts are claiming there is. As if that were not enough, it costs precious time. Every day that the banking system is left in this state is one more day when more people lose their jobs, and one more day for something additional and major to go wrong.

The only valid argument I can see for this plan is that it’s all the Senate will allow. Which may be true, but is frustrating, sad, and outrageous



rawdawgbuffalo 03.29.09 at 6:18 pm

so in other words, the fundamentals still aint sound


robertdfeinman 03.29.09 at 7:52 pm

The difference between nationalizing and leaving a firm “private” is one of governance. In one case the government gets to appoint the management directly, in the other case they can only lean on the existing management to do what the government feels is best.

What is really important is what is the firm supposed to do if it really insolvent? Who manages the defaults is independent of who “owns” it. Will a nationalized firm wipe out present bonds or force an equivalent to bankruptcy or will it keep pumping money into the firm or “buy” up the worthless assets and put them in some new entity which has even less public scrutiny?

If the assets really are worthless or “worth less” then someone has to take a hit. Who, when and how much are independent of the governance mechanism. If the FDIC is an example of what would happen then the public will take the hit.

I’d like to hear some discussion of what the steps are to deal with these assets and get away from the irrelevant issue of governance.


roy belmont 03.29.09 at 8:03 pm

There’s always the possibility that what seems to be incompetent action toward stated goals is actual competent action toward unstated goals.
When Iraq was still important as a national problem a lot of the otherwise perspicacious criticism of US action there faulted the Bush regime for its failure to achieve its stated goal(s). Whatever they were, I forget, democracy, freedom fries for all, or something.
But viewed through a lens of intentionality, where the actual, unstated, goal was decimation, destruction, crippling of the formerly threatening Iraq, in other words that what happened was on purpose, it looked, and looks competent enough. Evil, inhuman, base, ignoble, morally wrong but militarily successful.
Unimaginably large amounts of money have been spirited away into the darkness. Possibly this was intentional, and not a mistake.
The economy is contracting, possibly this isn’t a mistake either.


anonymous 03.29.09 at 8:07 pm

The market doesn’t care whether it’s “failing” or not; the prices are what they are. The question is whether we want to be spending money propping up security prices or, you know, doing something actually useful like funding education or healthcare.


David Wright 03.29.09 at 8:32 pm

The Geitner plan deals with insolvency as well as illiquidity. As others (including Krugman) have pointed out, due to the implicit put option, the banks are getting far more than the market value for the toxic assets. Thus, in effect, they are getting a huge cash injection thanks to the government guarantee. Having a lot more cash is precisely what makes you solvent.

If the toxic assets turn out to be entirely worthless, it won’t affect the banks one whit, because they’ll belong to someone else. The government will be out a lot of money, but it would also be out a lot of money if it nationalized the banks and took the toxic assets on to its own books that way.

Really, this is about the shareholders. Krugman wants to crush the shareholders and Geitner doesn’t. There is a good argument to be made that we should crush the shareholders. Presumably Krugman and ilk don’t want to make that argument, because doing so would reveal that they are persuing an ideological agenda, and they would prefer paint themselves as non-ideological technocrats who are just trying optimize the bailout.


David Wright 03.29.09 at 9:04 pm

Just to drive home the irrelevence of the insolvency/illiquidity distinction to this debate, look at John’s scenarios. The failure scenarios are (1) and (2). (1) is clearly about illiquidity, not insolvency. (2) is about insolvency, but it could be dealt with by upping the subsidy or more direct cash injections as well as nationalizations. In any case, “insolvency” is not the common denominator of the failure scenarios.

What really bothers the leftists are actually the success scenarios, particularly (3) but really also (4), because, as John writes, “fat cats” get off the hook and profit. A leftist like Krugman regards these scenarios as abhorent and unacceptable, a centrist like Geitner as, in Obama’s phraseology, “distasteful” but enitrely acceptable. What the leftists need to come clean about is that they are making a moral, ideological argument about wanting to punish their eternal boogymen, not a technical argument abou the practical feasibility of the Geitner plan.


robertdfeinman 03.29.09 at 9:09 pm

David Wright:
It’s not about “crushing” the shareholders. The stocks of the distressed banks are already selling for a pittance. The shareholders have already suffered a real or paper loss (depending on whether they’ve sold or are holding on).

