Disgraced ex-governor-turned-columnist Eliot Spitzer over at Slate talks about the report issued by Special Inspector General Neil Barofsky concerning why AIG's counterparties were paid 100 cents . . . more
A tasty morsel from Planet Money:
Treasury Department just sent out this statement saying that 10 of the largest financial institutions have been cleared to repay their bailout money, totaling as much as $68 billion.Mixed news of course - we'll have to wait until all is said and done to properly judge TARP, and this ignores any systemic or solvency problems that may still exist, but if the taxpayer comes close to breaking even on this it'll be a major win.
Looks like Treasury is now entertaining the possibility of letting big investment firms create "bailout bonds" (think war bonds) in mutual funds which would allow the average investor to participate in the PPIP, as I previously mentioned. I think this is a great idea in its own right; whether or not the PPIP will work as Geithner envisions remains to be seen.
But if you want to invest in something you're subsidizing anyway it's worth a look.
"The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."I agree, Lizzie. But guess what? We already did! What now?
-Elizabeth Warren, Chair of the Congressional Oversight Panel to oversee the TARP
Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.
Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.
It'll be interesting to see how this plays out. Is the Panel then recommending FDIC receivership? How does Warren see the shareholders getting wiped out? All common stock goes to Uncle Sam?
And who has the authority to act or not on the Panel's recs? Treasury? Can Geithner just give Warren the Heisman on this or is the ball in Congress's court now?
Clearly this has been a case of putting the (gold-plated) cart before the proverbial horse.
Interesting debate between four economists over at the Times concerning the latest revision of the TARP from Treasury.
From what I understand - and don't quote me on this - Geithner's program provides non-recourse low-cost loans to private investors. Basically the gov't is subsidizing about 93% of the cost of buying up at least $500B in toxic assets. This gives investors essentially zero downside with the taxpayer* FDIC on the hook for major cabbage if the assets turn out to be worthless in actuality, not just artificially depressed (as the Geithner camp is hoping is the case).
The debate ranges from "this plan sucks" (Krugman) to "better than nothing" (DeLong). From what I've read it seems that the plan will help, but the real question is whether it is just delaying an inevitable nationalization.
*Update: My mistake. The taxpayer isn't on the hook because the FDIC (funded by bank fees, not tax dollars) guarantees the loans to investors to purchase suspect loans from banks, although the taxpayer is on the hook for the second part of the program, which targets purchase of mortgage-backed securities (the typical so-called toxic assets). Check this post for clarification. But the gov't is nevertheless giving investors a huge incentive here assuming auction prices are acceptable to institutions holding these crappy assets.
Introducing TALF: the Term Asset-Backed Securities Loan Facility.
What's another few hundred billion bucks to use the crash cart on the flatlined credit markets? Seems like chump change these days.
Adam Davidson of Planet Money had an interesting interview with Treasury Secretary Timothy Geithner on Wednesday's podcast. Friday's ep follows up with varying opinions on the interview from a few big names, including Russ Roberts of EconTalk.
Geithner toed the company line to an almost ridiculous degree, but it's what one expects. In many ways he is the most powerful, influential person in the world at the moment, and if he orders his eggs over-easy rather than scrambled it could cause markets worldwide to crash.
It's to the point where he refuses to even utter the word "nationalization," although he talks about "that idea" or "that strategy" in response to Davidson's questions. But despite his dancing around the issue, he seemed to clearly deny that nationalization as such is not an option this administration will pursue, even before the bank stress tests have been performed. Nationalization, that is, in the sense of complete government ownership, management and control; one could certainly argue that banks are nationalized to a significant degree already considering the TARP funds giving taxpayers a big stake in money center banks as well as the recent news about Citi. And that's not to mention the implicit and explicit government guarantees for banks and depositors. Increasing nationalization will be a change in degree moreso than kind, although there is a clear line between propping up balance sheets with huge share percentages and actually assuming management.
Friday's episode also has an interesting interview with William Isaac, who nationalized Continental Illinois Bank while heading the FDIC during the Savings & Loan crisis in the '80s. (CIB was later purchased by Bank of America.) Isaac cautions against complete nationalization both in his interview and in his recent article in the WSJ. As one uniquely qualified to speak on the subject, it seems we would be wise to listen to him.
Geithner's recent comments have been this administration's strongest yet holding the line against complete nationalization. The financial markets won't stabilize until investors have a clear idea of the government's course of action with regard to the troubled banks. We need our confidence back - even if it's confidence in an imperfect solution.
