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This seems a reasonably balanced summary, unlike the deal itself, which - at 94% socialised risk - is designed to be extremely favourable to the Captains of High Finance

It is also open to 'bait and switch' tactics within the finance sector, which could result in the taxpayer shouldering a guarantueed loss

It seems to be a desperate last throw of the dice by Geithner, who is effectively begging Wall St to play ball but is risking extreme US taxpayer anger, as you mention

Apparently the big boys in NY have also asked for assurances that there won't be any retroactive tax penalties or salary caps against them if they 'help out' by taking part in this scheme; so they appear to smell the opportunity for a financial killing but want to know in advance that they won't have to pay any extra tax

It's working so far as the Dow rockets upwards

What a shock; the offer of the deal of the century and guarantueed back-stopped high profits attracts some takers so far........

It is practically McNulty-esque in its attractiveness as a dead cert

Nice for some! Shame that the taxpayer or owner of a SME will never be offered anything a fraction as attractive

Is it that the banks are unwilling to accept investors' bid price, or that if they did they would be insolvent?

Bang on, Stephanie ! The devil's in the basic concept.

When I read about this scheme, (or should it be scam), this morning I immediately thought it was a "no brainer". In fact I had to read it twice to make sure I understood exactly what was being offered.

In essence, what the government and the banks want us to do, is to stupidly invest our money in dodgy areas of the market, in exactly the same way as the professional bankers invested the nation's and the people's rhino !

Thanks, but No Thanks !

On the basis that most things have a value, especially when the good times return, this looks like a tempting deal for those that ran from the market early and have the cash. As for the rest of us we are stuck with assets that will remain under under water for some time, so I think I will stick with the sinking ship I know if not love and hope it rights itself.

Good piece Stephanie. As you say the meaning of toxic debt has been somewhat overblown and it is well worth reminding people that these 'assets' do have some value - even if we cannot yet establish what that value truly is!

Will this package work in the US? Too early to say. Whilst I have no insider information I have the gut feeling that rather than freeing the logjam, it will actually identify other systemic problems. Net result - no appreciable improvement. From what I am seeing on US tv networks there is a growing anger in the general populace about the effects of the economic problems and fear that there is no end in sight. The Republicans are sriously criticsing the Obama budget proposals predicting Armagedon whilst the White House spokeswoman only says that she has confidnce! Therefore, whilst this package has large elements of risk for the US economy, it cannot be divoced from other measures that are planned or in-train. So again I say "net result - no appreciable improvement but a continued fall in the value of the US$.

In the UK, our system differs considerably. It would be more favourble for the taxpayer to nationalise the banks rather then seek a US model.

"It's not that these assets have no value, as some would suggest, it's that there's no price that the banks are willing to accept."

That's spin Stephanie. If the banks will not accept a value they have no value.

They're unhappy to accept a value because is what they represent.

#1 along with the (securitised) hawked debt for cars, college fees, gadgets, personal loans, business loans, ad absurdum, presumably?

Why all the opacity one wonders?

Ah, the American Banking model.

Perhaps, they should be re introducing the old British Banking model.

IE Bank takes Deposits, Bank lends money, keeps Loans on its own books.

Securitisation of Mortgages and other loans for trade should be disallwed for Retail Banks.

"If you start from the position that banks cannot be allowed to go bankrupt, and they cannot be nationalised, this may be as good a scheme as you are likely to get."

But if the government won't allow the banks to go bankrupt, then effectively they ARE nationalising them. Let free market forces decide the fate of the banks and their "toxic" assets.

"If the plan works, voters will conclude that the banks and the private investors have got something for nothing. They will be right. That is unavoidable - indeed, desirable. "

the banks and the private investors getting something for nothing got us into this mess, i really cant see how it will get us out of it. Well without a massive inflation after effect anyway.

If you start from the position that banks cannot be allowed to go bankrupt and they cannot be nationalised.....

Then you also come to the inescapable conclusion that the system must provide some other form of extremely unpleasant sanction is necessary for bankers who bring their banks into the situation of needing unlimited taxpayer support.

THE ENDLESS CYCLE OF SELF DECEIT CONTINUES. JUNK IS JUNK!

