Another Mile Down the Road
| Mon Mar. 23, 2009 9:54 PM PDT
Yesterday I wrote that one problem with nationalizing big financial corporations is that the government probably doesn't have the legal authority to do it even if it wants to. They can seize banks, but they can't necessarily seize all the other components of big financial institutions. The Washington Post reports that the White House is about to ask Congress to change that:
The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document
....Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.
The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.
If, several weeks ago, you had charged a task force with figuring out how to successfully nationalize a big bank, what do you think they'd say you had to do? Three things, at least: (1) you have to figure out a widely acceptable way to value the toxic assets on bank balance sheets, (2) you have to set up a fair and consistent test for evaluating bank solvency based on those values, and (3) you need to make sure you have the legal authority to take over a huge, multinational financial conglomerate in an orderly way. Is it just a coincidence that these are precisely the things Tim Geithner has set in motion over the past month? I wonder.
Advertisement
Advertisement
Comments
Thank you, thank you, thank
Submitted by Anonymous-ish (not verified) on Mon Mar. 23, 2009 10:13 PM PDT.
Thank you, thank you, thank you.
I came to this conclusion as well. Other than Ezra Klein, Barry Ritholz, and a couple of other bloggers obliquely hinting at this, *noone* else seems to get it.
It makes even more sense when you consider this WSJ article:
http://online.wsj.com/article/SB123785266231219605.html
It's clear from it that the Administration understands that the current management will have to be replaced. The story almost seems like a plant to smoothe the way and explain to the public why the changes were necessary.
The market blithely wanders on its merry way, unaware of the decapitations awaiting it around the corner.
Dick Morris has a variant of
Submitted by Anonymous-ish (not verified) on Mon Mar. 23, 2009 10:50 PM PDT.
Dick Morris has a variant of this on his mind:
http://mediamatters.org/countyfair/200903230043
Not sure the dots connect
Submitted by DevilDog on Tue Mar. 24, 2009 12:01 AM PDT.
Kevin, you make a compelling deduction, based on the three criteria you set forth. I'm not sure that others who know more than us (Krugman, Galbraith, Simon Johnson, Kenneth Rogoff, et al.) would agree with the way you frame it. But maybe you're right. Maybe everybody is all wrong about Mr. Geithner. Maybe he'll turn out to be a traitor to culture of Wall Street from whence he (and Larry Summers) came. Maybe.
Interesting
Submitted by J. Michael Neal on Tue Mar. 24, 2009 1:40 AM PDT.
I'm now fascinated to watch this, not only because I love finance, but also to watch the President. If this is, in fact, what the administration is doing, Obama has nerves of steel. He is doing all of these things in the right order, but it wasn't easy. He exposed himself to a lot of criticism from natural allies along the way, some of which his been extremely nasty. Again, if this is what he's doing, that takes guts. It will be interesting to see if those whole lambasted him own up to what happened.
Also, this is where the rubber meets the road for Congress. I'm sticking with my prediction that it's going to be near impossible to get a good nationalization bill through. If they won't do it, that's where the blame goes.
Sure hope you're right
Submitted by SRW1 (not verified) on Tue Mar. 24, 2009 3:06 AM PDT.
Kevin, I sure hope that you're right and that the road isn't too long for this bus to run out of gas.
The alternative explanation, i.e. that these three things are not connected and that the administration is just throwing some bones to the general public is too freaking dispiriting.
Maybe Geithner really will do the right thing and just needs some ambiguity while he puts the pieces in place. Maybe a positive outcome for the stress tests of the big banks is not a foregone conclusion, maybe the eventual goal of Geithner's 'legacy' assets plan is not merely to save Wall Street, and maybe the administration is not considering to ask Congress for authority just because they are smart enough to realize that they might need it in case their attempt to save Wall Street fails.
Kudos to Obama, Geithner and Summers if what they are up to really is to systematically line up the means to properly clean up the financial mess. Especially Geithner would be owed a lot of apologies for the abuse that is currently a dime a dozen.
DeLong tones down his support?
Submitted by SRW1 (not verified) on Tue Mar. 24, 2009 3:59 PM PDT.
Well, Kevin, I'd see the chances that you might be right on the overall approach of team Obama/Geithner as having increased quite a bit. The NYT has an interesting exchange* between Krugman and Brad DeLong and DeLong's position is distinctly more cautious than what he wrote in the 'The Geithner Plan FAQ' on his web side.
In particular when he formulates in his response to Krugman:
And I suspect that in the end we will be driven down the road to some form of bank nationalization — and if that is where we are going Paul Krugman is correct to say that it is better to get there sooner rather than later. But unless Paul Krugman has 60 Senate votes in his back pocket, we cannot get there now. And the Geithner Plan seems to me to be legitimate and useful way to spend $100 billion of TARP money to improve — albeit not fix — the situation.
