Unemployment Now Above 10% in 7 States
 

[url=http://money.cnn.com/2009/03/27/news/economy/state_unemployment/index.htm]Unemployment jumps in 49 states[/url]: [i]Michigan's jobless rate - 12% - is highest in nation. Wyoming is lowest. Nebraska escapes with tiny decline.[/i]
[quote]The near-collapse of the auto industry pushed Michigan's unemployment rate up to 12% in February, seasonally adjusted, according to the U.S. Department of Labor.

Sky-high unemployment rates were also reported in South Carolina (11%), Oregon (10.8%), North Carolina (10.7%), California and Rhode Island (10.5% each), and Nevada (10.1%).

The most drastic month-to-month increases in the unemployment rate were reported in North Carolina and Oregon, which each saw an increase of 1%. New Jersey also saw a dramatic surge, climbing 0.9% in February.[/quote]
[i]My Comment:[/i] Seven states now with unemployment above 10% - how many will be in that category by end of the year, do you think?


[url=http://www.chicagotribune.com/news/politics/obama/chi-rahm-emanuel-profit-26-mar26,0,5682373.story?page=1]Rahm Emanuel's profitable stint at mortgage giant[/url]: [i]Short Freddie Mac stay made him at least $320,000[/i]
[quote]Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.

One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.

As gatekeeper to Obama, Emanuel now plays a critical role in addressing the nation's mortgage woes and fulfilling the administration's pledge to impose responsibility on the financial world.

Emanuel's Freddie Mac involvement has been a prominent point on his political résumé, and his healthy payday from the firm has been no secret either. What is less known, however, is how little he apparently did for his money and how he benefited from the kind of cozy ties between Washington and Wall Street that have fueled the nation's current economic mess.[/quote]
[i]My Comment:[/i] Apparently Emanuel was also one of the top administration officials present at those back-room meetings where the bonuses to TARP recipients were reinstated ... one wonders to what extent Obama et al may be deliberately allowing Geithner to take most of the heat for that.


Great article by Simon Johnson in the latest issue of [i]The Atlantic Monthly[/i] on the “triumph” of the U.S. banking oligarchs:

[url=http://www.theatlantic.com/doc/print/200905/imf-advice]The Quiet Coup[/url]: [i]The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government.[/i]
[quote]But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.[/quote]


Matt Taibbi, author of the provocative [i]Rolling Stone[/i] piece on AIG et al which I linked a few days ago, has a followup in response to a former employee of the AIG FP unit who had a boo-hoo-you-should-really-feel-sorry-for-us-overpaid-douchebags-at-AIG op-ed in Wednesday`s [i]New York Times[/i]:

[url=http://www.alternet.org/workplace/133627/aig_exec_whines_about_public_anger%2C_and_now_we're_supposed_to_pity_him_yeah%2C_right/]AIG Exec Whines About Public Anger, and Now We're Supposed to Pity Him?[/url]: [i]AIG exec Jake DeSantis' NY Times letter asking for us to chill out about his poor overworked employees is a sick joke.[/i]
[quote][i]"I take this action after 11 years of dedicated, honorable service to AIG. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down." via Op-Ed Contributor -- [url=http://www.nytimes.com/2009/03/25/opinion/25desantis.html]"Dear AIG, I Quit!"[/url] -- NYTimes.com[/i]

Like a lot of people, I read Wednesday's New York Times editorial by former AIG Financial Products employee Jake DeSantis, whose resignation letter basically asks us all to reconsider our anger toward the poor overworked employees of his unit.

DeSantis has a few major points. They include: 1) I had nothing to do with my boss Joe Cassano`s toxic credit default swaps portfolio, and only a handful of people in our unit did; 2) I didn`t even know anything about them; 3) I could have left AIG for a better job several times last year; 4) but I didn`t, staying out of a sense of duty to my poor, beleaguered firm, only to find out in the end that; 5) I would be betrayed by AIG senior management, who promised we would be rewarded for staying, but then went back on their word when they folded in highly cowardly fashion in the face of an angry and stupid populist mob.

