Inviting the Public to Play
As I’ve said before, I think there are at least three different dimensions along which you need to try to evaluate the Geithner Plan. One is political feasibility. Two is likely efficacy in terms of recapitalizing banks. And three is fairness/justice. I think the plan does great on number one, less well on number two but not terrible, and quite a bit worse on number three. After all, why can’t I get a generous non-recourse loan to leverage my investment in toxic assets? It hardly seems fair. And, indeed, unlike the Wall Street big boys I’d be happy to accept a $250,000 a year maximum salary from my employers. Jane Hamsher writes:
Do you get a chance to make money in this “off-the-charts good” investing opportunity? Noooo, these loans that nobody has to pay back aren’t being offered to the public.
To be fair, you do need to pay the loan back if you make money. But it’s a loan that sharply limits your downside risk and gives you some shot at a substantial payoff. It’s not a good investment for everyone, but I would say that for a lot of people who are in a position to be fairly risk-friendly with their money (the youngish and employed, basically) it’s a good deal.
A Baseline Scenario correspondent proposes:
If Geithner’s taxpayer subsidized toxic public/private plan goes forward, I think it would be fair if the federal government allow non-institutional investors to participate via a no-fee investment vehicle. I think if Americans had the option of investing in this program (without having to pay the egregious fees to the investment advisors/PE shops), it would be much easier to swallow since they would at least get the same deal the sharks are getting. There is probably more money on the sideline with individual investors than all these institutional investors. Maybe they could set up some ETF equivalent for it. I think the willingness of the administration to do such a thing would tell us a lot about whose for whose interest they are really looking out.
I’m pretty sure, though, that the public actually can come to the party. It says in my fact sheet, “A broad array of investors are expected to participate in the Legacy Loans Program. The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged.”
40 Responses to “Inviting the Public to Play”
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March 23rd, 2009 at 2:00 pm
seems like an excellent opportunity for trust fund scumbags
March 23rd, 2009 at 2:02 pm
After all, why can’t I get a generous non-recourse loan to leverage my investment in toxic assets?
You can, by purchasing shares in any participating firms (or mutual funds or what have you). If we go Sweden, there will still be a justice issue, to the extent that the $1-$2 trillion forked over the bank creditors won’t be matched by eventual equity sales.
March 23rd, 2009 at 2:03 pm
This is hilarious. The plan is potentially so good for investors that everyone wants a cut. Meanwhile, the assets are still toxic. It seems Obama has heard the call from the Onion:
Recession-Plagued Nation Demands New Bubble To Invest In
http://www.theonion.com/content/news/recession_plagued_nation_demands
March 23rd, 2009 at 2:10 pm
Oh come now Matt you damn well know it will be Hollywood Studio accounting rules.
March 23rd, 2009 at 2:20 pm
Contrary to what Geithner claims, there is a market for the toxic, ah, legacy, assets – it just won’t clear at high enough prices to make the banks solvent. The Geithner solution is to bridge that price gap with taxpayer $$$. No matter how hard he tries to spin, Geithner cannot escape this simple truth and neither can the taxpayers. It’s the original BushCo/Paulson TARP pig, but jazzed up with sophisticated sounding financial jargon and Byzantine dollar flows so this TARP pig can be smeared with lipstick
March 23rd, 2009 at 2:25 pm
This is hilarious. The plan is potentially so good for investors that everyone wants a cut. Meanwhile, the assets are still toxic. It seems Obama has heard the call from the Onion:
Too bad that was run last July when Bush was President.
Second, you do realize even in the loans program, your downside risk is losing everything you invest, right?
People don’t give a shit, they just like to bitch at Obama.
March 23rd, 2009 at 2:27 pm
you have a fact sheet? Can you share?
March 23rd, 2009 at 2:30 pm
Treasury has the fact sheet http://www.treas.gov/press/releases/tg65.htm
March 23rd, 2009 at 2:30 pm
Ok, scratch that. For anyone wondering, the fact sheet for Geithner’s plan is here.
March 23rd, 2009 at 2:33 pm
Contrary to what Geithner claims, there is a market for the toxic, ah, legacy, assets – it just won’t clear at high enough prices to make the banks solvent.
Why aren’t we hearing about the stress tests anymore? From either critics or supporters?
Ben Bernanke said on 60 Minutes that the stress tests were designed to see if the banks could survive in much, much harsher conditions than we’re currently experienced. That’s the last I heard about them.
I think Krugman is wrong in that as time goes by there will more support for bank nationalization/pre-privatization, if things don’t improve.
March 23rd, 2009 at 2:37 pm
I missed that line you cite in the Legacy Loans proposal. However, two things: First, I suspect that it is currently only open to qualified investors (rich people). Second, I don’t think there is anything comparable for the Legacy Securities proposal.
My guess is that the fund managers will raise money from their usual sources, which include rich people but not ordinary people. To get the latter in you would need a mutual fund or something that is allowed to take money from unqualified investors, which means the whole thing would be subject to SEC rules. There probably is a way to make it work, but it would probably take government endorsement or participation in some form.
