The Treasury Department unveiled its highly anticipated plan to rescue banks by helping them remove their troubled assets by creating a controversial f “toxic bank” — and Wall Street immediately reacted as stocks climbed.
But there could be a dark political cloud on the horizon: while the plan was being released banks got more rotten PR with a story breaking about how JPMorgan Chase is planning to spend millions of dollars and jets and a luxury airport hangar. With the public already sour and virtually carrying torches and storming the Wall Street Castle on AIG bonuses, expect this story to get big play in coming days, if it pans out.
The Treasury Department unveiled its long-awaited plan to remove many of the troubled assets from banks’ books Monday, representing one of the biggest efforts by the U.S. government so far aimed at tackling the ongoing financial crisis.
Under the new so-called “Public-Private Investment Program”, taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans.
The goal is to buy up at least $500 billion of existing assets and loans, such as subprime mortgages that are now in danger of default.
Treasury said the program could potentially expand to $1 trillion over time, but that the hope is that the program would not only help cleanse the balance sheets of many of the nation’s largest banks, which continue to suffer billions of dollars in losses, but help get credit flowing again.
The government will run auctions between the banks selling the assets and the investors buying them, hoping to effectively create a market for these assets.
To kickstart things, the administration said it will commit $75 billion to $100 billion and would consider how the program is progressing before committing more money.
“There is no doubt that the government is taking risk,” said Treasury Secretary Timothy Geithner. “You cannot solve a financial crisis without the government assuming risk.”
[UPDATE: The Treasury Department fact sheet is HERE. Also, scroll down since we’ve added a batch of financial and political weblog reaction.]
The Washington Post offers some more perspective on the plan:
The “Public Private Investment Plan” detailed this morning, a long-awaited but risky piece of the government’s financial stabilization strategy, will pour government money into private investment funds as a way to move loans from the balance sheets of banks to those of long-term investors.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks. The government will use up to $100 billion from the Troubled Assets Relief Program, matched by private funds, to capitalize the purchases.
The plan, which was widely hinted at over the weekend, appeared to be warmly received by Wall Street. The Dow Jones industrial average gained 2.4% in early morning trading Monday, helped by a surge in the financials. Shares of Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) each climbed about 15% on the New York Stock Exchange.
Investors have been waiting expectantly for details since Treasury Secretary Tim Geithner first announced the framework of a plan last month to address two of the biggest problems in the banking sector: the toxic assets keeping banks from lending and the shortage of capital at major institutions.
One of the biggest difficulties in getting the program off the ground was how to price the soured assets. If the government paid too little, banks would take the hit. But if the government overpaid, then already-soaked taxpayers would feel the pinch.
One nagging concern, however, is whether the government’s involvement will actually spur banks and private investor groups, such as hedge funds, pension plans and insurance companies to participate.
Administration officials indicated Sunday they had gotten support from private investors and banks who have been briefed about the program. But some analysts questioned whether the government’s help would be enough to push investors and banks toward figuring out a price.
The reaction on Wall Street: Stocks began to climb:
U.S. stocks opened sharply higher Monday after Treasury Secretary Timothy Geithner unveiled details of a plan to expand the $700 billion rescue of the U.S. financial system. The plan will rely on enticing private investors to buy the troubled assets clogging banks’ balance sheets.
The market was also boosted by a report that February existing home sales rose 5.1% and prices fell.
On Monday at 10:10 a.m. ET, the 30-stock Dow Jones industrial average was higher by 210.67 points at 7,480.05. The broad S&P 500 index added 24.19 points to 792.73. The tech-heavy Nasdaq composite index gained 38.99 points to 1,496.26. NYSE breadth 26-2 positive, Nasdaq breadth 18-4 positive. Trading active.
But you can easily anticipate the new and old media, partisan and talk show screamfest firestorms that are likely to break over this ABC News story:
Embattled bank JPMorgan Chase, the recipient of $25 billion in TARP funds, is going ahead with a $138 million plan to buy two new luxury corporate jets and build “the premiere corporate aircraft hangar on the eastern seaboard” to house them, ABC News has learned.
The financial giant’s upgrade includes nearly $120 million for two Gulfstream 650 planes and $18 million for a lavish renovation of a hangar at the Westchester Airport outside New York City.
