I'm reading this New York Times article on Treasury Secretary Geithner's new plan for toxic assets, and as much as I agree with Booman Tribune lately, I can't say that this plan makes much sense. At least, it does not make much sense if you believe Geithner's testimony to Senator Bob Menendez last month:
MENENDEZ: Can you talk to us about asset valuations?
GEITHNER: "Absolutely enormously difficult to decide on a mechanism that will give us confidence that the values are fair and realistic, and that the government understands the risks we are assuming. There are no perfect ways to do this. One approach is for the government to decide. One approach is for the government to use independent model based estimates for valuation. We are concerned neither of those two approaches would give us the level of comfort we need, so instead what we propose to do is design a fund that can have private capital come in along side government financing and use that as a way to help solve this valuation problem. And we believe doing it that way will leave us with better protections against the risk in making these basic judgments independently on our own.
Here's what the New York Times' sources are saying. Note that it's what the investors are hearing, not the public spin:
Executives briefed on the plan said it did not address the central question of how to bridge the divide between what the banks want to sell the assets for and what investors are willing to pay for them. The government hopes that the subsidies it provides to investors are so rich that they will be willing to risk overpaying somewhat for the assets.
Now, I'll admit there are multiple ways to read this, but in my opinion it plainly means the government is not getting the benefits of the investors' judgment. Rather, they themselves say Geithner is bribing them to pay more -- and that means Geithner mislead Menendez.
There's even worse in the article. The next sentence is:
The White House plan is intended to leverage the dwindling resources of the Treasury Department's bailout program with money from private investors to buy as many toxic assets as possible and free the banks to resume more normal lending
Really, so the government is leveraging the bailout money with investors' money? Why, then, does the article report:
Three chiefs of investment firms said in interviews that they were impressed with the terms of the program - which would have the government lend nearly 95 percent of the money for any investment - but remained reluctant to participate because of the potential for future regulation.
I'm sorry, but that means the White House sources are wrong. That is not the government leveraging -- we are putting up more than 9 out of every 10 dollars -- it is the private investors getting to leverage. I don't see how adding an extra 5% of private money, to give up more than 5% of the profits and when the partners apparently say you are overpaying by (much) more than 5%, makes any sense. I would guess that's why when Menendez asked "How much of public/private is going to be public and how much is going to be private? Valuation? " Geithner gave some answer about banks reporting and not anything about how much is public/private. I thought he misunderstood the question, or I did, but now I think he was evading the question.
I am deeply concerned about this plan. I am as rabidly pro-Obama as I can imagine, and I don't pretend to know how to unfreeze credit markets, but my faith does not extend to this Treasury Secretary or Larry Summers... and in my opinion, either Geithner mislead the executives, or he mislead the public and Senator Menendez. Given his tax problems, I don't see how I am supposed to believe in his honesty. Nor I am impressed that Christina Romer says these investors are "doing us a favor," because I doubt there is anyone in America who believes Wall Street does favors for nothing. The Obama administration needs to wake up, because if they have a better case to make, they'd better make it. |
