No Plan B - "Cash For Trash" = Another Taxpayer Bailout/Gaming Geithner's Plan

If progressives haven't yet sussed out Barack Obama's hardline centrist ideology the Geithner version of Hank Paulson's "cash for trash" toxic asset bailout should make it abundantly clear; fix this momentary glitch in a perfectly acceptable financial "engine" with as much taxpayer debt as needed and move on, preferably into mortgage refinancing, and let the housing bubble re-inflate! If this doesn't work, then poof! we'll create another trillion out of nothing and try something else! Even if Geithner's hedge-fund enrichment program is on the money, the problem of scale remains; AIG alone still has 1.6 trillion of unsecured debt while TALF is only budgeted out to $500 billion, with an option for 1 trill.

In a March 24 column for Vox EU, economist Jeffery Sachs lambasted the FDIC "subsidy" that will be built into toxic asset purchases:

The investors will bid substantially more ...(than face value)... because of the massive subsidy implicit in the FDIC loan. The FDIC is giving a "heads you win, tails the taxpayer loses" offer to the private investors. Specifically, the FDIC is lending money at a low interest rate and on a non-recourse basis even though the FDIC is likely to experience a massive default on its loans to the investment funds. ... In essence, the FDIC is transferring billions of dollars of taxpayer wealth to the banks.
Don't think this "nuance" has escaped Big Finance. On thursday the Wall Street Journal reported the curious phenomenon of Citigroup and Bank of America buying up big-time "toxic sludge" off the secondary markets. With FDIC asset price inflation guaranteed, Citi and BofA are just booking first-class passage on the PPIP gravy train. What suckers these taxpayers be!
Of course the bottom line is WILL PPIP loosen credit and restore lending? Economist James Galbraith doesn't think so. In his superb March 23rd article in the Washington Monthly, Mr. Galbraith is direct:
... The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed specualtion in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?
This kind of straight talk is verboten in the MSM, even for upscale liberal platforms like The New Yorker, where inferring that Geithner so far seems intent on saving Big Finance from any undue hardship at taxpayers' expense is "paranoid politics" according to George Packer. Your Humble Dissembler's assessment is if it looks like an asset-price-inflated FDIC-facilitated taxpayer bailout you can probably dispense with "smells like" and "tastes like".

AIG - Necessary Bailout Or "PASS-THRU" Scam?

Now that the smoke is cleared, the "shock" wearing off of the mid-September meltdown of the financial industry (alleviated by heroic, if painful 'bailouts') to the point where informed people can analyze actions and consequences, it's painfully clear that the initial Paulson-Bernanke TARP bailouts where skewed to the will of an ultra-insider Fed-Goldman-Sachs clique. In retrospect Goldman seems to be on 3 sides of the bailouts at once, as adviser (Blankfein was allowed to oversee the negotiations which produced the initial AIG package), receiver of bailout funds, of course, and the recently revealed $12 billion counterparty paid off by AIG. Wow, GS, what's in your wallet? Oh, the President, the Treasury Secretary, the Fed Chairman, etc., etc.
My big question is since we now come to own 80% of it already, what if the government would have nationalized AIG? No "bonuses" controversy to obscure the real issue of tens of billions of dollars "passing through " AIG on their way to Societe' Generale, Deutsch Bank, Goldman, UBS (where the 'architect', Phil Gramm resides), and many more. Of course, none of these charity cases were paying taxes; the IRS during the Bush years would never prosecute them. And if AIG was in Federal receivership, the counterparties wouldn't get 100 cents on the dollar either.
This all goes round and round and costs the taxpayers more and more money with an ever-expanding bread line of "too big to fail" debtors. With the Fed now devoted to creating trillions out of thin air to single-handedly (no risk to investors) revive credit and lending, "pass-thru"gate probably won't have much of a shelf life; AIG's initial TARP money is long gone, and baring incredibly progressive "clawback" legislation that demands retroactive taxes on counterparties in the end it's just more of a tax burden on our grandkids.

Fed Creates $1.2 Trillion To Re-Inflate The Housing Bubble

The Federal Reserve today announced it would purchase $750 billion worth of government-guaranteed mortgage-backed securities (on top of the $500 billion it already owns), plus $300 billion of longer-term Treasury securities over a 6-month period. This action is expected to exert downward pressure on interest rates of all types, especially mortgage rates. Calculated Risk quotes David Greenlaw of Morgan Stanley in the March 18th Wall Street Journal:
...."The Fed's annoucement signals a clear intent to continue to drive mortagae rates lower and we expect them to meet this objective ..... (I)f the Fed brings 30-year fixed-rate mortgages to 4.5% and all homeowners are able (to) refi, the aggregate permanent cash-flow savings would be on the order of $200 billion/year."
Aside from the fact that not everyone can "refi" (obnoxious term) this seems like a transparent attempt to re-inflate the housing bubble. If a great majority of homeowners can refinance at 4.5%, it means taking on more personal long-term debt (albeit at a great rate!). Something tells me that if the public thinks the recession is easing, folks will take on even more credit-card debt, too. Any sane person can tell you that sooner or later, debt is either written-off or unsustainable. What'll it be, America?

