The Long Crisis

Posts Tagged ‘Geithner’

Well, the stock market surely liked the Treasury’s and Tim Geithner’s 2.0 version of the cash for trash plan.

Secretary of the Treasury Tim Geithner unveiled the treasuries new cash for trash 2.0 plan (George W. Bush and Hank Paulson get credit for version 1.0) today and the stock market jumped almost 500 points. I suppose that means stock traders liked it.

Maybe. I wonder how many of the traders actually took the time to read the plan or were just so relieved that Geithner finally came through with some long awaited details that they entered buy orders en mass without even thinking about it. Some poor souls probably even think that the bull is back. Har!

Under the new so-called “Public-Private Investment Program,” (PPIP) taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans. Yep, cash for trash again under a different set of rules. This time the government wants to find some private partners to share the misery, errr, that is profits, with.

The goal is to buy up at least $500 billion of existing assets and loans, such as sub-prime mortgages that are now in danger of default. The treasury said that the program may be expanded to the one trillion dollar level if it looks like it might work. These days trillion seems to be a popular number in Washington.

There are fears that investors may be reluctant to participate in PPIP in light of the fact that Congress has retroactively altered the terms of many of the government rescue programs so far. In order to participate investors would have to trust Congress. Any takers out there?

One other nagging detail is that what’s best for the banks would be bad for the government, taxpayers, and investors. Geithner hopes to establish a market in toxic assets where none presently exists. This would be done by an auction process. Here is the rub. A high price would be good for the banks as they would get bad assets off their books at a price that wouldn’t force additional write downs. But the investors would certainly want to pay as little as possible for questionable assets. If the assets were actioned at what they are probably really worth the banks would take another big hit.

With rage still very much up in the air over the AIG bailout the political risk to the Obama administration from PPIP sweetheart deals will be considerable. Any signs that the government is encouraging higher evaluations and higher payments to the banks than the toxic assets are really worth will set off a justified firestorm of public comment and fury. The public has had it with sweet deals for the banks and other financial institutions that largely got us into this mess in the first place.

Even if PPIP works as planned there is one more problem that the government seems to be glossing over. A bad deal is a bad deal. Loans made to people who are unable to pay are bad deals. Even worse, real estate values have fallen so far so fast in many regions of the country that upside down underwater homeowners, even people who have good credit and are able to pay their mortgage payments, are starting to walk away from their homes. With a tremendous inventory of distressed properties on the market and commercial real estate starting to crumble a significant real estate recovery within the next few years is only a dream.

Think about part of the over hanging problem this way. What if you had purchased, say a $700,000 home, put down $zero as a down payment, Taken out a $700,000 mortgage, and now your house is worth $350,000. What would you do? You now owe $350,000 more than you could realize from the sale of the house and you have no down payment skin in the game.

Would you say in the house and continue to make your payments? Sure the market may come back but the real estate market is on a very long time cycle. It could take the market 40 to 50 years to recover, if it recovers at all. Sure, you would take a credit hit if you walked away but not nearly as bad of a hit as you would take from a bankruptcy.

At this stage of the depression cycle even good credit risk homeowners are being drastically adversely effected as their home mortgages go underwater. Many are now just walking away from their homes. Mortgages on these houses will not contribute one penny to the toxic waste income pool that the government hopes to share with suckers, errrr, that is, investors. But there will be plenty of expenses. Vacant houses left without proper maintenance fall apart fast.

Our depression is beginning to take on the characteristics of the long drawn out depression in Japan. The US government seems determined to make every mistake the Japanese government made in bailing out companies and financial institutions that should have been allowed to fail. After all, companies like AIG and Citigroup have earned failure.

Japan entered its depression in 1989. They spent enormous amounts of money propping up zombie banks and businesses trying to reverse the effects of the depression. After 20 years the property market in many areas of Japan is still down 80% from the peaks and the nation is still mired in depression. The US is on the same path.

In my opinion, the Geithner plan, cash for trash, would only set up the taxpayer and the go along investors for yet another hosing. You can not make bad investments good by shifting them from here to there. The government has all but guaranteed a long crisis by trying to solve a crisis caused by over leveraging and excessive debt by increasing debt and leverage and shifting bad assets around.

Geithner’s plan will soon be attacked for exactly what it is. Yet another effort to “look busy” and to protect his masters. And who are Geithner’s masters? Certainly not the taxpayer. Not the investors. That leaves, shades of Hank Paulson, the big banks.

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