Is Geithner's Hedge-Fund Bailout Illegal? (Mother Jones)

[girl gone mad]

Is Geithner's Hedge-Fund Bailout Illegal?
http://www.motherjones.com/politics/2009/04/geithners-hedge-fund-bailout-illegal">Mother Jones

In recent months, Treasury Secretary Timothy Geithner and other regulatory officials have made much ado about those "toxic" securities the Wall Street demons concocted by bundling together thousands of mortgages and dicing them up a dozen different ways to sell to investors. The big problem, as we've all learned by now, is that it's next to impossible to figure out what the accursed things are worth. Wall Street firms and pretty much everyone else went by their exchange price rather than by analyzing the loans within. Which all worked out just fine until the underlying subprime mortgages began defaulting like mad. All of a sudden, nobody wanted to trade in these byzantine assets, and banks that owned heaps of them were in serious trouble.

It's easy to see why government regulators might want to do something about all of this. The trouble is that much of Geithner's new $100 billion program to help Wall Street hedge funds purchase "toxic assets" from banks—and which could put us on the hook for up to $500 billion—doesn't involve these securities at all. Instead, about half of that money goes to a Legacy Loans Program to help hedge funds purchase relatively conventional loans. Yes, plain old loans, as opposed to the nightmarishly complicated mortgage-backed securities that have America's finance sector scratching its head. "This is a big surprise to me," says New York University economics professor Lawrence J. White, who helped spearhead the government's response to the savings and loan crisis during the 1980s. "I don't know why they're doing it."

Why, indeed? A March 23 press release from the Treasury Department claims Geithner's plan will "reduce uncertainty" on bank balance sheets and help banks and investors figure out what the loans are worth. Yet that's never really been the issue. Sure, valuing loans involves a bit of forecasting: You have to predict whether a borrower will keep her job, stay healthy, not accumulate other debts, and so forth. But these factors are comparatively easy to calculate. "If you're talking about individual loans, you can put some value on it," says Ann Graham, a former litigator with the Federal Deposit Insurance Corporation (FDIC) who now teaches law at Texas Tech University. "It's far easier than evaluating these exotic mortgage-related securities."

Geithner's loan strategy goes beyond merely missing the point. Given years of lax federal oversight, the plan all but guarantees—see if this theme sounds familiar—a windfall for banks that lied to regulators and investors so that they'd be allowed to lend out far more money than they could realistically afford to.

To understand this, a little background is useful: A bank that trades heavily in mortgage-backed securities is in trouble if the market for those assets dries up—and it has, and they are—but regular loans are different. So long as a bank intends to sit on them and collect the interest rather than sell them to another company, the government lets that bank use its own secret financial formula to determine the loan values. In short, banks have carte blanche to claim their assets are worth far more than they really are—White refers to this as "trust me" accounting.

Given this long leash, banking executives have naturally inflated the book value of their mortgages. And even as more and more of their customers fail to make payments, bankers have proved reluctant to admit their hubris and take a hit on the balance sheet. Why is that? Well, the government says banks have to keep enough assets on hand to cover their behinds if things go south. So if a bank that has foolishly overextended itself admits it was overvaluing its loan assets all along, it will fall short of this critical regulatory requirement. And when that happens, under the "prompt corrective action" laws enacted after the savings and loan crisis of the 1980s, federal regulators are obliged to invoke the N-word: nationalization.

http://www.motherjones.com/politics/2009/04/geithners-hedge-fund-bailout-illegal">More...

[westerebus]

1. And the stress test.

Another fraud added to the list coming out of the Administration. We did have an election didn't we?

There was the majority Congress that wouldn't impeach. Let alone investigate. So we gave ourselves a big D president to lead. And this is what we get?

So the new Administration hasn't had enough time?

Mr. Attorney General, go arrest..........................for TREASON. Then arrest the following bank CEO's for fraud.................................

How long did that take?



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