Gaming the Geithner plan? Yes it can be done and here is how:

[girl gone mad]

Gaming the Geithner plan?
Tyler Cowen, http://www.marginalrevolution.com/marginalrevolution/">Marginal Revolution

Yes it can be done and here is how:

Let's say that I am a bank ("financial institution") with $100 billion in "toxic assets". I have them on my balance sheet at 80 cents on the dollar. The market has them marked at 30 cents. We do not know what the held-to-maturity performance will be, since that requires knowing the future, although for the moment let's assume that they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them at 30 cents I take a monstrous loss - perhaps enough to force me under Tier Capital limits and thus render me subject to an FDIC enforcement action. I therefore will not sell for 30 cents so long as I have any belief whatsoever that the cash flow - or any government subsidy - will exceed that value.

If I, as a "financial institution" can participate as a bidder in these auctions I can foist off my loss onto the taxpayer. Here is how I can rig the game so as to avoid an otherwise-inevitable loss:

• I become a "bidder" and "bid" on my own assets at 75 cents.


• I am providing 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.


• The loan, ex my contribution, is non-recourse. That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.

Now the "assets" (a passel of CDOs?) turn out to be worthless. I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that's all.

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these assets are allowed to bid either directly or indirectly as it provides a means for banks to intentionally dump bad assets at a certain loss that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or more in losses onto the taxpayer, not through the operation of "bad luck" but rather through what amounts to a bid rigging operation.

[Gman]

1. No wonder the market went up 500 points

[girl gone mad]

5. I've heard another version of this scenario..

which involves two banks colluding to each overbid on the others' assets.

[Gman]

18. This morning we briefly discussed buying back into the market

we decided 6 months ago now that the bottom was at 65xx. It's been there and it's going back up for now. However, it's crap like this that is keeping me out, for now at least.

[The_Casual_Observer]

2. These articles are so smart now, where were all these geniuses

two years ago?

[girl gone mad]

4. Bloggers at Marginal Revolution, Naked Capitalism, Calculated Risk, etc..

have been around and provided excellent analysis. Analysis around the time of the Northern Rock bank run in the summer of 2007 is what led me to realize that the problem was so severe, even money markets might not be safe, and I moved all of my money into treasuries.

These guys saw it coming.

[The_Casual_Observer]

6. It's more likely that wall street for once exceeded those crackpot's

wildest conspiracy theories.

[girl gone mad]

7. Whatever.

These blogs are all written by respected economists and financial advisers. But you just go right ahead and stick your head in the sand and pretend it's all beyond anyone's capacity to understand.

[SlowDownFast]

11. They're not so "crackpot" now, are they? n/t

[The_Casual_Observer]

16. You know what they say about the blind pig?

[dixiegrrrrl]

20. The OP article is what Karl Denninger wrote in his column recently.

Seems like a lot of bloggers are using it.
I am glad it is getting out in front of people's eyes.

[SlowDownFast]

10. Some were around. No one was listening. n/t

[Hawkowl]

3. Inevitable

Of course the taxpayers are going to be on the hook for the whole enchilada! That is the point! Geithner is a fucking corporate whore.

Instead of the taxpayers getting any additional responsibility or accountability we just get hosed. I think Obama is being incredibly ill served by his "economic team". Their insistence about the private sector being involved and how the "free market" is going to solve this problem is completely wrong. This is all going to bite the president right in the ass when it fails.

[bobburgster]

8. I agree

Hawkowl, I tend to agree his economic team is tilted too much in favor of the private sector. It will bite his butt if people see Wall St. and the banks making nice profits while the taxpayers get humped again.

[truedelphi]

21. talk me down (as Rachel Maddow would say)

As I see it, Obama is now one of thwo things -

1) very naive and gullible
2) bought and paid for

neither choice is one I can tolerate in a President.

[SlowDownFast]

9. Karl Denninger originally authored the OP Monday:

http://market-ticker.org/archives/894-Open-Letter-To-The-FDIC-Ombudsman.html

Other economic bloggers have picked it up, and here is Mike Morgan's take on Karl's piece (he agrees):

http://realestateandhousing2.blogspot.com/2009/03/geithners-gift-to-hedge-funds.html

In addition, those that doubt that Geithner's plan is a dangerous and nefarious one ought to see these interviews of James Galbraith's take on the plan from Monday:

Part I: Geithner's Plan "Extremely Dangerous," Economist Galbraith Says
http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner%27s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=^gspc,^dji,c,bac,jpm,WFC

Part II: Geithner, Obama Kowtowing to "Massively Corrupted" Banks, Galbraith Says
http://finance.yahoo.com/tech-ticker/article/216480/Part-II-Geithner-Obama-Kowtowing-to-%22Massively-Corrupted%22-Banks-Galbraith-Says?tickers=XLF,FAS,SKF,C,BAC,JPM,^DJI

[SlowDownFast]

12. Mish doesn't like it either:

"The long awaited details of Geithner's "plan" for dealing with bad bank assets is finally out. Githener's plan is disingenuous at best. If people want to be outraged at something, it should be over Geithner's plan."

more:
http://globaleconomicanalysis.blogspot.com/2009/03/geithners-galling-and-dangerous-plan.html

[BelgianMadCow]

13. Yep. My first thought too. It's way to easy to let the taxpayer eat the loss

it's rather simple really. A way to go short on their own shit.

To me it just seems like a scheme set up to make an unrealistic price for the toxic assets, and if their value goes poof the taxpayer holds the tab.

Plenty of opportunity for fraud.

:-(

[marketcrazy1]

17. if they overpay bank stocks will soar

after yesterdays announcement volume on banks stocks was HUGE. big players will buy up bank stocks cheap then overpay in these auctions ( little risk to them ) and then SELL the bank stocks at a much higher price. the big boys will make a killing on this. any small losses they take on their "investments" will be more than offset by the gains they take scalping bank stocks....

[robinlynne]

14. In addition all these "toxic assets" happen to be houses which are sitting vacant because they

are still too expensive to purchase. Let's just say they sell them at a bit below market price. the houses sell. the banks take somewhat of a loss, but not the loss they presently face, and people actually get to live in the houses! In other words. Let us buy the toxic assets at an affordable price. I have looked at some of the foreclosures around. The prices are still ridiculously high. If I could afford a toxic asset I would jump at the chance! The banks will sell to other resellers, as will happen here. Big investors will get a great deal. We will pay for their great deal. Then they will sell the homes down the line at a huge profit. Why not sell the homes to us?

[truedelphi]

22. But it's my understanding that there are not any actual

Mortgages as you or I would think of a mortgage.

These are the SIV's and CDO's - little snips of this piece of Sm Fox's mortgage in Detroit, and Wm Case's mrotgage in Alalbama. Bundked together with 50,000 other little snips of other John and Josie Doe's mortgages.

So even if the bundle of these mortgages gets sold, there won't be anyone occupying any house(s).

This is as I understand it, I could be very wrong about this.

[thevoiceofreason]

15. Fallacy of the predicate

Would you be approved as a bidder on your own assets?

[shirlden]

19. Easy work around on that

My next door neighbor bids on my house and I bid on his...........just as the big crooks will be doing.

:fistbump:

[truedelphi]

23. Even if they wouldn't be - believe me, these scoundrels will have a

Gentleman's agreement -

The holder of mortgages written by Bank A (ie Bank President or Board of Directors of Bank A) will get the President of Bank B to Bid on those mortgages, while the holder of mortgages written by Bank B will get the President of Bank A to Bid on those. And so forth and so on.