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The Geithner bank plan or How To Waste Taxpayers’ Money

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The Financial Times reports on the problems of the Geithner plan to clear out banks’ toxic assets:

His unveiling of the public-private investment plan (PPIP) revealed a few more details than his hazy statement in February, which had sent stocks tumbling.

The substantial rally in banking stocks has been accompanied by a far more tentative rebound in the various derivative indices for leveraged loans and subprime mortgages, which the PPIP is expected to grease.

The mechanics of the PPIP also illustrate just how broken finance has become since the onset of the crisis. Not only do some bankers expect a bonus in the bad years, private investors require a hefty lay up from the taxpayer before they take a punt and buy impaired assets.

Beyond the irony that the Treasury is relying on securitisation and leverage to resolve a banking crisis that is based on excessive borrowing and owning securitised assets, the PPIP is trying to resolve a paradox between banks and investors.


Let’s pause for a moment and ask yourself if it makes sense for the taxpayer to foot the massive subsidies which is required to incentivse Wall St. investors to purchase the so-called ‘toxic assets’.  These Wall Street jokers and clowns, for whom until very recently ‘risk’ was not a word in their dictionary, not only demand that the taxpayer, who had played no role (excluding perhaps the subprime ones) in causing the meltdown, subsidise up to 85% (!) of the price of the asset, but in addition also demand the right to reward themselves huge bonuses with taxpayers’ bailout funds as well as for the public not to engage in a “banker-witch-hunt” for their hides.

Now tell me how it’s possible for an enraged public to not become even more outraged with their arrogant behaviour?  To make things worse, the more obvious solution, namely that of the Treasury nationalising the banks so they have full control over executive leadership decisions would only be considered six months after the stress tests those same banks would undergo at the end of April:

Lurking behind this is the fear that the sale of loans and mortgages at prices set under the PPIP will reveal that some institutions are insolvent.

Banks are still in a position to play for more time. Should they fail the Treasury’s highly publicised stress tests, which should be completed by the end of April, banks will have another six months to try to raise private capital. They can remain zombies throughout that period.

In the meantime, unemployment will continue to rise, bank loans are still not being extended, new investments can’t be made and the Obama administration is content to wait out six long months before they even consider nationalisation.  The Geithner plan at present tantamounts to the Treasury (and hence taxpayers) sponsoring an expensive cat-and-mouse game between Wall St. investors who want banks to sell their assets cheaply and Wall St. banks who are not willing to let them go for too low a price, or they’ll sell only the bad ones:

Complicating the standoff associated with setting a market price is the likelihood that banks will cherry pick their portfolios of loans and sell the bad stuff.

This charade has gone on for far too long.  It’s time the Obama administration live up to its campaign promise of change.  It isn’t enough to change the tone in Washington, DC (which by the way hasn’t changed much), which wasn’t directly responsible for the banking meltdown, but also the tone of Wall Street.  We need decisive and bold action, not half-hearted efforts.

Written by defennder

March 28, 2009 at 3:21 PM

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