Right Wing Nut House



Filed under: Bailout, Financial Crisis, Politics — Rick Moran @ 10:34 am

With all the brouhaha over the stimulus bill, a far more important plan is being formulated under most of the media’s radar by the Obama administration that will radically alter the banking system in the country while perhaps staving off a depression.

The first $350 billion of the TARP program has done absolutely nothing to improve the economy as banks have hoarded the cash rather than even slightly freeing up credit that would help get the economy moving again.

The problem is that all those mortgage backed securities and credit derivatives that grew out of the housing boom have lost so much value no one knows what - if anything - they are worth. So the Treasury Department has hit upon a risky, radical idea that would take those assets off the hands of banks and in one fell swoop, put their balance sheets in the black.

That is just one of the ideas that Mr. Geithner has come up with to deal with the potential catastrophe that is staring us in the face; bank failures in the thousands that would very likely pull the economy into the depths of a depression.

The risk, many economists say, is enormous.

 ’Bad Bank’: The prospects for the creation of a so-called “bad bank” have gone back and forth in recent days. A government-funded “bad bank” would buy toxic assets from bank balance sheets. But there are many hurdles.

 For example, how much would the government pay for those assets — pay too much, the taxpayer takes a hit; pay too little, and the banks do. Plus, many analysts believe that to be truly effective, a “bad bank” would need far more money than is available.

 However, the Wall Street Journal reported Saturday that Treasury may use private sector money for the bulk of the financing. And speaking on “Fox News Sunday”, Summers said Geithner believes he can bring “substantial private capital” to the plan.

The government would also have to purchase shares in the bank:

 Many believed that the bad bank model would have required far more resources than presently available under the Troubled Asset Relief Program, or TARP.

 In order for the bad bank plan to work successfully, the government would not only need to price and buy the bad paper, a difficult task in itself, but it would have to make large purchases of common stock to make up for the markdowns of the toxic paper on bank balance sheets.

This seems to be the major hurdle for newly installed Treasury Secretary Timothy Geithner and Senior Economic Adviser Larry Summers.

 Buying so much stock also could trigger a de facto nationalization of the banks.

There is also a plan to insure a bank’s assets:

Insuring assets: The Treasury Department has already done this for Citigroup and Bank of America. Here’s how the Citi arrangement — announced last fall - works, for example: Citi is on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. Citi covers 10% of losses above that amount, with the government shouldering the rest.

In a bailout scheme announced last month, the United Kingdom used the same approach.

Such a plan helps ease the pain on banks, but will not force the banks to fully recognize the extent to which assets their holding have lost value — an important step in the recovery process.

Or, the Administration may simply use the $350 billion to bail out banks on a case by case basis:More bank injections: This idea isn’t dead yet. Banks still need capital, and TARP fund still has some cash. Treasury may make more direct investments, though they would surely come with more strings attached, such as a requirement that banks boost lending, for example.

How about some really bitter medicine for the patient? Some debt/equity swaps:

Debt/equity swaps: Geithner could also require that debt holders in banks needing assistance “swap” their stake for stock. Existing shareholders would be wiped out and current creditors would give up some of their debt claims in exchange for ownership of the restructured firm. In addition to being fairer, swapping debt for equity would reduce the amount of debt weighing on the economy.

Now for the scary part; many economists don’t believe that any of this will work, that somehow those toxic assets are going to have to be bought up and removed from the balance sheets of banks. The cost will be $3-4 trillion (some believe that it may be double that figure).

The point is, the banking crisis is far from over and may yet take us down unless something is done. One thing is for sure, that $350 billion in TARP money isn’t enough. Eventually, Geithner is going to have to come before Congress and present a bill for saving the banks.

At that point, we may have no choice but to bite the bullet and mortgage the future in order to save it.


  1. Rick,
    Since you are a self described “Right wing nut”, why don’t you prescribe the cure of the market? Let the insolvent banks go broke. Let the ones who made better bets expand.
    How can a conservative say that spending more is the way to cure the problem of too much debt?
    Why do you want to amplify and transfer this problem to your children, instead of taking your medicine now?
    A decade or more of bad polices are now coming home to roost.
    Does the TARP program fit into your idea of self relience and fiscal responsibility?