I have a few responses to those points. They are 1) Bullshit; 2) bullshit; 3) bullshit, plus of course; 4) bullshit. Lastly, there is 5) Boo-Fucking-Hoo. You dog.

AIGFP only had 377 employees. Those 400-odd folks received almost $3.5 billion in compensation in the last seven years, a very large part of that money coming from the sale of credit default protection. Doing the math, that averages out to over $9 million of compensation per person.

Ask yourself this question: If your company made that much money, and the boss of the unit made almost $280 million in just a few years, exactly how likely is it that you wouldn`t know where that money was coming from?

Are we supposed to believe that Jake DeSantis knew nothing about Joe Cassano`s CDS deals? If your boss and the top guys in your firm were all making a killing selling anything at all -- whether it was rubber kayaks, generic Levitra or credit default swaps -- you really wouldn`t bother to find out what that thing they were selling was? You`d really just mind your own business, sit at your cubicle and put your faith in the guys up top to fill you in if there was something you needed to know?

This would be a believable claim for an employee of some other wing of AIG, a company with well over 100,000 employees. But DeSantis works for tiny, 377-person AIGFP, a unit that had only two offices -- one in London and one in Greenwich, Conn.

And we`re talking about financial professionals, the most shameless group of tirelessly envious gossips ever to walk the face of the earth. The likelihood that Cassano would pull in $280 million for himself, and his equally greedy, hopelessly jealous employees wouldn`t know not only exactly how he made that money but every last ugly detail about his life -- from what skank he`s sleeping with to what side of his trousers he hangs on -- is almost zero.

I know plenty of people who work in this world, and I`ve met very few who didn`t hate with every cell in their bodies anyone in their own companies who made more money than they did or got bigger bonuses at Christmastime. Gossiping about each others` bonuses, and bitching about each others` compensation, is the national pastime for these people.[/quote]
[i]My Comment:[/i] Taibbi may be a pottymouth, but genteel "let`s all remain calm and try to get to the bottom of this..." does seem rather inappropriate given the level of fiscal malfeasance involved here.

[b]
Friday Funnies:[/b] Dilbert pretty much nails the kind of pathological thinking that appears to be rampant in the boardrooms of Big Finance.

Swiss banks ban top executive travel

[URL="http://www.ft.com/cms/s/0/df9ce572-1a36-11de-9f91-0000779fd2ac.html?nclick_check=1"]http://www.ft.com/cms/s/0/df9ce572-1a36-11de-9f91-0000779fd2ac.html?nclick_check=1[/URL]

[quote=ewmayer;166914][B]Friday Funnies:[/B] Dilbert pretty much nails the kind of pathological thinking that appears to be rampant in the boardrooms of Big Finance.[/quote]

Not only in Big Finance, but unfortunately Dilbert is suffering a little from Garfielditis. I think the emo-math-nerd at [URL="http://xkcd.com/"]xkcd[/URL] makes a much better point.

"Cards of shame"

[url]http://money.cnn.com/galleries/2009/fortune/0903/gallery.baseball.fortune/index.html[/url]

[quote][SIZE=3]They're not your usual baseball cards. Topps Company will be issuing trading cards of confessed swindler Bernie Madoff as part of a series featuring the 'world's biggest hoaxes, hoodwinks and bamboozles,' due out early this summer. Here's a sampling.[/SIZE][/quote]

Wizard of ID for Sunday, 3/29

[quote=schickel;167212]Wizard of ID for Sunday, 3/29[/quote]

Arrrrrrgh!

It would have been so much more accurate had the small business owner written:

"I have worked hard and done everything right, but I cannot get a loan from the First Bank of Id to expand my business."