A public hearing will be held by Westchester County officials tonight regarding JPMorgan’s request for new hangar space.
According to JPMorgan Chase architects, the new hangar will be built with reclaimed wood, quarry tile and even a “vegetated roof garden.”
The Gulfstream 650’s are described by the manufacturer as the “fastest,” “widest” and “most comfortable” private jet ever with superior cabin amenities, an optional stateroom, and 12 interior designs to choose from.
“It’s a remarkably boneheaded decision,” said corporate watchdog Nell Minow, the editor and founder of The Corporate Library, a group that provides independent corporate governance research and analysis. “It’s completely tone deaf.”
The economic dynamics of this will be trickier…and the political dynamics even trickier. There are already questions about Geithner’s job security, no matter what President Barack Obama says since there is a BEEN THERE/DONE THAT attitude on the part of the public and new and old media pundits when they hear a President give assurances that a controversial cabinet member’s job is security. Usually that means the cabinet member needs to get protective clothing on because he’ll soon be hurled under the bus. And the public reaction to AIG has made the political environment “toxic” to bailouts…particularly by institutions that seem to feel that the money is compartmentalized and that they can spend lavishly on other things as if they never needed a bailout.
Here’s some other reaction the Geithner and his plan and to a piece he wrote for the Wall Street Journal about what was announced today:
But the issue isn’t Geithner’s delivery, it’s what he’s delivering: an approach to the crisis that is as toxic as the assets that have hamstrung the economy. Geithner, brilliant and hardworking though he is, is trapped within a Wall Street-centric view of the world and seems incapable of escaping.
That’s why every proposal he comes up with is déjà vu all over again — a remixed variation on the same tried-and-failed let-the-bankers-work-it-out approach championed by his predecessor, Hank Paulson. For Paul Krugman, this “insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid?”
I don’t believe Geithner thinks we’re stupid (although he almost certainly doesn’t think we’re as smart as he is). He just can’t change who he is: a creature of Wall Street, habitually sympathetic to the people at the top of the financial system, who he clearly thinks were born to run the world.
Geithner’s actions throughout his career are proof that the toxic thinking that got us into this mess is part of his DNA.
To my non-economist mind, that sounds eerily remniscient of the Troubled Assets Relief Program (TARP), the $700 billion plan passed last October to prop up the frozen financial system by buying, well, troubled assets. Granting, arguendo, that the Bush administration, which ran the first part of TARP, was evil and incompetent and the Obama administration is all sweetness, light, and omniscience, why would this work any better the second time around?
I know remakes are all the rage but usually they involve movies that 1) were successful at the box office and 2) were made long enough ago that teenagers haven’t already seen them. By contrast, TARP was a veritable Ishtar and is barely out on DVD.
Shorter US Treasury
“I usually shop there, but they are having a fire sale so we should go shop somewhere else”
When did they hire Yogi “no one goes there anymore, its too crowded” Berra ?
Direct quote of the US Treasury
“a wide-scale deleveraging in these markets and led to fire sales. As prices declined, many traditional investors exited these markets, causing declines in market liquidity.”
This is not a joke. The key to the Treasury argument is that asset prices are far far below hold to maturity values and that no one wants to buy them — that is, that no one shops during fire sales.
Also, others have noticed this but The Treasury officially rejects anathematizes and abjures the socialist doctrine of “supply and demand” enunciated by Marx’s great teacher Adam Smith.
I’m not sure I can comment on the plan unveiled today to “fix” our banks. And that’s a bad sign. Any time a government policy is too complicated for a person of reasonable intelligence to comprehend, it’s bound to have all kind of adverse side-effects (be sure to ask your Doctor before taking Bailoutulus).
As I understand it, the eeevil dumb hedge fund managers that got us into this mess in the first place are going to be given large piles of government cash with which to buy up the toxic mortgages. They’ll also put up some of their own money. But this is one time where I’m going to agree with liberals.
If I’m BofA and I see that Citibank is starting to sell, then I don’t want to be left out of the loop and miss possible deals, and I’m going to sell too.
Currently, the banks are holding onto a lot of foreclosed properties because they can’t sell them. But once credit starts flowing to homebuyers and property investors, they’re going to start releasing those foreclosed properties on the market.
