WASHINGTON — The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.
The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.
To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.
The uproar over the American International Group’s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.
The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.
The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.
Calculated Risk, one of the folks who has been right with his commentary on the economy, says the plan is awful, just another giveaway to investors:
With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.
Paul Krugman says
The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.
But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.
Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.
This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.
What an awful mess.
Have you got that, folks? President Merit Pay is planning to spend $1 trillion U.S. taxpayer dollars he and Uncle Ben Bernanke are going to print to coax investors to buy worthless crap from insolvent financial institutions in order to keep the House of Cards that is the U.S. economy from completely collapsing - only the plan is more likely to bring about the collapse than anything else.
John Cole sums this plan and the potential fall-out this way:
If this were a medical emergency, it appears it would look something like this:
The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.
If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.
Sure it's just 60 days or so into this administration. But these are not normal times and you only get so many tries at fixing the financial mess that Wall Street, Alan Greenspan, corporate America, and politicians in both parties helped create before the anger over the economy, the bailouts, the deficit and the rest turns REALLY ugly and those chances are blown forever.
Judging by the flummoxed way President Merit Pay and Tresuary Timmeh have been handling this mess so far and the amount of money they have wasted already on "solutions' that solve nothing, they really have no idea what to do and they're just trying anything so long as it involves setting lots and lots of money on fire and handing to really, really rich people.
This is not to say that Senator Johnny would have done a better job at this - his hands-off Wall Street approach was what helped create this mess in the first place.
But that doesn't absolve Obama from his own contributions to this mess.
I once thought if conditions got so bad that people started living in tent cities, we would reflexively call them "Bushvilles."
But now I'm starting to think some of those just might be named "Barackvilles" as well.