Carmakers flunk viability test | GM`s Wagoner Out
 

Not surprisingly, U.S. automaker-related stories top today`s news cull:

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=aitR5RV13Dkw&refer=news]Obama Says GM, Chrysler Have One Final Chance to Restructure or Lose Aid[/url]: [i]President Barack Obama gave General Motors Corp. and Chrysler LLC deadlines to “fundamentally restructure” or lose government aid that has kept them alive.[/i]

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=aF88onPEJ25A&refer=news]Chrysler, Fiat Agree to Alliance to Prevent Bankruptcy by U.S. Automaker[/url]: [i]Chrysler LLC and parent Cerberus Capital Management LP have a “framework” for an alliance between the U.S. automaker and Italy’s Fiat SpA, meeting a requirement for receiving $6 billion more in federal aid.[/i]

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=aAaIGx9s_otI&refer=news]GM's Wagoner May Get Pensions Valued at $20.2 Million, No Severance Pay[/url]: [i]General Motors Corp. Chief Executive Officer Rick Wagoner may be eligible for pensions valued at $20.2 million as of the end of 2008, according to a regulatory filing. He isn’t eligible for severance pay.[/i]

Back on 20 March I commented on a news story which quoted the Obama administration`s "car czar" (or "auto-crat" ... take your pick) thusly:
[quote][Steven Rattner, the U.S. Treasury’s chief auto adviser] said any decision about GM and Chrysler management would be tied to the ultimate configuration of the companies “and I’m not in a position to comment on that today.”

GM Chief Executive Officer Rick Wagoner and Chrysler’s Robert Nardelli have been “exceptionally cooperative,” “thoughtful,” and “energetic,” Rattner said.

“They’re good guys really trying hard to run those companies,” Rattner said. “I have nothing bad to say about them.”[/quote]
[i]My Comment:[/i] So, Steve, were you lying or did Wagoner`s performance "suddenly deteriorate" in the last 10 days to the point where you had to force him out? Or was this a case of "While I have nothing bad to say *about* him, I did have something bad to say *to* him"?

Barry Ritholtz comments on GM, in particular the why-the-disparate-treatment-of-the-automakers-and-the-banks aspect:

[url=http://www.ritholtz.com/blog/2009/03/how-gm-became-uncle-sams-bitch/]How GM Became Uncle Sam`s Bitch[/url]
[quote]As soon as the news broke about Waggoner’s resignation, I put up a quick post, writing:
[i]
“I am no fan of Wagoners, but I have to ask the geniuses behind the bank bailouts: When are you going to ask the TARP and bailout recipients to step down? Ken Lewis being asked to step aside after many years of running BofA ? How about Blankfein? Pandit? And the rest of the TARP recipients?”
[/i]
That generated the following comment:
[i]
I think this is kinda scary that the government can now force the CEO of a private enterprise to step down. I know they received money and they want more but the fact is that they should not have received it in the first place. And GM isn’t owned by the govt. like AIG. I’m not saying Wagoner was a good CEO. Only the principle is scary.
[/i]
Private enterprise? How do you figure? Once they asked for and got $30 billion from the government, they gave up all pretenses of being a private firm. The “G” in GM now stands for government, as in Government Motors.

As soon as you become dependent upon the biggest guy in the cell block for protection, you become his bitch.[/quote]
[i]My Comment:[/i] My spellchecker is refusing to tell me precisely how many "ah"s there are in (the word pronounced like) "Beeyotch".



[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=abuPwlNJSeis&refer=news]Bernanke Plots Exit From Rescues, Returning Fed to Inflation-Fight Focus[/url]: [i]At 4:30 p.m. on March 23, on a day dominated by release of the Obama administration’s plan to save the banking system and the fourth-best day in postwar Wall Street history, the U.S. Treasury and Federal Reserve released a one-page joint statement on the division of economic responsibilities between the two agencies.[/i]
[quote][/quote]
[i]My Comment:[/i] First promoting asset bubbles left and right and then attempting to paper over the dire consequences by running the money-printing presses at full speed all while punishing the prudent for actually trying to live within their means sure strike me as a strange way to "fight inflation" - but what do I know, I`m one of the poor benighted Great Unwashed non-economics-PhDs-holders ... all my silly little brain is capable of coming up with is sorry stuff like "If we`re printing trillions of dollars, those dollars have to end up somewhere, don`t they?", and "You can`t overspend your way out of a problem you overspent your way into." Pathetically unsophisticated, I know.