The real issue is about protecting the bondholders. Most bank bonds were bought by those seeking a low risk, medium yield investment. This means pension funds and mutual funds appealing to those saving for retirement. If these bonds default or are redeemed at a fraction of their value (or converted to common) then the pension funds will suffer a loss. In addition those with certain reserve requirements may find themselves below their limits and have to put more money into the funds. The government has done a lot recently to get big firms off the hook in making their funds whole, but there is a limit. If, say, GM was to have to pony up more money into its pension fund where would it get it?

Banks were considered safe investments with no glamor, it was the merging of the speculative parts of the industry with the staid parts that has led to all the difficulties. The Fed and the Treasury know this, but if they said anything about more pension funds becoming weak or failing they would only make the panic worse, so they are trying to glide past these difficulties by being vague about things.


auntiegrav 03.29.09 at 9:20 pm

Why is this issue (the economy) even debated at all?
We know where money comes from (the labors of people doing things that will be useful in the future, or promising to do useful things in the future), and we know that government is an ‘overhead’ cost, and we know that there is too much consumption and not enough saving.
There are only two things we need: health care so that everyone can either work or make reliable promises, and a sales tax to replace all income taxes.
The latter would put all externalized costs (like the bailout) right at the cash register. If the bailouts and military actions and police are necessary, then they will be funded when people buy things. If they are not necessary, then people will grow their own food, make their own houses, and protect their own neighborhoods and stop buying things.
This talk about “liquidity” or “solvency” is all just babble to distract us from the fact that NOBODY is talking about the reality of our bankrupt human race.


Alex R 03.29.09 at 9:45 pm

I’m not sure that there really exists a clear distinction between a “solvency” problem and a “liquidity” problem. We are prone to call a bank clearly insolvent if its assets are clearly worth less than its liabilities — and we say that the problem is just liquidity if the assets are worth more, but they’re just a little hard to sell for what they’re “really worth” at the moment.

So whether a bank is solvent depends on how much its assets are worth. But the value of these assets very much depends on the health of the economy. And the health of the economy, in turn, now seems to depend on the health of the large banks, which depends on how much their assets are worth… So we have a circular situation, and there may be more than one “solution to the equation” for the value of large bank assets: Perhaps there is one where the large banks remain healthy, allowing an earlier recovery of the economy, increasing the value of the uncertain assets, keeping the banks healthy; and then there is another in which large banks are considered unhealthy, delaying economic recovery, reducing the value of the banks’ assets, and ensuring their failure.

If this circular situation pertains, then the policymakers want to do anything they can to see that the first solution is realized, rather than the second. I suspect that this is why they want to wait until it’s clear that there is no chance of a “solvent bank” solution obtaining before they declare a bank insolvent…


Bernard Yomtov 03.29.09 at 9:47 pm

I wonder whether the Geithner plan may be intended to encourage the banks to drop their asking prices for the assets somewhat. He may be telling them this is the last stop before nationalization, so sharpen those pencils, rework those spreadsheets, and get those prices down.


John Quiggin 03.30.09 at 1:16 am

The big question here is whether all the payments made under the Geithner plan will improve the net worth of the banks and therefore reduce the cost of nationalisation/receivership. Some will, but I think a lot will not. There are some obvious cream-skimming risks here, for example. For a start, solvent and liquid banks with some bad assets may be able to use the scheme to dump those assets at above market prices. This increases the profitability of banks that didn’t need saving

In the case of insolvent banks, sharp investors may be able to identify the least-bad assets and use the government subsidy to acquire them. The result: The banks get a subsidy-inclusive price that is higher than market value, while the buyers pay a pre0-subsidy price that is lower than market value.

Finally, it seems likely that the scheme will reduce the feasibility of making the bondholders bear some of the loss as robertdfeinman suggests. Maybe that’s intended, but it would seem better to put the whole institution into receivership before paying off particular creditors.


Richard Cownie 03.30.09 at 2:01 am

The banks have two big problems right now: a) they’ve lost a ton of money on bad bets,
and b) the people in charge who made, or at least failed to prevent, those bad bets, are
known to be either incompetent or dishonest (or in some cases, both).