Being a US taxpayer, I find it extremely insulting that the same bank that is raising my fellow American's mortgage payments, (Yes they made a bad judgement in taking out a ARM) is being bailed out with their tax dollars.
This is the same bank that is taking their house in return.

The Us government needs to focus on main street as well, and maybe include protections from foreclosure. Otherwise it is really unfair to US Taxpayers to just forgive bad decisions of banks only.

Stephanie is right, there is no way to bridge the gap between the price the banks want to achieve, and what any private investor is willing to pay, except by giving the taxpayer the bill for the difference.The Geithner scheme will be gamed to hell and back. The banks will get "investors" incorporated in Grand Cayman or wherever to bid up the price of the assets, maybe even above book so they make a profit..bank A can buy, via its captive "investor", bank B's trash assets at 100, and vice versa...(the "investors' equity" will be funded by way of a non-recourse loan from the banks). The banks get to eliminate their exposure to trash at no or minimal cost, taxpayer loss is maximised, and the public gets no upside for its involvement. Surely this scheme is too transparent a rip off of the taxpayer to get approved by even the doziest of Congressmen....

They did something similar here in he CZ in the 90s. They created an entity called 'Konsolidacna Banka' to mop up all the bad debts, so that books could be cleared and banks sold. The difference was that the entity was fully state I think.

The main problem was that nobody knew what the bank actually had. The documents were unsorted. They just took them from the other banks by forklift. All they knew was that there was a lot there - a few billions.

The receivables were available for sale later.

Actually I don't know if it helped anything - some banks still screwed up afterwards because the same idiots were still running them.

This comment was removed because the moderators found it broke the house rules. Explain.

This summary is not as clear as it needs to be. I suppose economics doesn't go any deeper, at least as conventionally practiced. The market-clearing price must be "mid-wifed" by government bridging the gap. Clashing metaphor. The "bait-and-switch" comment of the Somali pirate commenter nudges this question, which is not an economic so much as legal or political question. Who decides what belongs in the "legacy" category? Standing way back, with housing prices and banking competency all in one field of view, the world is waiting for a guarantee that transactions will recommence, that there is a tomorrow. If the categorizations seem too, shall we say, Putinesque, the public might not play. So government as guarantor is being tested here. The public's main reason for distrusting government becomes a relevent question, then. I think it is the war on terror, the sequel. If "the west" is still determined to blow up the planet in order to save it, why should we believe government is refined and discreet in identifying "legacy" mortgages? First things first: first the fireside chat where the CEO assures us that he/she is tending to business, and then the massive roll-out of programs that we all know are largely symbolic, a display of power without any destination in mind, just to reinstate the idea of motion.

Isn't that the way it is supposed to look to the private sector investors that Geithner and Co are trying to tempt? Once the fish start biting well, I think Geithner plans to economise on bait. If I was running a private equity fund; I would want to catch a chunk of this before the terms of the offer moved against me.

"And the US taxpayer will have a 50/50 share in the upside."
What if there is a downside? Is there a 50/50 burden?

newsjock (#3) "In essence, what the government and the banks want us to do, is to stupidly invest our money in dodgy areas of the market, in exactly the same way as the professional bankers invested the nation's and the people's rhino !"

The chutzpah is outrageous. Just as high risk loans (of other people's momey) were given with attractive teaser rates up front (with longer term risks down-played to feckless borrowers) now that the market doesn't want these assets, they're dumping them on the taxpayer of the future using exactly the same discounting function psychology, i.e the costs will be way off in the future and to someone else (kids when they grow up). No wonder the Treasury Secretary is short staffed!

And the alternative?????

A reasonable summary.

However, if the assets are over-valued in the initial purchase, the taxpayer takes and immediate hit.

The fact is; if the banks needed funds so much to avoid collapse through their own poor risk management, those assets are only worth what someone would pay for them.

When we look at the recent losses of some banks (other have still shown a profit), this must be looked at alongside their profits for the last 10 years.

It seems that the banks had the assets, yet they played a game of brinkmanship to get governments to bail them out and reduce their losses, rather than liquidating some of their assets to balance the books and crystalising the losses in doing so.

Blimey Batman,

It looks like the wheels are coming off the 'Fair Economic Management by the Great Obama Administration'.