[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=awSxPMGzDW38&refer=news]Mark-to-Market Lobbying Buoys Bank Profits 20% as FASB Prepares to Say Yes[/url]: [i]Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.[/i]
[quote]The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, [u]would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities[/u]. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.[/quote]
[i]My Comment:[/i] And we all know how good the banks` "judgment" has been of late ... this is a classic case study in the enormous power of the banking lobby in Washington, the workings "financial oligarchy" described in the Atlantic Monthly article I linked last Friday:
[quote]FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.

Officials at Norwalk, Connecticut-based FASB were under “tremendous pressure” and “more or less eviscerated mark-to- market accounting,” said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York. “I’d say there was a pretty close cause and effect.”

Willens, investor-advocate groups including the CFA Institute in Charlottesville, Virginia, and former U.S. Securities and Exchange Commission Chairman Arthur Levitt oppose changes that would enable banks to put off reporting losses.

‘Outrageous Threats’

“What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,” said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.

...

Conrad Hewitt, a former chief accountant at the SEC who stepped down in January, said representatives from the ABA, American International Group Inc., Fannie Mae and Freddie Mac all lobbied him over the past two years to suspend the fair- value rule.

Executives “would come to me in the afternoon with the argument, ‘You’ve got to suspend it,’” Hewitt said in a March 25 interview. The SEC, which oversees FASB, would reject their demands, and “the next morning their lobbyists would go to Congress,” he said.[/quote]
[i]My Comment:[/i] Just another way to delay the inevitable, thus giving the bank CEOs more time to dole out bonuses and maximize the size of their own golden parachutes.


In non-automaker-related government bailout news, Mish Shedlock has decided that - hold on to your hats - Terrible Timmay Geithner`s "Public-Private Partnership" plan for helping banks offload their toxic mortgage-backed assets [url=http://globaleconomicanalysis.blogspot.com/2009/03/geithners-plan-can-succeed.html]could in fact succeed[/url], as long as one is clear about the definition of "success":
[quote]Geithner does not want a fair bidding process, nor does he want to arrive at a fair market value of assets. Rather, Geithner does want to avoid a hit to bondholders, at seemingly any taxpayer cost.[/quote]

Home Prices down again | Don Quixote`s bank
 

Big a.m. rally on Wall Street today on news of ... well there really isn`t any good news, but since when did one need good news to have a big running of the bulls? Case-Shiller home price data [url=http://money.cnn.com/2009/03/31/real_estate/January_Case_Shiller/index.htm]in another record drop[/url] and now down 30 months running - but record-low mortgage interest rates are making those still-dropping-in-price homes more affordable than ever! (That`s the NAR spokesman in me talking there).


[url=http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aomP3YFgw2o0]Spain Rescues First Bank in 16 Years as Deal Fails[/url]: [i]Spain mounted its first major bank rescue in 16 years as the state seized Caja Castilla-La Mancha after efforts to arrange its purchase by a rival failed.[/i]
[quote]The Bank of Spain said yesterday it appointed administrators to run the savings bank after removing its management. As part of the rescue, the government pledged to guarantee as much as 9 billion euros ($12 billion) of the lender’s liabilities.

“There must have been no other way out,” said Jose Carlos Diez, chief economist at Intermoney SA in Madrid. “This was not the preferred option.”

Loan defaults in Spain have tripled since the global financial crisis began in 2007, ending the country’s real estate boom and boosting unemployment to 14 percent, the highest in the European Union. The economy is in the midst of its worst recession in half a century, with the government forecasting a contraction of 1.6 percent this year. [/quote]
[i]My Comment:[/i] Spain`s RE bubble was as bad as any in Europe - similar in terms of asset-overpricedness and borrower overleveraging to those in the UK and Ireland - but (unlike in e.g. the UK and the U.S.) the Spanish banking regulators were apparently doing at least some semblance of their job, Spain`s banking system was widely considered as likely to be able to weather the resulting storm. Now the key question is: Is CCLM an isolated case or merely the first of many?