It doesn’t really matter whether the amount of money lost is large enough to make the
banks worthless or not: we know their books are bad enough that they can’t do the
necessary job of financing businesses in the real economy.

If the Geithner auctions succeed, then the banks will look a bit healthier. But they’ll still be
run by crooks and/or idiots. I believe a thorough purge of management is needed to get
any chance of restoring confidence and attracting private capital.

Unfortunately Geithner and his team seem to be inside the Wall St bubble, and don’t appear
to recognize how thoroughly discredited and reviled the Wall St insiders have become.


john holbo 03.30.09 at 3:24 am

“In the case of insolvent banks, sharp investors may be able to identify the least-bad assets and use the government subsidy to acquire them. The result: The banks get a subsidy-inclusive price that is higher than market value, while the buyers pay a pre0-subsidy price that is lower than market value.”

Your comment is helpful, John Q.

One thing I’m not clear about: to what extent will the loan guarantee actually incentivize overbidding? A case: I think the likely return on a given toxic asset is 60 on the dollar. So I am willing to bid up to, maybe, 55. This is a good deal for me because I’m paying the 55 mostly out of a government secured loan. I’m seriously leveraged, and I’m gambling with other people’s money. But that doesn’t mean I’m willing to bid up wildly beyond what I think it’s worth. I’m not going to bid past 60. Because my money is lost first. And, on the other hand, in the auction setting, I’m not going to be able to underbid too seriously. There are other actors out there, also helping themselves to the government-backed loans, who will see to it that someone with an expected return of 60 doesn’t walk out the door for, say, 30. So isn’t there a fairly narrow range in which sharp investors can get firesale prices? If the thing looks like it should be worth about 60, then the bidding will not be too far under that.

In short, the sharp investors are going to be making their money not through wild mis-pricing, to their advantage, but through force of leverage, courtesy of the government-back loans? Yes?

On the other hand, if the thing is just garbage, but the current holder sets a reserve of 60, then the thing is just going to go begging. And that, at least, won’t cost the government anything. The auction will just fail.


John Quiggin 03.30.09 at 4:07 am

John, if the market were as liquid and competitive as that, I think there wouldn’t be a problem or a need for a plan. The market price would be the best available estimate of the asset value, just as the efficient market hypothesis says.

In one sense, that is the contradiction here. The plan only makes sense if you believe that the efficient markets hypothesis is way out of line with reality (on the downward side at present, but that surely implies a concession that assets were drastically overvalued until recently). But, if you think that (as I do) you should want much more extensive reform of the financial system than Geithner implies.


John Holbo 03.30.09 at 4:16 am

“John, if the market were as liquid and competitive as that, I think there wouldn’t be a problem or a need for a plan. The market price would be the best available estimate of the asset value, just as the efficient market hypothesis says.”

I see what you are saying. For this reason I tend to be convinced that the problem can’t be a liquidity problem (as Krugman and others have been urging.) But, playing devil’s advocate: couldn’t it be that there is so much of the stuff chasing a market at the moment – 12 trillion, by some estimates I’ve heard: several trillion anyway – that there just aren’t enough canny Warren Buffetts to absorb it all. And that means that no individual Warren Buffett can risk jumping in. The uncertainty and the risk that he’ll be left holding something he can’t turn around and sell himself is too great. There is too much overall regime uncertainty to boot. But if several trillion worth of Warren Buffetts could all jump in at once, the coordination problem would be happily solved. But if you can’t get everyone to jump in together at once, you can’t solve the problem.

I realize this sounds a bit feeble. Does that just mean the plan is feeble?


David Wright 03.30.09 at 4:49 am

I disagree with JQ’s statement that the plan only makes sense if you believe the markets have mispriced the toxic assets. As Krugman himself has pointed out, the implicit put being offered by the government to investors will cause them to pay the banks substantially more than the assets are worth. This effectively recapitalizes the banks.

For example, consider an asset with a face value of $100 that the market accurately believes has a 30% chance of paying out and a 70% chance of defaulting. For this asset, the market would offer the bank $30, a value which we will presume would make the bank insolvent.

