Does the mathematics of the Geithner plan resonate with you?

[merbex]

Because all it does is rob Peter to pay uber wealthy, stupid risk taking Paul...

And yes, I am going to link to the article that Krugman linked to in his blog post

https://self-evident.org/?p=502

The Treasury helpfully provides an example, which I reproduce here:

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Let’s flesh this out by repeating it 100 times. So say a bank has 100 of these $100 loan pools. And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which. (These numbers are made up but the principle is sound. Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece. Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those. But the other half wind up worth $100 each for a $16 profit. $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury. So the investor gains $400 on these winning pools. A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400. So the private investor gained $100, the Treasury gained $100, and the bank gained $3400. Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless. But no worries. As long as the FDIC has more expertise in valuing toxic assets than the entire private equity and banking worlds combined, there is no way they could be taken to the cleaners like this. What could possibly go wrong?

For those here that echo the line that we aren't Sweden.....IIRC, there was a Sunday when Lindsay Graham, and some other Republicans were moving in that direction ...in the direction of nationalization yesiree, along with some Democrats making that concept for about 15 minutes a truly bi-partisan contemplation....you know why?

Because it puts an end to bailouts by taxpayers to risk takers on Wall St.

This plan is is just the Paulson plan using the FDIC for the dirty work....

Better hope your local bank down the street doesn't have to pay out grandma...the banksters on Wall St just cut in front of her and shoved her to the ground and Geithner told them 'cut to the front of the line gentlemen'

[MannyGoldstein]

1. You Should Be Supporting Our President!

Ask not what your country can do for you... ask what you can do for wall street!

[ShortnFiery]

2. Right! We are funneling even more wealth UPWARD. I'm not a genius but

that one factor doesn't make a hell of a lot of sense to me. :(

[merbex]

3. Not only are we funneling money upwards

the way we are doing it puts a lot more people at greater risk, and they have done nothing to warrant being put in that position....like grandma who sold her house and has about $85,000 left in her local bank.....if anything happens to that bank will the FDIC have her money for her after the banksters get their's?

This is just bullshit.....no wonder Wall St likes it

[MannyGoldstein]

4. Didn't You Get The Memo?

Trickle-down economics works.

[alcibiades_mystery]

5. It's not clear that an $84 bid on such a pool would be acceptable to the FDIC

So Krugman's entire argument is that the private equity and banking worlds are, in fact, better at valuing the assets than the government? That's a helluv-an argument for nationalization!

:wow:

[merbex]

6. Reading comprehension problem?

The link is to someone who Krugman linked to who shows the math behind the Geithner plan.....are you challenging the math?

Are you actually floating the idea that the FDIC has any way of getting out of the job Geithner has created for it?

It's ok with you that the FDIC will bleed money paying out these banksters?

You do KNOW what nationalization involves don't you?:
Firing the top management of the banks that presently have their hands out
Shareholders are wiped out...but hey SHARES ARE RISK and as a shareholder YOU SHOULD KNOW THAT
Actually going through the books 'examining the tapes' I believe the correct term is to determine what if anything is salvagable/saleable because when the 'asset' is sold WE, the taxpayer who is the government BTW last I checked Lincoln's quote, get the profit
When we can sell the cleaned up bank we will

[alcibiades_mystery]

7. Don't be an asshole

We're trying to have a discussion. You can have it like an adult, or you can insult and snipe. I'd prefer the former, and won't take part in the latter.

In any case, this mathematical demonstration is meaningless without comparison. What would the cost to the taxpayers be if the banks zeroed out all these assets (and why would they, since according to the model half of them are theoretically pegged at full value), became insolvent, and required nationalization. Krugman's main problem is that insolvency seems to be the case with or without the plan, so we should just skip the plan and nationalize. Counterparties don't disappear when a bank is nationalized. Only the equity holders are zeroed out. So the government would then take on some full commitment of the bank's liabilities? What's the math on that, and how does that "resonate?"

[merbex]

8. First one to swear loses the argument

The rest of your post:
That's the whole point of Jamie Galbraith's notion: there is NO DUE DILIGENCE being done

Look at the tapes before ANY money is handed out irregardless of whose money it is

Sounds like you are fine with all of us picking up the tab with no prospect of getting the lion share of the profit FOR picking up the tab,...... and you are challenging the math...funny, the link uses the format set out by Treasury

[alcibiades_mystery]

9. First one to insult loses, actually

And that was you.

I'm not challenging the math. As Marx once said, "we disagree with all of this, except that 2 and 2 equal 4." I'm challenging the assumptions.

[merbex]

10. Not on my threads n/t

[alcibiades_mystery]

11. So, you make up your own scenarios, and therevfore always win

No wonder you like Krugman's method here!

Whether due diligence will be done remains to be seen. That's the flaw with Krugman's mathematical proof. It assumes that the FDIC will simply accept any high bid on any assets. Krugman admits as much in your bolded portion: he doesn't think the FDIC guarantees will be conditional on some reasonable pricing, because he doesn't think the government has the capacity to do any such thing. That's the nub of the issue. You can debate that like an adult, or you can go back and forth with this childishness. I'll leave you to it, since "your thread" follows its own rules. Have fun discussing this with yourself.

[Nicholas D Wolfwood]

12. You very plainly insulted Alb.

This is not up for debate.

