The New Republic

Right. The other huge issues he mentions are that it isn't at all clear this will do anything to capitalize banks and that the spectacle of private investors (not necessarily the banks important to the system) making a killing buying these assets--if it works--will make it politically difficult to recapitalize banks later.

- dabeffert

March 25, 2009 at 10:27am

part of the importance of the plan is it actually lets you pose the question of recapitalization, because at this moment that notion is nothing more than idle speculation for small minds.

besides, given the current system, there is no magic bullet to this problem; there is no currently politically feasible solution that will resolve this problem overnight: nothing. Continuing to lament this fact is mere disingenuity.

- GSpinks

March 25, 2009 at 11:45am

Martin Wolf, like our own TBer roidubouloi, has been focused on the real issue from the get go, which is the insolvency of the banks and the need for existing shareholders to be wiped out, crap assets to be written off, and balance sheets to be recapitalized. This is precisely what Tiny Tim and Obama refuse to do.

Wolf's is a voice of sanity in the midst of a cacophony about "populism" and other bogus side issues ginned up by the Obama/Oligarchy's defenders like Walter Shapiro in TNR today, George Packer in The New Yorker, and the Obamaphiles at TNR.

Those of us who read Martin Wolf and roidubouloi, and who share their bemusement at this foolish and costly plan, are not wielders of pitchforks, or Hofstadterian paranoids or dittoheads or know-nothings. We are by and large people who recognize that this plan is ignoring the core problem and even perpetuating it by creating yet another massive arbitrage opportunity for a predatory oligarchic class which overlaps with the political class in this country.

If we had the financial resources of a hedge fund manager, or if our health insurance, jobs, mortgages etc were affordable and reasonably secure, then we would do as any rational individual in oligarchic countries like Russia, Brazil, Mexico etc does, and try to play the game as best we can. But some of us believe that America should not be an oligarchy, that personal outcomes should not depend primarily on one's proximity to state resources and to crony capitalists in and out of the government, and that public funds should not serve primarily to enable vast private fortunes for insiders.

And no, we will not be redirected yet again into believing that this is the best of all possible plans or that our leader is besieged by evil meanies wearing the colors of OtherSide. This plan stinks. Geithner and Obama need to develop some cojones and tell the nation that the big banks are insolvent and that their shareholders need to be wiped out-- before one more dime of our money is thrown away.

- teplukhin2you

March 25, 2009 at 1:32pm

For those who can't get beyond the FT firewall, here are more passages from martin Wolf's fine piece, with some comments. Start with the punchline:

"the crisis has broken the American social contract: people were free to succeed and to fail, unassisted. Now, in the name of systemic risk, bail-outs have poured staggering sums into the failed institutions that brought the economy down."

Bingo. Re our social contract, where is that "national dialogue" that Obama always turns to when he's in trouble? Americans are now receiving multiple body blows from our oligarchy's failure to create any kind of security at all: jobs are being lost, health insurance benefits are being denied, pensions and 401ks have been shredded, middle class homeowners on the coasts are locked out of both home equity lines of credit and gov't assistance programs.

Martin Wolf: "The congressional response is a disaster. If enacted these ideas would lead to an exodus of qualified employees from US banks, undermine willingness to expand credit, destroy confidence in deals struck with the government and threaten the rule of law. I presume legislators expect the president to save them from their folly. That such ideas can even be entertained is a clear sign of the rage that exists."

Again, clarifying: this asinine program is reactive and tail-chasing. It will punish tiny fish on Wall St and create a massive boondoggle for the big sharks.

Wolf: "This is also the background for the "public/private partnership investment programme" announced on Monday by the US Treasury secretary, Tim Geithner. In the Treasury's words, "using $75bn to $100bnin Tarp capital and capital from private investors, the public/private investment programme will generate $500bn in purchasing power to buy legacy assets - with the potential to expand to $1 trillion over time". Under the scheme, the government provides virtually all the finance and bears almost all the risk, but it uses the private sector to price the assets. In return, private investors obtain rewards - perhaps generous rewards - based on their performance, via equity participation, alongside the Treasury. I think of this as the "vulture fund relief scheme".