Now suppose the government offers to loan the buyer 90% of the price, and agrees to cancel the debt if the asset doesn’t pay out. If the price remained $30, an investor could front $3 and borrow the remaining $27 from the government. In the 30% likely case that the asset pays out, the investor gets $100, pays the government back the $27, and has made a $70 profit. In the 70% likely case the investor has lost his $3. Clearly, this is a great deal for which investors will be willing to pay substantially more than $3, so the asset price will be bid up. A little math reveals that the market, with the exact same beliefs, will end up paying $81 for the exact same asset under these circumstances. Selling assets for 81% of face value is much more likely to leave the bank solvent than selling assets for 30% of face value.

Now, if the market was right and the likely scenario occurs that the asset was worthless, the government is out the money it loaned, but that money (plus a bit from the investor) has recapitalized the bank, which is no longer endangered by the default. If, on the other hand, the market was wrong or the unlikely scenario occurs and the asset pays out, then the bank has been recapitalized at no cost to the government. Either way the recapitalization goal is accomplished. And the market was not required to be wrong about the “true” asset value for it to work.


John Holbo 03.30.09 at 5:02 am

“A little math reveals that the market, with the exact same beliefs, will end up paying $81 for the exact same asset under these circumstances.”

That’s rather eye-opening, David. But it seems to make sense. The gap between $30 and $80 is rather significant, as price-discovery goes.


John Quiggin 03.30.09 at 5:31 am

Coming back to my point, that’s great if the market is perfectly competitive. But suppose that it isn’t and that assets like this go for $50. The government puts up $45 and loses it 70 per cent of the time for an expected loss of around $30, of which the bank gets $20 and the buyer an expected profit $10 (some of which might be spent on things like getting bank insiders to point out the relatively good deals).

So, instead of having $30 with which to finance the bank’s receivership, the government has used $20 to do a recapitalization and $10 to enrich the investor.


John Holbo 03.30.09 at 5:54 am

One detail that doesn’t really affect your overall point, John Q: as I understand it, the final split might go more like this. The auction settles on $80 (let’s just say). The investor puts up $6 (or whatever the small amount is.) The government matches that (another $6.) And the rest, $68, is loan guarantees. So half the profit actually accrues to the government, if things go well. So maybe the amount that goes to enrich the investor should be halved, in your case? Or is it the case that the government’s $6 stake, plus loan guarantees, doesn’t actually buy it a 50% overall stake in the potential upside? Maybe it only gets paid potential profits proportional to its $6, not according to the $74 that is really, effectively, fronting?

I’m so confused.


john c. halasz 03.30.09 at 5:59 am

All this fine liberal talk about forming correct market prices for financial assets misses the possibly myriad ways that the whole proposal might be gamed through circuitous set-ups amounting to collusion between banks/sellers and hedgies/buyers, in which case the government is not paying out a premium to effect “correct” market pricing, even vaguely, but paying out a premium to forestall that eventuality and increase the eventual economic costs/losses, while recapitalizing bank managements/shareholders privately at public expense. As a too simple example, which nonetheless could probably be effected through a much more complex and effectively untraceable scheme:

“Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

It’s just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You’ve also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.”



David Wright 03.30.09 at 6:16 am

Yes, JQ, colluding buyers, or buyers with inside knowledge of which assets will definitely pay out or not, can most certainly fleece the government and/or the selling bank. (But isn’t that the opposite of what you said before? Before you were saying that for the plan to work, one has to assume that the markets are not efficient. Now you seem to be saying that the plan to work, one has so assume that the markets are efficient.)

Geitner does seem to be taking some pains to avoid this danger. He isn’t just asking Goldman to bid against Morgan-Stanley. He has asked a bunch of pension and mutual funds to bid, too. I believe even some closed-end funds for retail investors are forming specificly to buy toxics under this plan.

Of course, there is no guarantee that this attempt to ensure competetive bidding will succeed. But there is no guarantee that it would succeed if the government, having acquired the assets via nationalization, were the direct seller, whether or not it were offering the implicit put. Creating a market isn’t easy, but we are going to have to do so either way.

