In The Blogs

Gaming Geithner

| Fri Apr. 3, 2009 9:23 AM PDT

Via the Wonk Room, the Financial Times reports on plans for banks to game Tim Geithner's toxic waste plan by bidding on each other's assets:

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 (£680bn) plan to revive the financial system.

....Wall Street executives argue that banks’ asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets. But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity — such as pension funds — are the same entities that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.

Italics mine. Look: I'm no financial rocket scientist, but I'm at least a halfway reasonable judge of bullshit. Are the Treasury boffins seriously suggesting that the aim of their plan is merely to "rearrange" the assets from one distressed bank to another? Someone might want to take a wee look at public opinion on this before they put their feet any further in their mouths trying to explain why this is such a great idea. It's not gonna fly, folks.

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Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

the purpose is to rearrange

Submitted by dis (not verified) on Fri Apr. 3, 2009 9:43 AM PDT.

the purpose is to rearrange after establishing inflated prices so that banks can claim strong balance sheets

A: I'll buy that toxic asset

Submitted by Snarki, child of Loki (not verified) on Fri Apr. 3, 2009 9:57 AM PDT.

A: I'll buy that toxic asset for $1k! B: I'll buy it back for $2k! A: I'll buy it back for $3k! B: I'll buy it back for $4k! oh, yeah...what could possibly go wrong with this plan?

Meant to Fail?

Submitted by AndrewBW on Fri Apr. 3, 2009 10:36 AM PDT.

See also Yves Smith at Naked Capitqalism, "Treasury Trying to Defend Bank Gaming of Public-Private Partnership" (http://www.nakedcapitalism.com/2009/04/treasury-trying-to-defend-bank-ga...).

flexible capital ratios

Submitted by g. powell on Fri Apr. 3, 2009 11:22 AM PDT.

A little off topic, but the Financial Stability Forum is recommending countercyclical capital ratios be implemented to moderate economic activity. http://www.fsforum.org/press/pr_090402a.pdf

Deckchairs

Submitted by Anonymous (not verified) on Fri Apr. 3, 2009 2:41 PM PDT.

chop chop chop people, these deckchairs ain't gonna rearrange themselfs! Hey why is everyone strapping on their golden parachutes and running for the life rafts? It's like these people don't even realize that the weather much too icey to leave the deckchairs out like this.

Deckchairs

Submitted by Anonymous (not verified) on Fri Apr. 3, 2009 2:43 PM PDT.

"It's not gonna fly,

Submitted by Gary Sugar (not verified) on Fri Apr. 3, 2009 2:43 PM PDT.

"It's not gonna fly, folks." So they'll find another way to cheat. That's what they do. Who could have predicted...

"It's not gonna fly, folks."

Submitted by Gary Sugar (not verified) on Fri Apr. 3, 2009 2:46 PM PDT.

"It's not gonna fly, folks." - Kevin So they'll find another way to cheat. That's what they do. Who could have predicted...

Hurry everyone, the

Submitted by rt (not verified) on Fri Apr. 3, 2009 2:47 PM PDT.

Hurry everyone, the deckxhairs ain't gonna rearrange themselfs! Don't you guys realize the weather is much to icey to just leave these things out here?

"So they'll find another way

Submitted by Jay (not verified) on Sat Apr. 4, 2009 6:21 PM PDT.

"So they'll find another way to cheat. That's what they do." By cheat you mean play by the poorly thought out rules created by the political class? Although this behavior is a feature, not a bug of plan. See all the banks have to do is agree to swaps illiquid assets with one another on a one to one basis. The assets will then have no default risk, because they are backed with the full faith of the U.S. government. Rather than directing your anger at those that play by the rules maybe we should be pissed at Washington. This is the "Change" you can believe in. "The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. "

Jay - the "Man of System" didn't lobby for exactly these rules?

Submitted by Dollared (not verified) on Mon Apr. 6, 2009 9:09 AM PDT.

You gotta be a real government hater - and apologist for the slimeballs who have stolen trilions, and are preparing to steal trillions more - to say that it is the government's fault that these guys are going to cheat again. We don't blame the government when recidivist burglars do it again. These guys are only different in that their families were stable enough that their daddies taught them that going to the best schools and winning at lacrosse were the tickets to being able to take whatever they wanted. And then their daddies taught them exactly how to game the system. It's a sign of progress, I guess, that now some of them learn from their mommies as well. Theives are theives - a strong government might slow them down, but they bought off that option over the last 30 years. (when was the last time we saw an insider trading conviction?)