Time to get the Rhetoric Writers out again to whip up the supporters.
--------

'My Fellow Citizens

Think not what you can take from your Country, but think what your Country can take from you - which is trillions and trillions and trillions

We only ask that the Taxpayer puts up a meagre 93% of the risk and then forfeit all their childrens childrens' futures ; whilst our Banking partners will be forced to carry a huge 7% risk, which be assured, will be a great burden to the Banking Giants of America.

Survival thru' Fecklessness is our greatest gift to the American Banks and we must not forgo this opportunity for our Banks to sail through their misfortunes caused by the reckless borrowing of people wanting a home. Nothing at all, to do with failed Gambling by Bankers - they unfortunately simply had a 'lemming moment'.

Yet, as Natural history tell us - Lemmings are quite nice little furry things once you get to know them. We know we must be nice to Lemmings and by association, we must therefore be nice to our Bankers.

'If it is Tuesday it must be Belgium'
has now been replaced by the Administration slogan of

'If it is Monday it must be another Fiscal Plan'

This shows our hardworking and focused dedication to letting the Banks off the hook and in keeping the Taxpayer on the hook.

You can be assured that this Administration will do whatever it takes to acheive this aim.

And let the people leave this battlefield of our Economic Disneyland carrying with them this rallying cry in their hearts

Inflation ! Inflation ! Inflation ?????? '

-----

(selected audience responses)

Wild cheers from Brown

Null Points from Germany

China looks on inscrutably and quotes

''Three people do not a tiger make and three American economists and a British PM do not a 'sound decision' make''

(see Tiger ref at

)

newsjock says: In essence, what the government and the banks want us to do, is to stupidly invest our money in dodgy areas of the market, in exactly the same way as the professional bankers invested the nation's and the people's rhino! Thanks, but No Thanks !

Am I missing something here? As I see it the only problem is that we can't see what the assets are. If they are loans for hairbrained business ideas that are bound to fail then indeed, no thanks. But if they are loans for property then I'd be interested. Property debt is massively undervalued right now - partly because property is massively overvalued but also partly because of the herd mentality which says that property is riskier than we thought. Well it may be riskier than it thought but property comes with some caveats that other assets can never have.

I believe that if one were able to look at a portfolio of poorly rated property debts on a property by property basis one would see a peculiar pattern. The people who owe the money may have absolutely appalling credit ratings. They may have very little money. But in the vast majority of cases they will be paying their mortgages and if they aren't paying all of it they'll be paying most of it. Of course mortgage arrears are going up and repossessions and bankruptcies and what have you are going up but if you look at the vast majority of cases, I would have thought that even in the depths of this credit crunch 75% - 80% of these bad debtors are meeting their full repayments - as opposed to over 90% when credit was easy to come by.

Why am I so sure? Because people will always fight tooth and nail to keep a roof over their heads and their family fed, that's why. It may not be pretty but it's a basic human instinct, to protect the home. We are having a retail downturn because people are not spending the money - money that they are instead putting into covering the costs of their mortgages to keep the roof over their head. This very debt that was over-rated in terms of its safety is now heavily under-rated and might well be a good investment for the governments.

Nice article Stephanie,

Tim's chums on Wall Street must be laughing all the way back to their banks. The Treasury has managed to convince Obama that the big boys are too big to fail and that the only way forward is to take this medicine, which will probably give toxic spasms to the taxpayers in the US, with repurcussions for the rest of us. No doubt the guys at Goldman must feel very proud of their boys.

Strange that economists such as James K. Galbraith (son of John K. Galbraith) and 2008 nobel winner Paul Krugman should consider that Tim's plan has some significant failings in their comments today and yesterday. The market's may have loved today's announcement, but the underlying economic picture is still awful.

All Geitner and Bernanke seem to want to do is pump up the government debt to such insane levels that the general public will suffer huge "money illusion" and believe things are getting better as the dollar collapses, pushing up the price of commodities, and inflating earnings, house prices and removing the risk that debtors are worse off.

Nobody in the Bush or this administration seems willing to accept that debt got us into this mess and even more debt is sure not going to get us out of it. Unless of course you happen to be one of the idiot senior execs who oversaw the ruination of your bank and is now being rescued by a national government near you. This is all smoke and mirrors.