(Or are you suggesting that the government, or a “bad bank”, should simply hold the assets until maturity? For anyone who knows that the market has undervalued the assets, that is of course a smart thing for it to do. But I presume you are willing to grant that the government doesn’t know more about the payoff probabilities than other market participants. In fact, I could make a decent argument that it probably knows less.)


David Wright 03.30.09 at 6:29 am

John Holbo @ 26: I think I can clear up the confusion. To clarify that the subsidy comes from the implicit put (aka non-recourse loan), my example scenario included only it, not the more complex mix of implicit put plus matching investment that the real plan includes. Since JQ was responding to my example, it was fair of him to also ignore the matching investment.

In an imperfect market, the matching investment component may weaken the effect of cheating buyers on the government’s finances somewhat. (That may be why the smarter-than-me game theorists as Treasury included it. Or maybe it was just a political demand that the government “see some of the upside”.) But given a sufficently imperfect market, JQ is certainly right that the buyers can extract some money. But I think that I am also right that these problems are also going to occur if the government, having nationalized the banks, is trying to sell the toxic assets directly.


John Quiggin 03.30.09 at 6:37 am

“But isn’t that the opposite of what you said before? Before you were saying that for the plan to work, one has to assume that the markets are not efficient. Now you seem to be saying that the plan to work, one has so assume that the markets are efficient.)”

Apologies for writing confusingly. I was saying that, if markets were efficient as required for the plan to work, we wouldn’t be in this mess in the first place.

Undoubtedly, some of these problems will arise under nationalisation/receivership. But at least then the government will have access to the book, control over the reward structure of the employees, and hence a much better idea of what is and isn’t worthless than it can gain from external scrutiny.

Plus, on my first point, we get to do triage properly, instead of (probably) wasting a lot of money making good the bad bets of those banks that aren’t going to fail. The insistence on handing out money to everybody has been one of the most disastrous features of the Geithner-Summers-Paulson approach, and it rests on the idea that no one must be allowed to fail (in the sense of going into receivership/nationalisation).


Zamfir 03.30.09 at 8:51 am

I was saying that, if markets were efficient as required for the plan to work, we wouldn’t be in this mess in the first place.

On the other hand, people did have 18 months to read up on their subprime-risk knowledge, and to re-estimate the usefulness of their models. There must by now be people out there who can make a reasonable (and better than before) guess at the worth of stuff.

On the other hand, is there a any reason to believe that the nationalization squads are at the ready in case this plans doesn’t work? If not, option 3 seems the only option worth considering, and it is not the good option.


Zamfir 03.30.09 at 8:51 am

Oh dear, too many hands. Economists are contagious.


John Quiggin 03.30.09 at 8:58 am

There’s a great scene in The Chrysalids where the protagonist is given a hiding by his father for wishing for a third hand.


Zamfir 03.30.09 at 9:08 am

Hey, I read that book. But in translation it is called very different, so I didn’t recognize it from the title. What does that title mean anyway?


Henri Vieuxtemps 03.30.09 at 9:29 am

5) The auction is an apparent success, but the buyers end up losing their shirts. All the toxic assets are actually toxic and the Fed is on the hook for those loan guarantees, which are now revealed to have amounted to a huge giveaway to the banks. The banks get the money, channel it to the bondholders, preferred shareholders, and CEOs ‘deferred compensation’ from years ago. As all the bailout loot disappears the banks cheerfully declare bankruptcy.


Zamfir 03.30.09 at 12:05 pm

henri, that’s 3 again or not?


Henri Vieuxtemps 03.30.09 at 1:47 pm

Well, in 3 the banks at least “squeak through”; that’s something. In 5 the bailout money is (for all intents and purposes) stolen and you are back to square one. You gave a trillion dollars to some (relatively few) individuals without affecting anything in the financial apparatus.

In fact, if I am a bondholder, I will volunteer to be Geithner’s investor and gladly lose my 7% of the bailout – as long as I expect close to 100% of my bonds to be paid back. Because right now my bonds are worth nothing.


Michael Drake 03.31.09 at 12:42 am

“Oh dear, too many hands. Economists are contagious.”

That’s why they started using invisible hands.

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