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Archive for the ‘Geithner’ Category

“Even God Himself could not sink the Titanic.”

Tim Geithner must think we’re all a bunch of idiots. The Federal Reserve is buying 80% of treasuries, the debt has exploded, and our unfunded obligations going forward are north of $65 Trillion (i.e., 1X our entire national wealth), and he reassures us that America will never lose its AAA rating?!?  This, by the way, is this lightweight’s typical mode of reasoning:  assertion without evidence.  He’s not even doing a good job of buying time for the Ponzi Schemers whom he has served his entire career.

We are in major trouble.  Mainstream Wall Street figures are talking about heading to the hills, buying survival farms, and the like.  The debt explosion makes this “recession” different from its predecessors. We are in the middle of a great reckoning, and Tim Geithner wants us to forget this fact and continue business as usual which he pursued at the New York Fed.  But this too will end thanks to the globalism we were told would solve all of our problems.  Our international counterparties–especially the Chinese–are our government’s lifeline.  The Chinese are a creditor, and like the British who put 19th Century Egypt into receivership, they will soon decide what we do, what we spend, how much we can buy or sell, and all sorts of other incidents of sovereignty. And even that probably won’t work in the end, because the Chinese, like us, are also a credit-addicted behemoth, tempest-tossed by the instability of a worldwide fiat currency meltdown.

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Not only did the bailout of AIG help stem losses at Goldman Sachs, but it let them avoid all housing related losses from its huge MBS exposure by subsidizing their credit default swaps with AIG–in effect, in surance policies–dollar for dollar.  Not a penny in losses.  And, worse, Tim Geithner, working then as NY Fed Chairman in late 2008, colluded with them to hide this scandalous situation from the public:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.”

Isn’t this amazing?  This is the worst kind of crony capitalism.  Mexico and Indonesia could do no worse.  What free market principle says a big risk-taking investment bank can never book a loss?  What principle says this institution, which never was FDIC insured, was not a money market, and was known for its knee-deep exposure to housing, could avoid all housing-related losses as millions of Americans struggle to pay down their upside down housing notes or get walloped with the credit devastation of a foreclosure or bankruptcy?

The only thing saving Wall Street from a pitchfork rebellion by the middle and lower classes is the byzantine confusion created by “financial engineering.”  The principle here is no principle at all:  the primitive idea that connected super-big and super-rich firms and people can fleece us, pass their losses onto the public, and confuse and bribe our politicians into doing whatever they want.

Goldman Sachs is a dangerous, anti-democratic and anti-free market behemoth.  It serves one purpose:  enriching its senior management at the expense of the public, the government, and even its own shareholders.  And Tim Geithner is a weak-willed and mealy-mouthed moron, whom it should be increasingly obvious was suggested as treasury secretary by the powers that be because he was a useful idiot and strawman who would do Wall Street’s bidding at the expense of the general public.

Goldman Sachs should be liquidated, the personal assets of each of its managers and directors for the last ten years clawed back into a fund, and this sum should be distributed pro rata to every American taxpayer.  Unjust you say?  Well, no more unjust than the crony capitalist principle that lets them do this in reverse.

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There are probably a million ways to game the Geithner bailout plan, just as the TARP has already led to various unintended consequences, such as the continued provision of generous bonuses by AIG and the Merrill Lynch purchase by BofA. James Galbraith has a good article on this today.

The whole premise of the bailout is that these “toxic” assets comprised of various tranches of bonds secured by mortgages are worth a lot more than the market will presently pay for them.  Is this true?  Yes, their cash flows are in order for now, but there are impending waves of foreclosures and defaults as these loans reset in the next few years. 

The Geithner plan amounts to a bribe to investors.  Invest 7.5 cents, TARP will invest 7.5 cents, and the remaining 85 cents will come from the FDIC. Yes, that FDIC, it being the most important component of stability in our banking system that is supposed to be rock solid in all circumstances. If things go wrong, the 15 cents from the private investors and the TARP are wiped out in the manner of equity, but the FDIC has no recourse other than managing, foreclosing, and then unloading these properties. The FDIC will be in the position of foreclosing upon hapless homeowners, but it will face obvious political pressures to play ball with doomed workouts to help the unlucky. We’ll get to see how good of a landlord Obama is when his role is not “community organizin'” but salvaging value from broke people for the FDIC. My guess: not a very good one.

Under the Geithner plan, banks will sell their “toxic” assets at whatever price they want. Under this scheme, the hope is that somewhere above today’s 30 cents or less in value. The idea is that they’re “really” worth somewhere closer to 60 or 70 cents on the dollar, and that having the banks now take 70 cent (as opposed to 30 cent) losses would be an unnecessary and short-sighted exercise with systemic consequences.

But banks and investors like to make money and avoid losses. That’s in their blood. Why wouldn’t a bank take 7.5 cents of its own deposits to buy certain assets from itself at the requisite 60 or 70 cents, in spite of the fact though the assets are in fact only worth 30 cents, when 85% of the bid price is nonrecouse pain absorbed by the FDIC?  I mean, why not bid 100% if it’s just a question of minimizing losses. That way they can still reduce their collective exposure to 10% or less of what it was, because they would take no losses now and push them off into the future. At most, the gap of 70 cents from actual (i.e., 30 cents) to the $1.00 par value would only cost 7.5 cents to wipe out, and the cost of 92.5% of that shift would be borne on a nonrecouse basis by the FDIC with the remainder by the TARP? Why wouldn’t bank A and bank B do this for one another on a handshake if the self-purchase was too unseemly or prohibited?  What rules would prevent that?

Tim Geithner’s and Obama’s bullishness in general and their talk about the real value of the assets ignores all the impending defaults on the underlying mortgages.  As I already stated, they are probably worth 30 cents at most, and that generous estimate too depends on the continued vitality of home buyers on the scene who will set the market price for the various overpriced and oversupplied 2004-2006 homes. This whole plan shifts the worst banks’ risks on to the most responsible banks and ultimately the taxpayers by giving the FDIC and the Treasury the bill: specifically, at least 92.5 cents of exposure on this plan for every dollar of losses avoided by the banks. Who knew Obama would become the worst banks’ best friend?

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