The Worst Person In The World - In Perpetuity

Before we reveal our candidate for eternal damnation, a few thoughts about AIG and their indefensibly clueless decision to follow legal protocol and award millions in bonuses to the key players in their London "financial products" division:
1) As Gretchen Morgenson so aptly described today on Fresh Air (D.O.E. has a love/hate relationship with NPR) if the economy doesn't improve pronto we may have to give EVEN MORE MONEY to AIG, due to maturing credit-default swaps. Wether the American taxpayer then collectively storms the castle, torches and pitchforks in hand, is open to question.
2) I love how Obama's condemnation of AIG's bonus giveaway made Larry Summers look like such a pompous asshole for the remarks he made about "America, a nation of laws" and "the sanctity of contracts" on the Sunday pundit gab-fests. I predict both Summers and Geithner will be millstones around Barry's neck 'till he throws 'em overboard!
3) Dr. Doom has spoken! On Saturday uber-heavyweight economist Nouriel Roubini referred to last week's market "rally" as a "dead cat bounce", nothing to get your assets out of T-bills for.

And now, D.O.E. proudly nominates Joesph Cassano, president of AIG Financial Products, as the Devil himself. Back when housing prices were eternally on the rise and AIG's London affiliate was insuring Mortgage-Backed Securities to the tune of, oh, 400 times the net worth of AIG itself, Mr. Cassano was receiving a million-dollar-a-month bonus. Good thing, too, because when the criminal and civil lawsuits come rollin' in, Super Joe will have the best legal representation on Planet Earth. May you be eaten by dogs.

Whistling Past The Graveyard, Part 2/Bankers Want It Both Ways

The run of the "mini-bulls" continues! For the week, the NYSE was up 9% to a "startling" 7223.98 (James Glassmer, author of Dow 36,000, MUST be feeling vindicated) as investors rejoiced over a coal slurry of positive developments:
1) Instead of crashing, GE was only downgraded to AA status, due to worries over questionable investment decisions by GE Capital.
2) Warren Buffet's company was downgraded to AA. That'll show him for daring to question the value of deregulating credit-derivatives! The nerve of some people!
3) Larry (the "Oracle") Summers was prosletyzing at the Brookings Institution yesterday, saying all is nearly well, Tim Geithner knows what he's doing, the crisis is so complex mere mortals can't fathom it, while refusing to answer questions about temporary nationalization of the zombies (wait for those "stress tests" oh ye of little knowledge).
4) New retail sales numbers fell less than anticipated.
5) The best for last: Investors are speculating that regulators will change mark-to-market accounting rules, which determine how companies value assets, and they're betting the SEC will reinstate rules intended to slow the short-selling of stocks. for more on this changing-the-rules-to-please-the-players paradigm, we turn to Floyd Norris of the New York Times:
.... (T)he problem in short is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could never be repaid. It is that someone is forcing them to fess up. If only the banks could pretend the assets were valuable, then the system would be safe. ....Representative Paul E. Kanjorski, Democrat of Pennsylvania, said the accounting rule "does provide transparency for investors", but that "strict application" of the rule had "exacerbated the ongoing financial crisis". .... "If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself".
And I thought Ben Bernanke was falling over himself to further game the system for Big Zombie. Rep. Kanjorski's "proposal" amounts to what Robert H. Herz, the chairman of the Financial Accounting Standards Board, calls "mark-to-management" accounting. Norris is more direct:
.... I call it 'Alice In Wonderland' accounting, after Humpty Dumpty's claim in the book that "When I use a word, it means just what I choose it to mean, neither more nor less."
Norris' best remedy to this increasingly ridiculous recalibration of accounting rules is to force banks to disclose which toxic assets they own, wether that engenders a competitive disadvantage or not. Given Obama's, Geithner's, and Summer's coddling of "to-big-to-fail" banks this suggestion is off the radar, but at least the NYT financial desk has an adult in the room.

Was It Something He Said? - NYSE Up 379 Points

Our long national economic nightmare is over, at least for one day. As I'm sure everyone knows by now, the New York Stock Exchange was up 379 points on tuesday, due primarily to good news from Citigroup. Chairman Vikram S. Pandit confirmed in a monday night employee memorandum that the company was on its way to a highly profitable first quarter. I guess all that taxpayer bailout money was good for something. Also, speaking tuesday before the Council On Foriegn Relations, Federal Reserve Chairman Ben Bernanke unveiled a new mantra: far-sighted. "flexible" regulation of financial markets is back in style. According to the online edition of today's New York Times:

... Mr. Bernanke stoked a new controversy by endorsing more flexible accounting rules that would not force banks to book as many losses during an economic downturn as current rules require. ... (H)e called for reducing the "pro-cyclical" aspects of current regulation - the tendency of accounting rules and capital aquirements to aggravate both financial retrenchment during a slowdown and financial excesses during a boom. ..."We should review capital regulations to insure that they are appropriately forward-looking, and that capital is allowed to serve its intended role as a buffer - one built up during good times and drawn down during bad times" ...

