The idiocy of Wall Street
Sometimes you really have to hand it to them. Is Wall Street capable of learning from its mistakes? The Financial Times reports today that troubled and bailed-out banks such as Citigroup, Goldman Sachs etc. may consider buying toxic assets from each other under the Geither public-private “partnership” scheme:
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans.
Wow. So much for Geithner’s bank plan. Under existing terms, insolvent banks can trade for other insolvent banks’ troubled assets using non-recourse loans subsidised by taxpayers’ money. In other words, there’s no way in hell we’re getting bad assets out of the system; it exits the balance sheet of troubled bank A and enters the balance sheet of troubled bank B. It’s evident that, in addition to the other numerous flaws of the Geithner plan, the PPIP assumes that there will be private investors and funds for whom possession of and subsequent devaluation of toxic securities will not negatively impact the financial system:
Wall Street executives argue that banks’ asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets.
But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.
Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity – such as pension funds – are the same entitites that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.
And to think Capitol Hill has started to ease off their promises to hold corporations accountable. As many others have been screaming repeatedly to no effect, why isn’t nationalisation on the cards?