Treasury had announced several months ago its plans to purchase toxic assets through partnerships in which Treasury would bear the brunt of all losses and get only a share in any gains. I thought the partnership proposal sounded like another way to sink the Treasury further into the deficit hole, without making the kind of progress on getting good banks that could do the credit work they should be doing (but not overdo it) while getting rid of the bad stuff without so much socialization of the bankers' losses. See this posting on A Taxing Matter: Geithner's Toxic Waste Plan: good? bad? (Mar. 25, 2009).
As it turns out, the banks and funds that helped devise the scheme and who seemed to have gotten what they wanted--a way to get a premium price for their junk-- didn't want to do it either. First, it would mean they'd have to 'fess up to the real state of their losses. Second, they knew the government would be hard pressed not to exercise some of the clout it should have for taking on all that risk--meaning they might not be able to go about business as usual with a government regulator looking over their (fictional) shoulders.
In that context, it is (I think but am not sure) good news that Treasury has scaled back the program considerably. See Cho & Appelbaum, Treasury Dials Back Plan to Aid Banks, Washington Post (July 9, 2009).
It is good news, because what looked like another huge giveaway to the banks and the private firms picked as investors/managers of the program (firms like General Electric, Blackrock--already names in the pantheon of bailout recipients, now getting even more corporate welfare through the hefty government risk-assumption in these deals) in what has come to appear to be an overweaning focus on Wall Street and the stock markets rather than on Main Street and workers won't necessarily take place. But I am not sure, because if the banks are still just hiding the losses in the way they mark to market, we will be just extending this crisis longer. But even so, it might be that the best thing would not be the toxic asset partnerships but rather a real restructuring (and downsizing) of the banks. So on the whole, I think it's good this is small rather than big. I'd still rather see something else--a real bank restructuring and downsizing rather than this continual consolidation that is being assisted by government bailout funds.
Instead of a $100 billion to $500 billion program, the government will start it with a US investment of $30 billion, to buy up to $180 billion in securities. Remember that these securities are probably going to be purchased at a premium with the support of government financing for private investors who will get most of the gain and not have to bear much loss. The premium is the reason it helps the banks' balance sheets in a way that declaring the losses and then engaging in a fire-sale doesn't. But the premium means that the banks are again getting "socialization of losses"--we the taxpayers are bearing the brunt of they the bankers' speculative risktaking.
The reason for the much smaller toxic purchase? The claim is that firms are "recovering" so they just need this as a "backstop." We'll see.
Comments