Night of the Living Dead (1968)
Bankers at major living-dead Wall Street investment firms have continued to graze on the gray matter of prominent members of the new administration’s economic crisis team.
Among the reported victims are:
Financial jocks jumped on news of Geithner’s proposed “public-private partnership.” Investors delighted, noting that the plan preserved the sanctity of business-as-usual investment market culture without any threat of significant “change.” High fives were heard everywhere throughout global trading floors and boiler rooms. Whether they were genuinely grateful for the plan, or just looking to make a few gratifying long sales before Friday, Wall Street profiteers rallied and the Dow climbed 500 points on Monday.
Mainstream media talking heads rejoiced, then promptly phoned their brokers for updates at the bottom of the hour.
In other news, marginalized economists and scholars successfully thwarted the zombies by donning lampshades and sitting in the corner while the weekday party took off. However, a few of them snuck out earlier this week and reported their close call with the financial undead on various op-ed pages, blogs, and public broadcasts.
Okay, kidding aside, here’s a sampling of various experts’ reactions to these recent developments:
First we have Paul Krugman’s early rejection of the plan as details were leaked over the past few days: “Despair over financial policy” (The Conscience of a Liberal [NYT blog], 3/21/2009).
He declares, “The zombie ideas have won” and repeats the refrain that the Treasury Department is tempting fate by preserving a systemic moral hazard.
Then we also have other reactions of disappointment and disbelief, like those aired Monday morning on NPR’s Boston-based current affairs program, On Point. I excerpt some of the discussion below, representing typical objections to the plan from both the left and the right:
“[Geithner, Summers, et al] have decided that the way to get private money, to rescue these toxic assets, is to double down on the same kind of strategy that Hank Paulson unveiled back in October that didn’t work, which was to have the government put up guarantees — in this case [the] government’s providing as much as 94% of the capital. I think there’s an echo chamber effect going on where Larry Summers and Tim Geithner are talking to each other, and they’re talking to the likes of Goldman [Sachs] and Citigroup. They’re talking to the very same people who created the mess, and they’re not talking to the critics of this approach. My sources say they’re not even talking to Paul Volcker — who nominally heads a task force appointed by the president, that has never met — who’s a critic of this. They’re certainly not talking to Joseph Stiglitz, the Nobel Prize laureate at Columbia [University], Nouriel Roubini at NYU, Paul Krugman — well-informed people who think this whole approach of having government put up a lot of the capital, guarantee almost all of the loss in the hopes of bringing hedge funds and private equity — the least transparent part of the system, the most underregulated and prone-to-abuse part of the system — back to the party, to do the same kind of convoluted deals that helped cause this mess. And it’s incredibly risky, it’s incredibly expensive, it may well not work, and there’s also the risk of political backlash.”
“Let me just say: If this were to work and a lot of rich guys got even richer, I would hold my nose and say, ‘If that’s the price that it takes to get the banking system running again, I can live with it.’ My concern is more that it’s not going to work and furthermore that it’s rife with potential for abuse. Let me give one little example and I hope this is not too technical: So, a hedge fund — or private equity company — comes in and says, ‘We will buy this toxic asset at fifty cents on the dollar.’ It’s a pool of loans. Then [the company] buys a credit default swap. So, it’s ‘heads I win, tails you lose.’ If the value of the asset goes up, [the] hedge fund makes out. If the value of the asset goes down, the government eats the loss, and the hedge fund collects on the credit default swap. There is all kinds of potential for these gains. And make no mistake about it, this was not designed [in] the best interest of the U.S. taxpayer. This was designed on Wall Street, by Wall Street, for Wall Street. .... If you look at the transition from Paulson to Geithner, it’s the same team.”
“This [current approach] is the worst of both worlds. The Treasury, which does not have the resources to do this properly, is intervening in an episodic and ad hoc way. If you're going to have this degree of government involvement, it’s better to do it with your eyes open, with some transparency there.”
“[Hedge funds and private equity firms] exist to do deals — complicated, highly leveraged deals. This [plan] gives them a chance, gives them a new lease on life. Better yet, it’s guaranteed by the government. Hedge funds — people are deserting hedge funds in droves — this gives them a new lease on life. And I think the administration is underestimating the populist backlash against using taxpayer money and taxpayer guarantees, so that a whole new round of rich guys — in some cases the same old rich guys — can get even richer, at taxpayer expense. I also think that the government is going to need more money one way or the other and, if you do it via an RFC, where you don’t enrich private speculators but you help ordinary people and you do it directly, there’s going to be much more popular consent for spending taxpayer money and putting taxpayer loan guarantees at risk, if you don’t do it by enriching a lot of middlemen, but you do it more straightforwardly. And, you know, Citi, what Citigroup worries about — since they are, I mean, if anybody’s insolvent, Citi’s insolvent, right? The government has put about 65 billion dollars into Citi. You can buy the thing by buying up all of its shares for 17 billion right now. If that’s not insolvent, I don’t know what’s insolvent, because if it weren’t for all this government money, they’d be out of business. So we’re really not talking about 12,000 banks. We’re talking about a handful of large banks — Citi, maybe Bank of America, possibly Wells Fargo — that would have to go through some kind of receivership project and come out the other side. [It’s] much better to do this straightforwardly.”
“Any time we subsidize the banks, like this plan does, we are giving some money to those long-term debt holders and to the equity investors in the banks. If you forced the long-term debt holders to convert into equity — which is sort of a receivership, sort of a Chapter 11, but could be done somewhat differently so that the government wasn’t necessarily running things — you get a private sector solution and the banks become potentially quite solvent, ’cause there’s a lot of long-term debt out there and it doesn’t cost the government anything.”
“I have to agree with Bob [Kuttner] — which I don’t often do — on most of what he said. This is not a good solution, there are better solutions out there, and the plan is flawed. ... I think that the thing to understand is [that] there are two possible scenarios: The scenario number one, which the administration is banking on, is that the toxic assets — and they are ‘toxic’ assets, not ‘legacy’ — are undervalued, and that the banks are fundamentally solvent. That was the assumption in the original Paulson plan; that is the assumption here. The other scenario is that the toxic assets are correctly valued and the banks are not solvent. This is where Paul Krugman is [coming] from, this is Nouriel Roubini, on the right you got Luigi Zingales, one of my colleagues, Ken Rogoff — former chief economist of the IMF — and in my view that’s probably the more likely scenario. So now let’s look at what happens in this plan under those two scenarios. If the scenario is that the toxic assets are correctly valued, and the banks are not solvent — meaning they don’t have enough equity to support their business — this plan is not going to help. ’Cause the banks won’t sell, ’cause if they’ve got these things marked at a particular point, if the value that the hedge funds pay is not above those marks, this doesn’t help because it doesn’t give them more equity.”
“The whole idea here is to get the banks solvent, to get them more equity. .... that I think is the most likely scenario, ’cause remember [that] the economy has deteriorated substantially since the first Paulson plan, and, you know, we were in trouble at that time [too]. Well, ... they take that gamble [under the current plan] and now you’ve created a situation where it’s heads, the hedge funds win, and tails, the government loses. And this becomes a very, very expensive program. And that’s also the case, by the way if we’re in the situation where it is a liquidity problem, not a solvency problem. The hedge funds will either make a lot of money, which will create outrage at the other end, or the government will end up losing a lot of money, neither of which is great, and there are better solutions. The government really doesn’t get anything here.”
To be continued...
No comments:
Post a Comment