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The Spectacle Blog
This morning, the U.S. Treasury unveiled its new plan to rescue the financial system by partnering with the private investors to purchase up to $1 trillion of “toxic assets” (now called “legacy loans” and “legacy securities”). The problem I see with the plan is that with the Treasury, FDIC, and Fed heavily subsidizing risk-taking by private investors, it creates a moral hazard problem.
The plan is broken up into two programs. Under the first program, private investors will bid on toxic loans through an auction process. In the example that the U.S. Treasury department uses, a bank has a pool of $100 face value residential mortgages, an auction is held, and the highest bidder is $84. The FDIC would provide guarantees $72 of the financing, while the Treasury and private investors each pitch in $6. In other words, taxpayers are on the hook for more than 90% of the investment if it goes sour. Not only does this mean that private investors could end up up making careless decisions, but knowing that they are bidding with other people’s money, it could artificially drive up asset prices in the auction process. Under the second program, private fund managers raise money to purchase toxic securities and that investment gets matched by Treasury money. On a theoretical $100 private investment, Treasury will pitch in up to $300, bringing the total available for purchasing securities to $400.
The one area that isn’t clear to me right now is what kind of upside U.S. taxpayers are getting for taking on a majority of the risk. This program has all the makings of welfare for wealthy hedge fund managers.
Either way, the market seems pleased with the plan for now. As I write, the Dow is up 262 points, which will probably give Tim Geithner a reprieve for the foreseeable future.
View all comments (10) | Leave a comment
More Blog Posts by Philip Klein
http://spectator.org/blog/2009/03/23/the-new-plan
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Pingback| 3.23.09 @ 11:00AM
The New Plan — But As For Me links to this page. Here’s an excerpt:
Max| 3.23.09 @ 1:51PM
Love the fact that they are renaming toxic securities to give them a less negative connotation, thank you government. Saw a good video about toxic investments here, http://www.newsy.com/videos/getting_to_know_toxic_assets/
Bob| 3.23.09 @ 3:17PM
Geithner is a back room guy. It isn't just that there are now details on the plan. But as soon as the plan was announced, PIMCO, the largest and a very conservative bond investing firm, said they would partner on this. They are looking into a fund/ETF so everyone can participate. There is a lot of capital on the sidelines, and a fund/ETF will make this a huge success. They announced so soon after this announcement that it couldn't have been a coincidence. I believe Geithner obtained their agreement in advance and had this announcement timing planned. This is a very big deal.
Remember that there is a lot of capital on the sidelines and if pension funds participate (there is little downside), then everyone who has a pension benefits from this. Furthermore, the banks are beginning to look pretty good.
As I said a few weeks ago before this 20% market rise, I saw evidence of market capitulation. That looks pretty solid right. As far as expectations, the market is a leading indicator so it will be 6-9 months before we start seeing a GDP turnaround.
If this all occurs, and GDP starts to grow again, the Obama will win the next election by a landslide. All of the Republicans who blamed Obama for the market decline must now give him credit for the market increase, right? It will be interesting to see how many of you are intellectually honest on this subject. My guess is that the anti-intellectual right wing whackos will not give any credit to the administration. On second thought, that's not a guess.
Now, there still is a fiscally conservative alternative plan out there addressing health care, education, immigration, and revising the tax code. We'll see if any of our Republican leaders will present an alternative or will they just say no again.
Reggie | 3.23.09 @ 5:23PM
One more example of how the government could just care less about how they spend taxpayer dollars. I wish someone would get on the Senate and Congress to pay taxes, so they would have their money invested in these horrid ideas instead of just playing with our money like it doesn't matter.
Bill Bailey| 3.23.09 @ 6:45PM
The plan is doomed. Just more of the same old crap.
Gene| 3.23.09 @ 10:47PM
BOB,,I sure hope you are right , but guess who is left holding the if it goes sour,yep you are right again , the taxpayer,you and I, and bythe how does the trillion the fed printed up last friday and gave to the treasury fit in to all of this,does that put my great grandchildren another trillion in debt??
Pingback| 3.24.09 @ 7:49AM
Commentary » Blog Archive » Flotsam and Jetsam links to this page. Here’s an excerpt: