The Great Geithner Heist

The Geithner plan, also known as the Pee-Pip ("PPIP" or "public-private investment") plan, is the biggest heist yet. Geithner makes Bernie Madoff look like Santa Clause. I mean, what's 50 billion when you can "legally" grab a trillion? It is so unbelievable, so stunningly incredible, that once you dig into it, you'll think you've lost your mind.
So let's review. We're in this massive financial meltdown because banks (e.g., Goldman, Citi, B of A, and JP) made shoddy loans to dodgy or duped borrowers, securitized those mortgages via collateralized debt obligations (a fancy way of saying you can buy stock in a pool of mortgages), bought and sold the CDOs, and bet on them with credit default swap ("CDS") contracts.
When the real estate market tanked, the CDOs tanked too. For the most part, private investors in the free market are willing to pay little or nothing for them.
But the banks are holding firm on the price because if they take anything less than what they claim the CDOs are worth, they'll be insolvent. It's simple high school economics: if your assets are worth less than your liabilities, you are insolvent. You're upside down. So . . . the banks have overstated the value of the toxic stuff on their balance sheets so they can appear solvent (and therefore eligible for bailout money).
The banks can't lend because the toxic assets on their books are ticking time bombs. They're hoarding cash to cover the future implosions. We've got a bunch of insolvent "zombie" banks that are rightfully afraid to lend money and a Congress that is rightfully afraid to give these zombies more money.
Just as Geithner figured out a way for companies getting bailout funds to circumvent the bonus and salary caps, he's figured out a way to funnel up to a trillion dollars to these banks, free and clear . . . without having to go to Congress.
Because after all, someone has to buy these toxic assets for more than they are worth, so the banks can be solvent and start lending again. Right? This is the Administration's fundamental and terribly flawed premise. The idea is to reinflate the bubble with more lending and more spending; we do that by taking the toxic mortgages off their hands at prices that let the banks stay solvent. But who is going to pay the banks more than their junk CDOs are worth? Who? Why, you, gentle reader.
In my opinion, it goes something like this:
_____________________________________
Banks: Help us, Timmy, we're melting. No one in their right mind will buy our garbage mortgages, our toxic CDOs! We've got bondholders to pay, shareholders to satisfy, bonuses to collect . . . Help us.
Tim Geithner: Okay. How about if the taxpayers buy these crappy assets from you bankster boys at whatever price you want? How would that be?
Banks: Wow, Timmy, why that would be swell! What hallucinogen are you on? Give us some. If Paulson couldn't pay enough for the toxic assets to keep us solvent, how will you? You'll never get Congress to go for it.
Timmy: Good point, banksters, but I'm a few steps ahead of you. I've come up with a plan so complicated and jumbled up, no one will know what hit them. And we're going to move at lightning speed.
We know we can't go to Congress for any more money. But I've got a few tricks up my sleeve. Turns out, the FDIC and the Federal Reserve both hold boat loads of money that can be used in exigent circumstances. We can access all of that money and give it to you guys. And the beauty of it is, there's not a damn thing Congress can do about it.
Banks: Great, Timmy. Fantastic. But won't Congress figure it out and go all AIG on us?
Timmy: I don't think so. First of all, you're assuming Congress will understand the plan. Our PR machine is expert in pulling snow jobs. We've got really good-sounding, misleading language in the plan, claims like the plan "not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price . . . " It's chock full of happy falsehoods. Plus, we're renaming the toxic stuff "legacy" securities and "legacy" assets. It's all in how you frame the issue.
Banks: Gee, Timmy. But it still sounds like an insurmountable task in obfuscation.
Timmy: Relax. Right now, Obama is the man. No one wants to rain on his parade. Plus, my plan is pretty complex, so it's not like someone could explain it on the evening news in a 90-second soundbite.
I've made it sound like some phantom magnanimous "private investors" are going to buy the toxic assets when it's really you guys. And I've made it sound like our mythical private investors are fronting half the money for this junk.
Of course, that's not how it will actually work -- I'm no dummy. But the taxpayers and Congress sure are. In reality, you boys will be buying the toxic assets from yourselves and each other using taxpayer money, at whatever prices you set.
You'll each start a PPIP and contribute 7% of the purchase price for the garbage assets. The Treasury will kick in another 7%, and the taxpayers (via the Federal Reserve and FDIC) will loan your PPIP the remaining 86% of the price. In essence, your PPIPs get 93% financing to buy the crap.
Banks: But hold on. If the "legacy" assets turn out to be worthless, our PPIPs won't be able to pay back Treasury's 7% or the 86% loan from the taxpayers.
Timmy: Calm yourselves, little dogies. The loan from the taxpayers to your PPIP is non-recourse. If your PPIP can't pay it back, just hand the crappy assets over to the taxpayers and leave them holding the bag. Your little pee-pips get to walk. Sure, the taxpayers will lose all their money and the PPIPs will lose their 7%. But the banks won't lose anything. Don't sweat it.