This reminds me of the concept of "fair and reasonable" which exists in Australian corporate law. The separation of these two elements allows for something to be:

- "unfair" (i.e. those on one side of the transaction are being treated much better than those on the other side); but

- "reasonable" (i.e. it is still better for those being treated unfairly to accept the proposal because it is the best option available to them).

In this case, the voters are being treated "unfairly", but given the alternatives it may be "reasonable" to accept the unfair proposal.

The US and the UK governments have put themselves in a losing position in this game. There is a way out - change the game. By, for example, by nationalising a bank - this is likely to change some attitudes... It is a shame that in the year of Darwin we are seeing the assissted survival of the unfittest at the expense of the fit...

quote "If you start from the position that banks cannot be allowed to go bankrupt, and they cannot be nationalised, this may be as good a scheme as you are likely to get. The problem, as I said at the start, is not the detail but the basic idea."

That is the problem we should not be starting from there, let the banks sort out their own mess, if they go bust so be it, Once governments got involved there were going to be people creaming it in and the tax payer gets dumped on , its a lose lose for the tax payer , win lose for the banks.

Stephanie,

Quite right, these assets are quite literally worthless in that it is impossible to set a tradable price for them. However they will be transferred from their current nominal owners to these state backed funds, at some price.

The price will be another bail out for the banks to the detriment of everyone else, mainly investors and savers. This, like quantitative Easing and zero interest rates is an economic nonsense in the literal sense that it does not make any sense. Banks have too much money and no longer require either savers' or investors' money, why should they when taxpayers are force feeding them cash (and this is another one of the insanities!)

The banks are bankrupt. They should have been wound up and their assets sold for what they could fetch. What we are doing should be seen in this light. For example: no employment contracts for any of the staff should be continuing after the rescues as they would have ceased in bankruptcy if that had happened as it should have done.

We, the people, the average taxpayer need rescuing from these greedy bankers. They are still acting as thought this disaster has not happened, and this must stop. (c.f. AIG absurd staff bonuses etc.)

The politicians and regulators who were major contributors to this disaster are still drawing their fat salaries and this must stop too. The arrogance of the regualtors is beyond belief; the absolute cheek and bare face brazen perfidy that they are still showing is incredible. These men are major contributors to the disaster and yet they remain in their jobs - this is an absolute outrage! The people will not put up with this affront!

I may be completely wrong but hasn't the US government been effectively paying the difference in the percieved value of these assets (liabilities some might say) by pouring money into AIG.

Perhaps, by 'taking ownership' of the legacy assets they hope to stem the flow of 'insurance' money to Barclays and Deutsche Bank and UBS and all the other 'offshore' organisations that have benefited from the AIG bailout. And maybe even Goldman Sachs.

#13 grandpulltheotherone

Exactamundo mon ami. It's even better than you suggest as a scam 'cause Bank A can use some of it's TARP money to overpay for the toxic assets of Bank B and vice versa! Therefore the US taxpayer takes the hit AND pays for it.

"If you start from the position that banks cannot be allowed to go bankrupt, and they cannot be nationalised, this may be as good a scheme as you are likely to get. The problem, as I said at the start, is not the detail but the basic idea"

EXACTLY!! The basic idea that banks cannot allowed to go bankrupt is WRONG. Once the banks are given this tag then they just sit pretty and wait for the taxpayer to pick up the bill. Look at the car inductry, capacity cuts, works closures, wage cuts - all so that they can cut costs and survive. Where is the equivalent from the banks? Cut costs? No we'll have bonuses thank you very much. Early on we saw asset sales as banks realised how bad the situation was but since bailouts arrived - nothing.

The latest scheme should not be a blank cheque for the banks. They should be offered the chance to sell at a price of 5 cents in the dollar (I have read that Lehmanns toxic assets were sold for 10 cents in the dollar and still lost money), and if they refuse then let the market decide what happens. The banks loss should not be tax deductable in future years and any losses incurred by the tax payer should then be paid by the bank in additional taxes over the next 10-20 years. I think the banks would still fall over themselves to sell as they would have to realise that there is no alternative.

Once the dust has settled then we need a compensation scheme, paid for by the banks, big enough to ensure that it can handle the costs of any bank going down. Otherwise, chop up the big banks to bring them down to a size where they can fail.

Re 22. StategyCall >

Obama came in on a loser, the economic position he inherited was practically as big a poison chalice as has ever been seen.
Especially when previous administrations had already committed so much to propping up the banks.

