Rolf Englund IntCom internetional
Treasury Department Releases Details on Public Private Partnership Investment Program
My Plan for Bad Bank Assets
Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.
The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.
PPIP is a risky effort to buy time while the Obama administration tries to find a way to convince an immensely hostile Congress to supply
It would be far better to move directly to the endpoint in all successful resolutions of financial crises. This would entail acknowledging the $1.5-2 trillion in lost asset values on financial-institution balance sheets while closing down the weakest institutions, making sure to protect depositors in the process.
This /The Geithner plan/ is a recipe for the insolvency of the FDIC and
Meanwhile, in a bizarre convolution of reality reminiscent of Alice in Wonderland, the Financial Times reported last week: "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 plan to revive the financial system." And why not? They can put up a few percent of their own money, and swap each other's toxic assets financed by a bewildered public suddenly bearing more than 90% of the downside risk. The "investors" in this happy "public-private partnership" keep half the upside while ordinary Americans take the downside off of their hands
The politics of bank rescue are toxic.
"The Geithner plan, among the many ways you can get rid of these bad assets, is one of the better ones,"
A thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks,
It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.
It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.
The banks could be saved without saving their shareholders – a better deal for taxpayers and without the moral hazard of rescuing shareholders from the banks’ bad bets. Most simply, the government could provide loans to buy the toxic assets on a recourse basis, therefore without the hidden subsidy. Alternatively, the plan could give the taxpayers an equity stake in the banks in return for cleaning their balance sheets.
The U.S. economy is spiraling downward into recession and gargantuan budget deficits.
Of course the largest risk, as always, is to the taxpayers.
In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers.
The feds and private investors would each put up six cents in capital.
Mr Geithner aims to have markets establish prices for assets now burdening banks’ balance sheets.
If, instead, the cash-flows behind the assets – such as subprime mortgage payments – have deteriorated too much, disposing of them at fair long-term values would crystallise heavy losses.
Banks will avoid this unless forced to sell, no matter how liquid the market. The plan’s success thus depends on the stress test – only vaguely defined – banks are supposed to undergo.
No one knows whether the market malfunction is due more to long-term losses or short-term liquidity risk.
But this is a gamble, which could fail in two ways.
And if private investors do take the subsidised risk, the assets may yet cause large losses for Congress to pay.
The sceptical economists led by Paul Krugman does not like the plan
He points out, rightly, that it involves a government subsidy to private investors in the form of guaranteed debt.
On the other hand, the plan is quite cleverly structured to split the equity returns between the government and ensure that the private sector asset managers bid for the assets, rather than the government trying to establish the right price.
The most significant thing to have been missed is the distinction the plan makes between
legacy loans and
In the case of legacy loans, the government will provide FDIC-backed debt to create up to a six-to-one debt to equity ratio for the funds that buy the assets.
It is providing much less leverage for the funds that will buy legacy resident and commercial mortgage-backed securities.
If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy
— specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.
Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.
Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.
It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts.
That’s what Sweden did in the early 1990s.
But the real problem with this plan is that it won’t work.
Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.
"Toxic waste" = Bad loans utan marknadsvärde
The plan will rob American taxpayers by exposing them to too much risk
"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.
U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives", Stiglitz said.
The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.
US bank rescue plan
RE: The Devil is in the detail.
Under the new so-called "Public-Private Investment Program", taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans.
Reaching the $1 trillion level without seeking new funding from Congress will depend on investor interest in the program and which parts of it prove more popular. The plan relies on existing legal authority,
By bringing in private investors, the government hopes to jump-start market mechanisms to establish benchmark prices for these assets.
Geithner's plan falls flat
The Treasury has $320 billion available under the Troubled Asset Relief Program, but the administration said it won't ask Congress for additional money at the current time.
While that judgment may be astute politically - Republicans in Congress have blanched at the administration's $800 billion-plus stimulus program - it only defers the need to repair the damage at banks whose capital levels have been crushed by falling asset prices.
This is not a true market mechanism, because the government is subsidising the risk-bearing.
The scheme may improve the dire state of banks’ trading books.
Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down.
The new plan seems to make sense if and only if the principal problem is illiquidity.
The politicians are making it worse, not better, and you know why they're making it worse?