I guess this is from the “Are You Kidding Me?” Department.
The New York Times is reporting tonight that the Obama Administration is trying to figure out how to securitize for the masses the steaming pile of poo known as Wall Street’s toxic assets. In other words, can the government get you to invest in a mutual fund-like vehicle which would buy the subprime mortgage bundles you’re already subsidizing with your tax dollars?
The Times, in it’s wonderfully-at-times understated way says the plan is fraught with risks, but might work like this:
The new funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the new loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.
But, as with any investment, there are risks. If, as some analysts suspect, the banks’ assets are worth even less than believed, the funds’ investors could suffer significant losses.
Does it seem to anyone else that we’re so stuck in a bad behavior pattern that our collective ingenuity has just taken a day off during this whole mess? The bastards that brought all of this upon the world need to be nationalized for a period of time sufficient to unwind their ridiculous schemes and taken public once again under an old-fashioned regulatory regime where bankers bank, insurers write insurance policies, and brokers provide market services. Instead, we’re trying so hard to bend over backwards to preserve big business and the investment class that first Bush and now Obama are looking ludicrous.
This could also be taken as a signal that there’s a reason these assets are called toxic: they’re not worth anyone owning at the end of the day.
In the end it’s all on the taxpayer …
Joseph Stiglitz writes a wonderful op-ed in today’s NYT, Obama’s Ersatz Capitalism. From the piece:
In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.
The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.
Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!
From the New York Times:
The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican senators have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.” Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.
While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp and the Federal Reserve will be tapped to offer further financing.
Under one component of the plan, Treasury will provide up to 80 percent of the initial capital, which would go alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.
A separate component will have the Federal Reserve widen the financing it now provides under its new Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program, will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.
From the Wall Street Journal:
The coordinated effort of the Treasury, Federal Reserve and Federal Deposit Insurance Corp. will attempt to address the issue of “legacy” real-estate-related assets that Treasury Secretary Timothy Geithner said is reducing banks’ willingness to take risks and to lend money to consumers.
“This will help banks clean up their balance sheets and make it easier for them to raise private capital,” Mr. Geithner said.
The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair as much as $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Mr. Geithner told reporters the plan could reach $1 trillion in size over time.