    Because if we “let them go broke” they would take thousands of other banks with them. Should they “take their medicine” too? It would be an irresponsible government that sat by and watched the country dive into a depression we would be a decade or more - if ever - recovering from. The “market solution” in this case would mean the literal destruction of the American banking system. It simply cannot be allowed which is why it is probable that we will spend trillions to try to stave of disaster. Don’t like it but the alternative is worse.


    Comment by Farmer Don — 2/8/2009 @ 1:25 pm

  2. Rick,
    I was looking forward to the conclusion of your essays on the future of conservatism - so, how should conservatives deal with the current problem that the banks have, given the way the country has changed as you tried to describe it in your previous posts ?

    I would say that the more banks try to avoid the pain of actually figuring out what their losses are, what their assets are truly worth (which i think they know but wont acknowledge) the more they are digging themselves into a very inflexible situation.

    I dont quite understand/know this - How much of these bank bad assets affect the average bank customer’s deposits/holdings ? (i.e. assuming that the FDIC actually works)

    My guess is that banks have restrictions/regulations on how much of their account holders money they can use to make investments - So the bad assets of the banks should not hurt the average customer a whole lot but mostly the bank’s profit margin. Is this true ?

    If it is true, then the banks have to take the hit. If it isnt and customer deposits are seriously endangered then nationalization is inevitable.

    So, the question is - what approach should conservatives take to this problem other than the idealogical one of taking responsibility for personal mistakes ( this attitude is so out of fashion now)

    Comment by Nagarajan Sivakumar — 2/8/2009 @ 1:25 pm

  3. Here’s an interesting take from a friend of mine. Basically, the problem isn’t mortgages or deposits, but wierd “financial instruments” that are so complex that nobody knows what they’re worth - if anything.

    This is why the “let ‘em all fail and start over” solution may be the only thing that has a hope of working.

    Here’s his post:


    Comment by Foobarista — 2/8/2009 @ 4:52 pm

  4. #3 What part of financial instruments don’t you understand? Here, let me help you.

    The problem with being oversold is that you can always get more oversold. So I wouldn’t be oversold, if I could help it. Of course, short sellers will arrange to borrow shares they consider overvalued and then may or may not sell them. If the price drops, they would normally repurchase shares, return them and pocket the difference. However, they may just choose to exercise an option.

    Investors who believe the VIX is signaling a trading low will give a thumbs up to asset sales for re-pricing purposes. It does not mean a permanent signal to purchase derivatives, but could be a meaningful indication to stock up. What to stock up on is the question. This is not a reason to panic. Credit default swaps should pick up the losses.

    In order to insulate unprotected assets and capitalize on the chaos, a new CDS trading platform may be suggested and quickly instituted. This will regulate transparent pricing mechanisms inherent in the insolvency.

    Got it? Jeez, dude, it’s not that complicated.
    By the way, all this talk about catastrophe makes me want to crawl under my bed. I’ve got kids though, so I have to act calm and mature. What an actress I am becoming. Good thing we’ve got Rick to solve our problems or else I’d be a wreck.

    Comment by sara in va — 2/8/2009 @ 5:32 pm

  5. Foobarista,
    Thanks for posting the link that attempts to answer the question that I had about whether banks are going to value their assets.

    I could not understand most of it but what i could get is that financial institutions are hopelessly stuck in trying to figure out how much their assets are “truly” worth. Given the fact that the Government is going to throw atleast another 700 billion, they are probably waiting to see if they could get the Govt to buy their assets at the highest price possible.

    When they finally realize that they are not going to get the Govt to buy the toxic assets at the value they want, they may begin to act on their own.

    Comment by Nagarajan Sivakumar — 2/8/2009 @ 5:47 pm

  6. I believe nothing can be done to ameliorate the pain and suffering that is inherent in this economic mess. In fact I believe any further government action will actually accentuate it.

    An economy is like an ecosystem in that it responds to a complex feedback system, and a myriad of variables. The very idea that government has the “solution” is foolish to me.

    Which I suppose, goes to my objection to a government that’s the fixer. It’s not the idea that government cannot have a positive influence; it’s the idea that government has the solution.

    I would suggest the work of Volterra to you on this. Certainly government can mandate the numbers of supply and demand, but it cannot control the subsequent interactions.