Banks: So if we set up PPIPs to buy these bad assets from each other and everything goes to hell, we're off the hook?
Timmy: Exactly. The most you can possibly lose is the paltry 7% you put in your pee-pip. This way, you bank boys get to sell your junky assets for whatever you want and your banks get all the money up front. You get to stay solvent, fly around in corporate jets and avoid salary caps.
The bad assets will just sit in the mysterious PPIPs you started. When the toxic mortgages default, your forgotten little PPIPs will just quietly go bankrupt. The taxpayers will take the 93% hickey, not the banks.
Banks: Sounds like a dream, Timmy. But if you want us to put up even 7% for this worthless garbage, we want a good return on our investment.
Timmy: Oh, you'll get a good return, astronomical in fact. For putting up only 7% of the purchase price, your PPIPs will get 50% of all the profits. Plus, remember, you already have government money right now. Just use some of it to kick in your 7%. That way, your banks aren't out a dime.
Banks: Well, that's fantastic, Timmy, but we can't be expected to shoulder 50% of the losses when these mortgages go sour.
Timmy: You boys just aren't getting it. Your losses are limited to the seven percent you put in your PPIP. You're making your banks solvent by gambling with taxpayer money. How sweet is that?
Banks: Wow, man. But how we can pull this off? How are we going to get away with pricing the worthless assets at way more than they are worth? The free market is basically pricing them at thirty cents on the dollar or less.
Timmy: that's the beauty of my plan. You guys are going to set the prices by bidding on each other's assets. If you want JP Morgan to give you a good bid for your toxic stuff, you give them a good bid for their toxic stuff. It's a back-scratching thing. When Mighty O told you guys at the big bankers meeting, "You are all in this together," he meant it.
_______________________________
To defend this trillion dollar taxpayer gift to the banks, Geithner argues that since the PPIPs are staking their "own" money in the venture (read the fine print: a whopping 7%) and the PPIPs will bid against each other for the toxic assets, a fair price will be reached. In this way, so goes his disingenuous logic, the taxpayers won't overpay for these crappy mortgages.
Except, err, remember the housing bubble? You know, the one we're in right now? People overpaid for houses because they didn't have to put much, if any, of their own money down. Remember? How is giving the PPIPs 93% of the purchase price for these toxic assets a sure-fire way to figure out their fair market value? Anyone? So much for "price discovery."
It's certainly no surprise the stock market "liked" the plan. If the banks had to sell their toxic waste for fair market value, the shareholders and bond holders would get wiped out. But under the Geithner plan, these people -- the ones who most deserve a haircut -- are completely protected. If the banks get close to 100% for their garbage assets, there won't be any write-downs. And no write-downs means no losses for the bond holders and shareholders. Oh, happy day.
As for our losses, you know . . . the taxpayers' losses? Friends, fear not. From the government and here to help you, Sheila Bair, FDIC president, told the New York Times that the FDIC expects ZERO losses on these toxic mortgages. Zero losses on assets no rational investor wants to buy at the banks' current asking prices? Get out of town! She has also said she is perfectly okay with the banks buying toxic assets from themselves via their own PPIPs.
Now you can see why this is all so crazy-making.
But maybe you're thinking, "Oh, come on. There's no way the government is perpetrating a scam like this on its taxpayers. Who is this wacky lawyer chick, anyway? If this were true, I would have heard about it."
Well, you're hearing about it now. And you don't have to take my word for it. Plenty of respected economics professors and finance gurus are up in arms too. Paul Krugman is apoplectic. Even the emminent well-respected Financial Times has sniffed out the scam.
If you do nothing else, I beseech you to watch this video by Sal Khan of Khan Academy. He's not some odd duck I found quacking around on the internet; he's appeared on CNN and his academic credentials are impeccable. In this simple video, he shows how Geithner's plan will work.

So, to recap: we, the taxpayers, are going to give a trillion bucks to the banksters who got us in this mess to begin with.
And to put some perspective on what a trillion dollars means, consider this: if you borrowed one million dollars a day, starting with the day Jesus Christ was born, up until today, you still would not have one trillion dollars.
If you want to email your elected representatives, here's a link. Granted, Geithner's plan makes a total end-run around Congress so they can't exactly "vote" against it. But the folks in Congress are a creative bunch, as we saw with AIG. I'm sure they can come up with something.
Then again, we could all choose to do nothing. "This is just too hard to understand. Who am I to question the powers that be? Those people in DC are smarter than me."
Maybe our kids won't ask us why our currency went from "In God We Trust" to "In Goldman We Trust." But how will we answer if they do?
Next up: a solution to the toxic asset problem that doesn't screw the taxpayers.

Labels: Geithner Ii Video, Geithner Plan, Tarp