Me: Again, Wolf nails it. Consider how stupid this plan is: the thousands of hedge funders and mega-pension funds that are the intended targets of these sweeteners are not short of investment capital. The top 50 hedge funds + the top 50 US pension funds alone have more than that  $500b figure at their disposal. We the public are in effect being asked to bribe the world's savviest investors to make a deal. We have become what Warren Buffett says is the first thing an investor must avoid becoming, and must seek out for the other side of his trade: the patsy at the poker table.

Wolf: "But will it work? .. the scheme may improve the dire state of banks' trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody - certainly not the Treasury - thinks this scheme will end the chronic under-capitalisation of US finance. Why might this scheme get in the way of the necessary recapitalisation? There are two reasons: first, Congress may decide this scheme makes recapitalisation less important; second and more important, this scheme is likely to make recapitalisation by government even more unpopular.

"If this scheme works, a number of the fund managers are going to make vast returns. I fear this is going to convince ordinary Americans that their government is a racket run for the benefit of Wall Str*eet. Now imagine what happens if, after "stress tests" of the country's biggest banks are completed, the government concludes - surprise, surprise! - that it needs to provide more capital. How will it persuade Congress to pay up?"

Me: This is almost certain to happen, because the patsy in this case is in the game to the bitter end. Treasury will nto be able to step back when it becomes obvious that these sharks will demand more and more and more in the way of subsidies/bribes for them to trade.

This is how arbitrage works. The mighty hedge fund traders are sharks, and Treasury's plan has made the sea incarnadine with public $$$. Feeding time!

- teplukhin2you

March 25, 2009 at 1:47pm

This is a test to see if anything will post.  Tried the same cut and paste from word twice (because I don't want to lose it) and nothing happens.

Please, TNR, won't you tell us the secret of how and why things vanish and what we can do to avoid this?

- roidubouloi

March 25, 2009 at 3:42pm

"has been focused on the real issue from the get go, which is the insolvency of the banks and the need for existing shareholders to be wiped out, crap assets to be written off, and balance sheets to be recapitalized."

I think I get it: you *are* pushing for the Obama administration to go Putin-Chavez. Rather than work within the constraints of the system we have, to a) resolve the actual logistical issues facing the credit market and b) revise policy and law to avoid this problem in the future, the government should just abandon the rule of law and do whatever it wants. Would this be a matter of Executive Privilege, National Security, or some as yet untried BS? Aren't you the same Tep who posted about the economic side-effects of corrupt governments seizing assets and property?

As for Wolfe: "the crisis has broken the American social contract: people were free to succeed and to fail, unassisted"

People were free to get screwed without recourse, some few were free to pocket as much money as possible before being caught and/or fired, but the last time I checked, this whole fiasco had very little to do with "the people" except worm its way into most major investment portfolios on the market...

"...bail-outs have poured staggering sums into the failed institutions that brought the economy down..."

It occurs to me that calling some of these institutions "failed" is like saying you have a bad fuel injector because you put water in the tank and it shot that water into the piston...mind you, I won't shed a single tear if any of the relevant CEO's wind up suffering from an agonizing death, but it occurs to me a) that many so-called "failed institutions" are innocent bystanders in this whole fiasco, and b) nobody promised that criminal charges would not be leveled as appropriate, or c) that they would keep the laws and regulations exactly as they were before the feces hit the rotary oscillator...

"Now imagine what happens if, after "stress tests" of the country's biggest banks are completed, the government concludes - surprise, surprise! - that it needs to provide more capital. How will it persuade Congress to pay up?"

And I'm really getting sick of hearing this argument; it is beyond disingenius if only because no one has promised that this plan would solve the liquidity issue. In fact, everything I've read plus a little common sense indicates that this plan will *create* the liquidity issues by eliminating the uncertainty on the value of toxic assets. D'OH!!! And what, rather than work within the system to fix what need fixing and improve what needs improving we get a whole bunch of hot-heads who suddenly discovered that they actual admire the Putin-Chavez methodology of regulating free markets...

- GSpinks

March 25, 2009 at 4:14pm

GS, the big banks are insolvent. They have to be recapitalized one way or another. We can do it quickly and efficiently, ie, with minimal losses to the public treasury, or we can drag this out painfully and waste trillions trying to induce investors to pretend that sh*t is shinola, as per the Paulson/Geithner/Obama approach.

- teplukhin2you

March 25, 2009 at 5:29pm