[merbex]

13. Write a post and make up your own rules about insulting someone

The point of my post is to get people to do the REAL MATH associated with the Geithner plan.....someone did, as the link I provided shows and it wasn't Krugman, it was someone Krugman linked to and the poster pretty much ignored that point, cauing me to think he had a reading comprehension problem.

Would you like to address the point of the whole post?

That the FDIC will be out BILLIONS in an effort to placate banksters whose banks we pretty much already technically own or would you rather play Miss Manners?

[Nicholas D Wolfwood]

15. No, I'd like to address your false assertion that you didn't insult Alb first.

You're acting like a child, frankly, regardless of whether or not the content of your post is accurate.

[Teaser]

16. Odd that I actually did argue the math below

and I don't get a response.

[merbex]

20. You did, you are just impatient n/t

[Beetwasher]

23. Correct, People Are Overlooking (Purposely?) The Oversight Component Of The Plan

FDIC will FIRST analyze and evaluate the MBS. THEN they will determine how much they are willing to loan based on that evaluation. With honest, competent oversight buyers should not be overpaying with government loans.

If they don't overpay and MBS prices stabilize, then the plan is workable and should stabilize the system.

Once the system is stabilized then we can move onto making the fundamental changes to the system for the long term.

[alcibiades_mystery]

27. Krugman's implication is that oversight is impossible

implausible, or unlikely because the private entities have been unable to conduct it sufficiently!

How he then turns around and argues for nationalization and a beefed-up regulatory regime is a mystery, since this claim assumes the validity of the very neoliberal arguments he would otherwise purport to be arguing against!

[Teaser]

14. The mathematics make perfect sense

Because both the theory of value underlying the Geithner plan and that which Krugman is using are approximations.

Krugman assumes (for the moment anyway) that value of assets is determined by what the market says they are now. This model assumes that there is no negative feedback loop between perception of value and current economic conditions...i.e. that the two are nearly independent. Therefore, to maximimize value here, you just eat the banks, break them up, and sell the profitable parts.

Geithner's model assumes the existence of a strong negative feedback loop between current economic conditions and perception of value...i.e. that the value of stocks is what they would be minus this feedback. So it attempts to remove the feedback from the picture by "jump starting" a market for these items. It is a sort of "Keynesian finance."

Different assumptions about value lead to different conclusions. Geithner's model, well, you may not like it, but it is on its face plausible. If bubble can artificially inflate the value of an asset, surely anti-bubbles can artificially deflate those values.

[merbex]

18. Bingo, so now our values come into play

The math is inescapable, as you say 'makes perfect sense', so one must now put an idealogical value for doing one thing over doing another....Geithner, ipso facto through evidence of the mathematics in his plan involves values the status quo ante and others see it as a sick corrupt system in dire need of reform because the money is coming ( after we have already paid out enoug to make us 'owners") from an agency designed to protect our relatively small bank deposits thereby pulling another thread away from the frayed safety net; we must all ask ourselves if this is worth it.

I don't think so.

[Teaser]

26. value, not "values". Our values don't enter into it.

What matters to me is, which model of risk is *more plausible*.

Krugman has not given me any reason to believe that his model is more plausible than Geithner's.
In fact, on the face of it, I believe Geithner's model is a better approach to valuations on these assets, as it acknowledges that perception can push their valuations up *AND* down, and not simply inflate their value.

[Beetwasher]

21. And Don't Forget The Value Of COMPETENT OVERSIGHT

Geithners plan also has an analysis component that will determine the VALUE of the MBS before the auction and then it has limitations on the amount of the loans based upon that evaulatuion. If there is competent, honest oversight then there should be no hyper-inflated prices being paid for the instruments.

[high density]

17. Lots of assumptions going on

The author copied the Treasury's example and then dumped a pile of worthless assumptions on it that came from NOWHERE. Half of these assets are worthless? Says who? The bottom line is that the bank sold $100 in assets for $84 under the plan. The bank lost $16. Everything beyond that is bullshit out of this guy's ass, and he admits it in later updates.

[merbex]

19. Is a CDS worthless? We don't even know if these are some of 'assets'

that are being sold, but I think they are pretty worthless

It isn't all land condos and time shares on the books of these banks you know

[Beetwasher]

22. Huh?

How could a CDS be some of the 'assets'????

MBS are made up of mortgages. Period. CDS are a completely different instrument.

[high density]

24. "I think"

What you and I think doesn't matter. The fact is this market will be created. The FDIC will oversee the value of these assets (mortgage backed securities.) Private equity plus the FDIC/Treasury will be involved in purchasing these assets.

This seems to be reasonable. The Treasury is accepting a lot of risk, but it's a lower level of risk than nationalization would bring yet everybody here is excited about that idea.

Edited to add: CDS are not in this program.

The Treasury Department Says:

Through this new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities (RMBS) that were originally rated AAA and outstanding commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) that are rated AAA.

[Beetwasher]

25. Right, Even A 15% Reduction In Risk Is How Many Billions?

Not to mention long term MBS should actually perform if we can stabilize the prices and the gov't will get it's money back plus interest.

A VAST majority of mortgages in the MBS are just fine. A lot of the the loss in value is due to the bubble bursting and subsequent loss of confidence in the system. Add confidence and it should hopefully stabilize.