Most small investors probably aren’t savvy enough to take advantage of these asset auctions, but we will be able to take advantage of the real estate deals that come up.
The only thing that concerns me is that here in Southern California we have TOO much housing. We have a housing glut.
In my town, there are buildings upon buildings of empty condo developments. How much that will depress the real estate market, I’m not sure.
–Russell Arben Fox’s long post needs to be read in full. Here’s just a small part of it:
Here, you have a massive slab of complete unknowns to deal with, most of which boil down to one thing: these “toxic assets” (or “legacy assets” as Geithner is now calling them) which our major financial institutions have very nearly bankrupted themselves over—-are they essentially worthless, or are they (again, as Geithner is now putting it) of an “uncertain or depressed” value? All those mortgages on all those homes bought by all those people…can they ever really be refinanced and sold? Will those homes ever really be worth more than the land they are built on, at that? This is the unknowable, because when you’re talking about finance capitalism, you’re talking about guesswork and credit and risk. That’s what it seems to mean to me, anyway: the aim of the banks is to make those pieces of paper they hold, representing a calculation based upon much more than just the cost of the land the homes are built on and the price of the lumber and the copper wire which holds those homes together, be worth something comparable to what they thought they’d be worth when they bought them (or bought a bundle of them from someone else who had bought them even earlier) to some other buyer or investor. How can they do that?
Two options for dealing with the unknowables of a complex, national market: give professional investors enough money so they feel confident in taking the risk, or let government assume the risk (and the rewards). The Geithner plan does the former, which has lead to anguish and teeth-gnashing amongst the more “socialist” (or better, populist) elements of the commentariat. Geithner and Obama are asking for relatively little buy-in from actual investors (about 15% of the total estimated cost of whatever it is they may or may not end up buying) and with the balance made up of non-recourse loans from the government.
…..And so, for people who are giving themselves crash courses on economics these days, like myself, it really comes down to this to a bit how high concept guesswork: do we agree with the administration that the current credit crisis, like the national economy generally, just needs a bit of Keynesian priming to get to the normal processes of finance capitalism working again? Or do you believe that finance capitalism really has gotten the banks of the U.S. (and much of the world!) into a situation where they are deeply invested in something fundamentally worthless (or, shall we say, unsound), in which case no amount priming is going to prevent the government from having to rescue the banks in the end anyway? I know which way I’m leaning. How about you?
The effectiveness of the Treasury’s Public Private Investment Program hinges upon whether private investors will take the carrot that the Treasury is offering them. In order to buy into the program, not only do private investors need to be confident that the assets will appreciate in value, but also that the U.S. government will not rescind on their offer or create some surprising rule like the retroactive tax on bonuses. Also, banks have to be willing to part with the assets, which may not make sense if they have already written them off. How Currencies are Reacting to the Treasury’s Toxic Asset Plan
Nonetheless, it is clear that along with the Federal Reserve’s Quantitative Easing program, the U.S. government is throwing everything including the kitchen sink at the U.S. economy and it could finally work. The only catch is that the program will probably not begin until the end of the third quarter because applications are not due until May.
Anyone worried that Geithner’s toxic asset plan would encourage investors to overpay for toxic bank assets should be relieved. It doesn’t.
What they should be worried about, however, is whether it will actually do anything for the banks.
….Of course, one can always make the argument that what’s needed in the financial system is a bout of painful writedowns for banks and the acceptance of real prices for their assets. In that sense, Geithner’s plan may be a success by forcing banks to finally deal with their balance sheets in a realistic way. If the plan was, however, intended as a not-so-subtle way of recapitalising banks at the taxpayers’ expense via overpaying for assets, we question whether it will work.
Either way, US stocks are now rallying.
If Secretary Geithner’s scheme works, we draw the lesson that our banks became too big and we aim to make them smaller relative to the economy moving forward. The regulatory agenda currently in progress – including for discussion at the G20 next week – would do essentially nothing to reduce the political power of big banks. We need simple caps on bank size, leverage relative to the economy and – this is harder – measures of interconnected tail risk (i.e., is everyone making the same kind of crazy loans?). Design a system with this in mind: regulators get captured and super-regulators get super-captured.
If the scheme doesn’t work, we draw the exact same lesson. And, of course, we should expect Chairman Bernanke to move forward with his Plan B (or is it Plan Z?): inflation.