That sure sounds like DeLong is prepared to concede that Public-Private Investment Funds are not the eventual solution but rather a necessary stage on the road to get to that goal.
I'd repeat though: Hopefully this bus will not run out of gas.
* http://roomfordebate.blogs.nytimes.com/2009/03/24/will-the-geithner-plan...
Assumption of debt
Submitted by Neal (not verified) on Tue Mar. 24, 2009 5:02 AM PDT.
....... (1) you have to figure out a widely acceptable way to value the toxic assets on bank balance sheets, (2) you have to set up a fair and consistent test for evaluating bank solvency based on those values, and (3) you need to make sure you have the legal authority to take over a huge, multinational financial conglomerate in an orderly way.....
All that has been tossed out the window yesterday. 1) The Geithner plan values the assets at whatever price a hedge fund manager decides it is, 2) the banks are solvent because the hedge fund gets the taxpayer to buy the assets at an inflated amount so the banks immediately trade trash for cash, and 3) you have no argument for takeover because the banks are now flush with taxpayer cash.
Problem solved for today.
The Geithner plan is little more than a fig leaf for giving cash for trash---taxpayer money for "toxic" assets.
There are far too many parties out there that are willing to sacrifice a few billion dollars up front to bail out the big banks almost totally free and clear with public money. Besides, in the end, the private parties ultimately hold no risk.
Even Pimco holds enough bank bonds to throw a few billion into a fund to make the banks whole and rescue his bank investments.
I'd be really surprised if
Submitted by nepeta on Tue Mar. 24, 2009 5:13 AM PDT.
I'd be really surprised if Geithner turns out to be an angel. If you want to gauge your sentiment against his words, he'll be testifying before the House Finance Cmte. at 10AM this morning (C-span3).
Thanks again
Submitted by Brian O (not verified) on Tue Mar. 24, 2009 5:58 AM PDT.
Kevin - you're doing some great commentary on this topic. You've had the patience to let things unfold (over the course of four whole days!) without immediately jumping on the "Krugman says we're all going to die" bandwagon. And now it appears the plan coming from Treasury and gang is actually well thought out and thorough, clearing what garbage it can from the market while retaining the threat of further action if the banks sit it out. It might still not work, but here's to the lost art of appreciating nuance. Ah, sweet nuance.
Non-Bank
Submitted by Palooza (not verified) on Tue Mar. 24, 2009 7:12 AM PDT.
Kevin, I think you are misreading the article (and Geitner's plan). They are talking about getting the power to seize "non-bank" companies:
The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies...
So that would actually not include BofA, Citi, GS... etc. Bad misreading on that one.
Wrong
Submitted by J. Michael Neal on Tue Mar. 24, 2009 11:42 AM PDT.
Being able to seize Citi, BoA, and so on is exactly what this would do. Once again, they are, for the most part, not depository banks. In this sense, they are not "banks" in the sense that the government has the authority to seize them. That power is reserved for what is only a small part of what we call the banking sector.
There is no #1. Pricing
Submitted by smoke & mirrors (not verified) on Tue Mar. 24, 2009 8:10 AM PDT.
There is no #1. Pricing only happens on assets the banks want to sell. Then the Treasury plan systematically biases the price upwards.
After watching two hours of
Submitted by nepeta on Tue Mar. 24, 2009 9:53 AM PDT.
After watching two hours of Geithner and Bernanke talking at the House hearing, I gotta say I came away basically trusting both of them. An about face for me. I see why Obama trusts and likes Geithner. Both talked in detail about the government loans being paid back with profit to the taxpayer and protected with collatoral and other kinds of security. Am I being too gullible? Anyway, interesting testimony hitting most of the current talking points, including regulatory reform and Geithner's new call for a way to take a non-bank company into receivership. He said that AIG would have been a lot easier to handle if that law were in place today. Plenty of comedic entertainment offered by Republican members in their questions. Doofuses. Or is that doofi?
Stupidity abounds
Submitted by Ex Nihlo (not verified) on Tue Mar. 24, 2009 4:02 PM PDT.
I believe that authorizing the Federal Reserve, (a private enterprise authorized by the United States to Issue currency) to seize more companies serves the following purposes:
1) Allow the FED, politicians, and treasury to widen their search for any insolvent or struggling companies to be scooped up in the TARP net.
2) Bring pressure to bear against these companies, that while may not yet be insolvent are facing difficulties, to accept government funds (Hey its happened before).
3) Allow the shareholders of the Federal Reserve Bank to purchase these assets and stick the taxpayer with the bill.
Summary, we, the taxpayers, are getting screwed by both our republican, democratic, and independent representatives. The clear course of action is to call, write, and/or e-mail your senator or representative to express your displeasure. Let these companies fail, there is a clearly defined procedure, why the hell should we pay for their incompetence?
Post new comment
MoJo Comments: Send Us Your Feedback
We changed our spam software to better filter comments. Should you encounter any issues, please let us know.