March 23rd, 2009 at 2:40 pm
My prediction from my participation position as a taxpayer is that the firms that participate will turn these assets as quickly as they can get their investment back without regard to potential profits later they would have to split with me. Like the realtor who makes top dollar on their house by holding out for the right offer while advising “typical homeowner” to take the first contract that earns a decent commission, taxpayer interest is not uppermost in their minds. These assets are only worth much if held for years (if ever), not something investment firms are known for. Maybe Vanguard will set up an index fund to buy and hold to maturity.
March 23rd, 2009 at 2:46 pm
My prediction from my participation position as a taxpayer is that the firms that participate will turn these assets as quickly as they can get their investment back
But who will buy them, and at what price? They are still based on the toxic assets.
Clearly a second plan will be needed to make sure there is a market for the Geithner assets; perhaps with some government money?
March 23rd, 2009 at 3:10 pm
“My prediction from my participation position as a taxpayer is that the firms that participate will turn these assets as quickly as they can get their investment back without regard to potential profits later they would have to split with me.”
What are you talking about? All profits, if there are any, will be split 50-50 between the government and the private investors. That’s why it’s called a partnership.
March 23rd, 2009 at 3:42 pm
As has been obliquely noted by several comments (starting with #3), how can it be both a bad plan because the assets are worthless and the taxpayers’ contribution is going down the toilet, *and* a bad plan because the assets are valuable and the profits are going to be taken by a handful of plutocrats?
March 23rd, 2009 at 4:01 pm
together we pool ten dollars to purchase lottery tickets (me $1 and you $9) if we win I get half the money
March 23rd, 2009 at 6:24 pm
Mr Yglesias:
You err in your first paragraph. We must judge these plans by their ability to clean up the banking system. By “clean up” I don’t mean “increase the amount of money”, but the ability of regulators to determine the balance positions of those institutions, and the ability of the investing public to determine the health of those banks.
That is not recapitaliation. Recapitalization is simply pouring money in, without knowledge how much money is enough.
Only by setting prices for these assets, providing a market, then requiring federally regulated banks to be rid of these assets, can we move to a banking system we can trust.
Trust is confidence.
And only with confidence will we have a recovery.
Recapitaliation, we’ve already seen, doesn’t lead to confidence.
March 23rd, 2009 at 6:25 pm
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March 23rd, 2009 at 6:29 pm
if you wish to participate send my your $9 and I will let you know if we win i will take the cost of sending you a cashiers check out of my half just so every thing is fair
March 23rd, 2009 at 6:52 pm
Because of the nature of these deals (long-term buy-and-hold; non-equities based) a lot of the funds lining up for these deals will be pension managers, meaning the public is already involved in the upside. (FYI: I know several mgrs who plan to bid on these assets, and they’re *all* pension mgrs, although undoubtedly many big HNW hedge funds will get into the game also.)
March 23rd, 2009 at 8:16 pm
I don’t know anything about this world but, non-recourse or not, isn’t the issue inflation?
March 23rd, 2009 at 8:20 pm
In the parlance of Wall St. “individual investors” are those named on Fortune Magazine lists. You and I? We are known as marks.
March 23rd, 2009 at 8:38 pm
Would I have to have good credit? And would they break my thumbs if I default?
March 23rd, 2009 at 9:04 pm
The first thing I read this morning about it on Bloomberg was that
March 23rd, 2009 at 9:27 pm
That should be translated:
“BlackRock will create mutual funds so that the rich can get their snouts in this trough as quickly as possible.”
It’s an “everyone gains” proposal. Oh, unless the assets are shit. Then the taxpayer loses.
March 24th, 2009 at 12:18 am
I’m not sure this ever happens. To open this thing up to the public, you would have to disclose exactly what assets are being purchased from the banks and the exact composition of those assets. But remember, part of the problem with some of these assets like the CDOs is that they are so complex that no one actually knows what precisely is in them or how to accurately forecast the cash flows from what could potentially be hundreds of sources. I’m not sure there will be any way to really analyze or confirm the exact contents of a lot of these instruments—which is part of the reason why the market currently doesn’t buy their book valuations—which might dampen retail participation even though Uncle Sam is making up the large portion of the bid-ask spread.
And besides, I don’t think the Treasury really wants taxpayers involved. If this thing goes south (as I think is likely because I think these assets are permanently impaired) the fall out might be more severe if a ton of individual investors got burned as opposed to the electorate writ large.
My two cents.
March 24th, 2009 at 8:54 am
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March 24th, 2009 at 9:07 am
I agree with buying propecia, but only if you are just starting to go bald. Wait too long, and it won’t have the same effect. My brother has hair now and I do not. He took propecia at a young age. It’s kinda like TARP, shoulda been more front-loaded with teh stimulus.
March 24th, 2009 at 9:08 am
er, not TARP. the stim bill. you knew that.
March 24th, 2009 at 1:19 pm
The BaselineScenario guys write a piece in the LA Times, and this bit goes to what my earlier comment was saying: it will be impossible for investors to trust with any degree of certainty what is in thse assets or how much of them remain on the bank balance sheets. This could blow up the whole plan. I don’t have to tell anyone here that avoiding this problem is one of the key benefits of receivership.
Read the whole thing here:
http://www.latimes.com/news/opinion/commentary/la-oe-johnsonkwak24-2009mar24,0,1446613.story