These statements don't exactly strike Your Dissembler as a commitment to more transparency. If Bernanke intends to prevent the ridiculous leveraging of debts to assets that brought down Bear-Stearns and Lehman Bros., fine. But this incredibly opaque rhetoric seems to imply some sort of "cushion" for the big boys to land on next time they take a fall. Meanwhile, despite Chairman Pandit's rosy memorandum, the Wall Street Journal reports preliminary gnashing of teeth over the future of Citigroup:
.... Barely a week after the third rescue of Citigroup, Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount .... One possible future step could involve creating a "bad bank" to take distressed assets off the balance sheet of Citigroup or other troubled financial institutions. ...Last week, shares of banks fell to their lowest levels in decades, as broad stock and bond markets tumbled. In the credit-default-swap market, the cost of insuring against defaults by financial institutions is soaring. ...
With Firedoglake estimating the cost of establishing a Citigroup "bad bank" at 250 billion, I'd say a lot of folks are whistling past the graveyard.

A.I.G. Update/ What Price Toxic Assets?

Today on Capitol Hill the Senate was roasting Federal regulators, presumably to blame for looking the other way and costing the American taxpayer $170 billion. That's just for A.I.G., of course. The only problem with the Senators' newfound populist rage is that the credit derivatives that brought down A.I.G. and everyone else have been UNREGULATED since the passage of the "Commodity Futures Modernization Act" in late 2000! But that's the great thing about American politics: never let the facts get in the way of some good 'ol fashioned bi-partisan grand standing! It's the United States Of Amnesia, after all!

Controversy has been raging at hell-fire level all over the econo-blogosphere as to the value of toxic assets (or "toxic waste" as Tim Geithner calls them) held by currently insolvent "zombie banks" ("sound financial institutions" in Geithner-speak). The Krugman-Roubini school defines them as worthless trash, ready for the boneyard (nationalize 'em, dammit). Lucian Bebchuk (In Defense Of Private Funds For Jump-Starting The Market For Troubled Assets) takes a relativist approach; if these assets were over-valued during the housing bubble perhaps they are under-valued now. He advocates devising competitive "rounds" for the private entities vying to purchase said toxicity (with a $200 billion initial investment for any serious players). Sounds like he's in Geithner's corner. Your humble Dissembler doen't believe Bebchuk for a minute, and neither does Kansas City Fed Bank President Thomas Hoenig (Too Big Has Failed):
... We should ask ... why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with a large volume of "toxic" assets they created and coping with a raft of politically imposed controls that would be placed on their operations?
Earlier in the piece Hoenig effectively says "shareholders de damned" which is a hell of a thing to opine for someone in his position and amounts to a blatant admission that yes, the financial system is in BIG trouble and political considerations be damned, temporary nationalization is the way to go.

Q: Why $30 Billion More For A.I.G.? A: Credit-Default Swaps

Ben Bernanke was back before the Senate today, taking horrific abuse over the $30 billion line of credit extended to A. I. G. on top of the $130-160 billion that's been thrown away already. Senators from the left (Ron Wyden) and the right (Jim Bunning) assailed Bernanke and the Fed over this seemingly endless giveaway to the mother of all insurers. Dollar Ben was also suitably outraged, claiming that A.I.G.'s London 'financial services' branch had gamed the system big-time through its manipulation of unregulated credit-default swaps that enabled the insurer to grab the world economy by the throat. For more insight we turn to NYT buisness columnist Joe Noctera with excerpts from his Feb. 27th Times article "Propping Up A House Of Cards":

... Unlike many of the Wall Street investment banks, A.I.G. didn't specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) these mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. ... Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets - housing - could only go up in price. ... (B)ecause credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses. And it didn't. ... At its peak, the A.I.G. credit-default business had a "notional value" of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) ... If the company defaulted, hundreds of billions of credit-default swaps would "blow up" and all those European banks whose toxic assets are sopposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed.
And that's how the "interconnectedness" of the world economy became the Sword of Damocles. We could truly all go broke together unless these debt-spouting behemoths are shored up. And if in the short-term Bernanke-Geithner Inc. (the Treasury and the Fed) just keep doling out $100 billion bailouts, how soon before hyper-inflation sets in? How do Robert Rubin, Lawrence Summers, Phil Gramm, and Bill Clinton feel about deregulating derivatives now?