    Comment by Allen — 2/8/2009 @ 8:28 pm

  7. Rick,
    It’s not that nobody knows what the MBS’s and the CDO’s are worth. On the contrary, everybody knows what they are worth. It is just that the people who made them do not like the going price, so they are refusing to sell the junk they made to anyone but the Federal government. Of course the “fire” sale price will eventually be set by the banks not the government.

    Yes, Virginia, I said EVERYBODY knows what this stuff is worth. Under Capitalism this financial garbage is worth what the market will bear. If nobody buys what is being sold, the price is
    lowered. If nobody buys what is being sold, lower the price again. Repeat this process until what is being sold is being purchased. IT IS SO SIMPLE. It is the IRON LAW of supply and demand. It’s called market forces, capitalism, the “invisible hand” allocating resources in the most efficient manner possible.

    The only real question is who will “take the haircut”. Will it be the 1% that has 19% of the taxable income. Or will it be the rest of us?

    You only get one guess.

    Comment by bsjones — 2/8/2009 @ 10:49 pm

  8. Foobarista,
    I followed the link and had a read.

    The one thing that struck me was this sentence:

    “Calling the market stupid is as productive as calling reality stupid, even though you could very well be correct.”

    I understood that to mean something like: “What’s done is done.”, “Water under the bridge.”, or even, “Let’s leave the past in the past.”.

    Why must we NEVER ask, “What went wrong? Why must we NEVER ask, “Who is responsible?” In other words, why must we NEVER ask for accountability?

    I think it is because everything that we have been told about how the market works is a lie. What if Wall Street is not composed of our brightest and most productive citizens taking huge risk for huge reward? What if Wall Street is composed of criminals involved in criminal acts that would make Vito Corleone blush.

    Sound accurate? How about this.

    What if OUR IDEOLOGY is an enabler to the many crime families that live on Wall Street?

    Go to hell you say? We don’t have an ideology you say. What we have are principles (but you bsjones are too dumb to tell the difference!). No, bs, you are wrong. WE HAVE A POLITICAL PHILOSOPHY!!! Reagan’s philosophy. “Government IS the problem.”

    O.K., I get it. We conservatives are never wrong. When government power grows our freedom is diminished. Expanding the scope of government reduces my power to choose etc…

    Just remember, the criminal elements in Wall Street want you to believe just that. It serves their interests to have government out of the way. Wall Street does not want any countervailing power to slow them down by asking questions or putting up barriers. They want to do what they want to do, when they want to do it, as often as they want to do it, regardless of the consequences for you and everyone you know. They would prefer you to think, “Where would America be without Wall Street?”

    Good question.

    Where would we be without Enron?
    Where would we be without Bernie Madoff?
    Where would we be without World com?
    Where would we be without Henry Paulson, Timothy Geitner, Robert Rubin and the genius of Allen Greenspan?

    (Don’t tell me these guys party affiliation. They belong to the party of ME. Don’t tell me these crooks are our government. They are the crooks who bought the government from BOTH PARTIES. Sadly, YOUR government was sold for the equivalent of a few freezers full of steak.)

    Of course, Wall Street must still have TARP. Just don’t ask them to forgo a bonus. They are our most productive citizens. Don’t believe me? Ask Neil Cavouto.

    Comment by bsjones — 2/9/2009 @ 1:46 am

  9. bsjones,
    kind of enjoyed your rant. I believe some of us were used by Wall Street as useful idiots “government is the problem” they shouted and turned to whole place in a gigantic casino. That has nothing to do with conservative principles but with greed and more greed. I still wonder where all the money is. However, I truly believe capitalism can’t work without vigorous government oversight. I didn’t always think so but current events show me that most humans will do a lot of things if they think they can get away with it. Regarding party affiliation; I never thought that had any bearing on moral conduct, no difference there.

    Comment by funny man — 2/10/2009 @ 11:42 am

  10. [...] Or, the Administration may simply use the $350 billion to bail out banks on a case by case basis:More bank injections: This idea isn’t dead yet. Banks still need capital, and TARP fund still has some cash. Treasury may make more direct …Continue Reading [...]

    Pingback by Auto Industry Bailout » Blog Archive » Right Wing Nut House » Bleak Choices Facing Geithner in Trying To … — 2/10/2009 @ 9:28 pm

  11. [...] some conservatives believe that the government handling of these troubled assets are necessary to solve the problem.  I have been tough on these conservatives in the past, and some of that has been vindicated.  [...]

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