In any case, our top political leadership needs to really sell some version of the following message. We let the banks get out of control and the cost will be enormous; our debt/GDP ratio will in all likelihood rise from around 40% to over 80%. We cannot afford to have the same problem again. We must break the power of banks before they break us all. And if you don’t think banks can do that much damage to economies, just look around outside the United States – the world is full of countries where growth is slowed or distorted by a financial system that becomes too powerful. This is not about tweaking the existing U.S. regulatory system; it is about complete change and – in many senses – turning back the clock to a financial system that was simpler, smaller, and much less dangerous.
Obama quite obviously believes that all people are fundamentally decent and, if you expect them to behave decently, they will. It’s a hopefulness and optimism I admire, and I quite genuinely believe it’s a good starting point from which to begin negotiations with anyone on an individual basis. But it’s a crackpot approach for dealing with intrinsically corrupt institutions who have repeatedly proven they are motivated by avarice and spite.
The entire premise on which this plan rests is inherently flawed. The big players in the financial system and the rest of the American people have utterly disparate motivations. The wildly tone-deaf disconnect exemplified over and over by the institutions now in need of rescue should, by now, have illustrated their intractable unwillingness to even get on the learning curve, no less start learning and curving.
And because they operate with no small amount of abject stupidity in addition to their greed and insolence, I cannot imagine on what basis, besides a totally unsubstantiated hopefulness, Obama and Geithner can argue they have a reasonable expectation that the banks will achieve the requisite alignment with the citizenry’s needs for this scheme to work.
Furthermore, this is essentially the same plan that Geithner proposed about 6 months ago and Hank Paulson rejected it because he knew it had no chance of working. Geithner wanted to purchase these toxic assets, place them in some “toxic bank” which would supposedly eat up all the bad debt. Paul Krugman provides some good analysis of these two plans and essentially said the same thing that Paulson did, this cannot work.
The markets will probably go up today because they are looking for something, anything to get done. However, in the long run this plan does nothing and is probably DOA.
This story about “risk” is a pleasing one for people who imagine that the masters of the universe, or their managers, actually worry about such things. I don’t know if Timmeh does or doesn’t believe this, but it’s absurd. The current financial crisis has nothing to do with how much risk the banksters were willing to take on. They didn’t say: oh, well, I think we should tolerate a bit more risk now. They said: CA CHING CA CHING CA CHING CHING!
I have no idea if Timmeh is a fool or corrupt and I’m not sure which is better or worse. But the idea that all this came about simply because the banksters decided a bit of extra risk was good is an idea only a macro finance person could sanely entertain.
One question–perhaps a tangential one–raised by this announcement is whether or not the public will move on from AIG outrage to digest and judge the plan, and whether it will quiet calls for Geithner to step down.
The consensus seems to be that either this works or we move on to what Krugman wants: i.e., the temporary nationalization of a substantial number of banks….My guess is that the short-term response in general is going to be positive, if anything because this plan will make it seem as if the government is actually doing something about what is perceived to be the root problem of the economic crisis. Of course, the era of (semi) good (mediocre) feelings will evaporate if an inadequate number of private investors are willing to dip their toes in the pool.
It turns out the Obama administration’s solution to a problem caused by wildly speculative trading by hedge funds is to set up a hedge fund, to engage in some wildly speculative trading.
That’s a bit of an exaggeration, but not by much. Treasury Secretary Tim Geithner announced this morning that the administration plans to use between $75 billion and $100 billion in money from the Troubled Assets Recovery Program as seed capital for a new $500 billion public/private fund to buy up the bad loans clogging up the balance sheets at banks around the country. (You can read the Treasury Department’s fact sheet on the program here.) In essence, Geithner thinks the fund — and the government’s participation — will persuade private investors to gamble that the loans will eventually recover enough value to make money selling them off once the economy is back on track.
The idea is to ensure that the government shares in the profits if the assets make money, but also to ensure that the taxpayers aren’t stuck holding the bag if they lose. It’s not entirely clear that the plan meets that goal, though. The FDIC would guarantee loans to cover some of the cost of buying the loans, and the Treasury would kick in 50 percent of the cash required in the deal.
There a LOT more weblog reaction HERE.