Interesting trend on the home-foreclosure front - the latest wave of walkaways from foreclosed properties appears to be on the part of none other than the owning [url=http://globaleconomicanalysis.blogspot.com/2009/03/banks-walk-away-on-foreclosures.html]banks themselves[/url]. This is an interesting new twist on the game of foreclosed-property Old Maid. What Mish`s article doesn`t mention though - and much as I enjoy Mish`s blogging, he has an annoying I-am-never-ever-ever-ever-ever-ever-wrong blindness at times - is that Mish [url=http://globaleconomicanalysis.blogspot.com/2008/02/moral-obligations-of-walking-away.html]has been encouraging underwater homeowners to "just walk away"[/url] since last year (with the usual lame "but check your local laws..."-style fine-print disclaimer), arguing that aside from a hit to their (likely already low) credit rating there was little downside to doing so. Well, if the bank that originated the loan no longer holds it and the entity that bought the mortgage (probably as part of some pool-of-crap-mortgages-CDO) is out of business, leaving the original would-be-walk-awayer liable for the property in the eyes of the city, that strikes me as very much of a downside. Not to mention that the attitude of "greedy banks screwed America, so I`m gonna screw the banks by walking away from my mortgage" is a morally reprehensible way of weaseling out of a legal contract. If you are one of the homeowners who *legitimately* was victimized by predatory lending there are perfectly legal avenues for you to pursue - but for the other 90+% (my estimate) who simply bought near the top of the market because "all my friends are making huge paper profits on the home purchase, I want some of that action too" and who are now experiencing buyer`s regret, I say tough titty. But in modern-day America such notions as "personal responsibility" and "living up to one`s end of the deal" are considered quaint, old-fashioned and dispensable by most individuals, corporations and even by our government.

David Brooks: Car Dealer In Chief
 

The New York Times` David Brooks is skeptical of the "tough love" for GM and Chrysler:

[url=http://www.nytimes.com/2009/03/31/opinion/31brooks.html?_r=1&ref=opinion]David Brooks: Car Dealer In Chief[/url]: [i]By enmeshing the White House so deeply into G.M., President Obama has increased the odds that March’s menacing threat will lead to June’s wobbly wiggle-out.[/i]
[quote]Some companies are in the steel business, some are in the cookie business, but General Motors is in the restructuring business. For 30 years, G.M. has been restructuring itself toward long-term viability.

For all these years, G.M.’s market share has endured a long, steady slide. But this has not stopped the waves of restructuring. The PowerPoints have flowed, and always there has been the promise that with just one more cost-cutting push, sustainability nirvana will be at hand.

There are many experts who think that the whole restructuring strategy is misbegotten. These experts think that costs are not the real problem. The real problem is the product. The cars are not good enough. The management is insular. The reputation is fatally damaged.

The most likely outcome, sad to say, is some semiserious restructuring plan, with or without court involvement, to be followed by long-term government intervention and backdoor subsidies forever. That will amount to the world’s most expensive jobs program. It will preserve the overcapacity in the market, create zombie companies and thus hurt Ford. It will raise the protectionist threat as politicians seek to protect the car companies they now run.

It would have been better to keep a distance from G.M. and prepare the region for a structured bankruptcy process. Instead, Obama leapt in. His intentions were good, but getting out with honor will require a ruthless tenacity that is beyond any living politician. [/quote]

Joseph Stiglitz: Obama’s Ersatz Capitalism
 

2001 Nobel Economics Laureate Joseph Stiglitz weighs in on the Obama/Geithner bank-toxic-asset plan and comes to the same conclusion as many skeptical bloggers I`ve previously quoted:

[url=http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html?_r=1&ref=opinion]Joseph Stiglitz: Obama’s Ersatz Capitalism[/url]: [i]What the Obama administration is doing with the banks is far worse than nationalization: it is the privatizing of gains and the socializing of losses.[/i]
[quote]THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.
[u]
The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.
[/u]
Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.[/quote]

[QUOTE=ewmayer;167619]2001 Nobel Economics Laureate Joseph Stiglitz weighs in on the Obama/Geithner bank-toxic-asset plan and comes to the same conclusion as many skeptical bloggers I`ve previously quoted:

[i]What the Obama administration is doing with the banks is far worse than nationalization: it is the privatizing of gains and the socializing of losses.[/i][/QUOTE]



Bingo!!!!