Why, if the banks need funds are they not forced to sell these assets to the highest bidder?

As to the mentions of nationalisation. From a UK perspective, it may work for retail banking, but for merchant banking, the damage it would do to the city; and practically our only true export industry would probably do even more damage... In fact letting some such institutions "fail" would probably be much less damaging to long term economic prospects.
Of course the question needs to be asked, why our economy was allowed to become totally dependent upon one sector. It does seem like awful strategic risk management from politicians and the treasury.

RE 31 agc3167: "Otherwise, chop up the big banks to bring them down to a size where they can fail."

> absolutely - but instead the RBS / HBOS takeover was pushed through over-riding competition rules.

As you say, don't let anything become "too big to fail"; by definition allowing organisations to have such influence that their survival is critical to the economy as a whole means society carries far too much of the risk.

A step back to the separation of retail banking, merchant banking and good old mutuals providing mortgages seems to offer a lot of advantages.

Sounds like a great deal for the private investor and not so great for the taxpayers. Geitner says that the issue that has done the damage is the fact that these legacy assets / securities were dumped in a fire sale by investors first time around which marked down their value. The fire sale discount mark down on the bank balance sheets has done the real damage. He says that the economy cant afford to wait for banks to allow assets to mature, so the US is subsidizing a market for investors to buy. The taxpayer has already underwritten the fire-sale write downs with public capital. If the assets are now sold at better values, will the write-ups be refunded to the taxpayer? Publicly underwritten losses will be used to offset taxable future profits and reduce tax revenues payable - is this fair to the taxpayer? If the legacy assets / securities benefit from monoline insurances, why should the public bear disproportionately in the risk of default by virtue of the joint venture funding arrangement? Have the insurers been bailed out with US tax dollars as well?

Sounds like a spondoolie-fest for Wall Street.

I'm in the minority that looks at it the other way, that the plan isn't just a big ineffective giveaway to banks and private investors, it's actually more about getting private investors to take a risk on buying the trash assets, so the taxpayer who will fund most of the purchase price won't get screwed.

It isn't really about defending the plan, it's more about being objective. And what really is the objective in all this? It's actually quite modest, yet at the same time it is terribly important. It is to raise banks' lending capacity and reduce uncertainty about the scale of the problem on their balance sheets. The easing that success on that score will bring is worth every treasury dollar (or pound).

The devil I'm afraid really is in the detail, Steph. The more risk Treasury requires investors to take, the less likely its plan is to work. Giving a number of funds non-recourse finance to purchase the securities is the carrot. Banks are non recourse, so they either require adequate capital or they should be confiscated. The devil in the detail is the quantum of capital and how to measure it and what the confiscation process should be.

Though this is a significant carrot. New capital put in banking will also be levered up non-recourse, and importantly this will be private capital. The devil is about the numbers and possibly the confiscation rules (the stick). It's not whether the idea is good or bad, it's whether Treasury demands enough private capital to be a reasonable outcome for taxpayers.

If the government requires enough capital then it is real capital and it reduces risk to the taxpayer. If they require too much capital then the returns won’t be attractive enough. The issue is how much new capital for how much taxpayer risk.

A good summation of the situation. However, might it not be in the state's interest to raise tax on the earnings of these assets? The proviso being they have any value to start with. It would be something of a sleight of hand but private investors need to be answerable to more than their desire to accummulate wealth. Part of the issue with our present way of doing business is that there is no moral accountability and in the vaccuum created by this the whole financial system has been brought close too ruin. Private investors directly and indirectly will be beneficiaries of the state's bale out to the banking system so it only reasonable and right that they should contribute. Their investments, whether in this or anything else, depend on the functioning of the system.
I'm getting a little tired of jadedjean's tub-thumping and statistics-jangling and continuing references to under-performing poor people. Stick to the point and on the way take a look at Canada's high flying African-born graduates while your at it. You'll like it - it's statistics! Don't you just love 'em?!
Feckless housebuyers did not create this problem. The problem was created by apparently non-feckless financiers with a cynical disregard to banking practice (risk management) and ethics. As a fan of empiricism you should understand that the process involves someone offering a mortgage first. You can aspire to buy the moon if want but it's just that unless someone offers you a mortgage. In terms of simple causality you have to have the offer first. No mortgage. No house. No sub-prime disaster. Aspirations intact.
As for the Hispanics, como normal y como sempre es un caso de poco a poco. If your start at the bottom of the pile in the US, it is very difficult to get to the top especially if you are illiterate to start with, don't speak English and often don't have any right to residency. If you were Hispanic, Black etc. or at least had any empathy, you might come close to realising why statistics can never tell the whole story.
The point about empiricism is to have any validity it has to happened first. You cannot argue empirically on the basis of a hypothesis because - ipso facto - it hasn't happened. Take a hike on that one trick pony of yours!

