Turbo Tim's Toxic Asset Purchase Plan Leaked

And it is essentially the same "plan" announced weeks ago.

WTF has the treasury been doing?



Paul Krugman
March 21, 2009, 7:12 am
Despair over financial policy

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Update: Calculated Risk and Yves Smith have similar reactions.

 

People are blasting the toxic assets program so much that they will look like total morons if it works

 

You are right if it works then a lot of talking heads needs to be put out of business. The alternative in my eyes is to nationalize clear the assets then take the banks back to the private sector. Why are we so resistent to that?

 

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With special thanks to James Taylor (you youngsters won't recognize the tune)


Well I'm a bad asset baby
I'm gonna bankrupt all of you
Yes I'm a bad asset on your books baby
I got no option but to bankrupt all of you
I'm gonna infect the whole global market heads will roll
and kill the thought of buy and hold

Well I'm a subprime mortgage baby
A sliced up bunch of packaged junk
Yes I'm a subprime mortgage for you baby
Some crazy algorithmic junk what a joke now baby
well you can call me toxic paper baby
A booby trap of steaming crap
Mr Magoo's got investments just for you
just don't try to sell now baby

Well I'm a credit default swap babe
no guarantees i'll pay on time
i'm a credit default swap i'll erode your bottom line
go up, go down, go broke, back to zero
no guarantees i'll pay on time mama
and if i can't have a loan for this home
thats like a stone around my neck
there won't be pennies left to find
oh broke am i broke am i broke
I just can't seem to pay the bills
I say go down, zero, stock price, we cry, you try
get just another bailout plan for you
Oh, just bend over,
I got those bad asset blues

 

That's a gamble many are willing to make.