All comments here are so frank, insightful and well-meaning. All of you, please know that this upheaval, although unpleasant, is necessary and important to help us in our development by forcing all of us to re-evaluate our priorities and in which directions we choose to invest our energies.

As so many of you have proven your ability to "see through the smoke screen", it will soon be time for you - as the prophets of past ages did - to speak your Truth to those who will listen and move on from those areas where your messages fall on deaf ears, "wiping the dust off your sandals" before exiting.

Many of you are true prophets. Please speak your Truth loud and clear.

A second bite at the cherry, please.

I've thought some more about the US encouraging private investors to plump for toxic assets.

The present financial crisis has been brought about by risky loans going sour and companies going "bust".

The US offer of attractive loans, so that American Joe Bloggs can have a slice of the toxic action, is just compounding the original problem.

At last! A decent blog from Stephanie Flanders.
She's starting to get the hang of it.

I wouldn't be surprised if the banks buy 'toxic' assets
off of each other with the US tax payer paying for it!

A pass-the-parcel merry-go-round with the US tax payer losing.

This will take years to play out.

Charlie80808 (#39) "At last! A decent blog from Stephanie Flanders.
She's starting to get the hang of it."

I agree. Let's hope she keeps it up and dumps the rhetoric. Journalism is supposed to critically hold politicians and their public servants accountable in democracies, not spin on their behalf.

Has Ms Flanders nothing to say on the rise in inflation?

This comment was removed because the moderators found it broke the house rules. Explain.

Jaded Jean,

Your comment, "Those who want to make money out of the vulnerable have been telling them lies pretending to care and improve their lot in life. There is no evidence that this can be done through education as intelligence is largely genetic."

Your first comment is very insightful, however, being a white Caucasian, I do not see myself as being more intelligent than all the billions of Asians (large percentage of California population), blacks and Hispanics. I continually meet people from these backgrounds who are infinitely much more intelligent than I am. Could it be perhaps that the "intelligent" ones in California who vote, legislate and run the economy and government there have not managed the entire environment there (economic, social, political, demographic, cultural, etc.) so intelligently?

NotaProphet (#43) Despite what one has hear in recent times, perception is not all. What matters is measurements of behaviour. The media has been preteding that these measures don't exist or don't matter.

All I've stated is what official government agencies and academics publish about group mean IQs and levels of academic attainment. This itself should not be news.

That it has important consequences for our economies, yet is alien to mnay people is rather disconcerting, as it should be obvious.

#44 apologies for typos - keyboard problems ;0)

#44 and #45 keyboard problems - a new euphemism for arriving home from the pub is it?? I must remember that one thanks

as to your claims about the low IQ of the prison population, this could presumably be remedied by incarcerating all of the bankers, hedgies and other financial magicians who should be cooling their heels in a minimum security institution

I believe that the vast majority of this banking uber class is white and private-school educated; what a marvellous example they set

CASHBACK MA'AM?

somali_pirate_SP500 (#46) "as to your claims about the low IQ of the prison population, this could presumably be remedied by incarcerating all of the bankers, hedgies and other financial magicians who should be cooling their heels in a minimum security institution"

Alas, their behaviour was/is venal, but it was/is not illegal. They had that well prepared for earlier via deregulative legislation and light-fingered management. See statistical representation of groups in the House of Lords - not many British Chinese oddly.

It's difficult, when one follows the links, not to come away (guiltily no doubt) fearing that low interest rates, sex-equality, mass immigration, and constant pressure to consume (shop, shop, shop)for the good of the country is all a bit let's say.... incestuous.

I'm off to wash my keyboard out with soap.