Roubini OpEd in support of new Treasury plan

[MichaelB]

An unexpected vote of confidence from the man who has been one step ahead of everyone else so far. It's still a long and rough road ahead, but Prof Roubini is supporting the plan - AFAIK the first time he has publicly expressed support for gov't actions. Hopefully, a harbinger of things to come.

Give credit to Timothy Geithner's new toxic asset plan
For the economy to be viable, the financial system must be healthy. For this to occur, the system needs to be cleansed of its poorly performing loans and so-called toxic securities backed by loans. This way, once creditworthy institutions and individuals come to the market looking for capital to borrow, financial firms will be in a position to lend them money.

Secretary Timothy Geithner's new toxic asset plan is a serious step in the right direction in that it creates a public-private partnership to buy the troubled assets of financial firms - in other words, to do the necessary cleansing. Up until now, with all the government bailouts, the financial system has been barely treading water. With this plan, it will still be a hard swim, but, at least, there is a path to shore.

Give credit to Timothy Geithner's new toxic asset plan

 

[donheff]

I read that Roubini thinks the plan envisions (or at least should envision) a next step that involves nationalizing (i.e. receivership) week banks/institutions after the "stress tests" weed them out. The "strong" institutions would (should) get to play in the announced plan.

 

[jug]

Roubini is on the money. In order to bring order, one must first untangle the knot of toxic junk and send it flying out of the system, i.e., grease that oils commerce, money.

The only bank big enough to do this is the Fed. So it must be leached out.

Only then will banks regain confidence slowly, as the Fed takes it's time to "price" correctly the bad paper, and then perhaps mitigate the hit being taken by the taxpayer in the form of deficeit/national tab-debt.

This is one way to skin the cat. Too many competing factors among the banks to do this. Also, take into account, there will be fraud, double dipping in the form of Tarp money, and the collection of swap contracts, among other things, so expect a 10-15 percent cost of doing business with the boys. Oh, yeah, congress also gets it's 5%.

Now back to w-rk you suckers, get on that treadmill and keep producing so the boys can eat caviar, and you can eat stale cake.

jug

 

[Gone4Good]

Before the details were announced Roubini was on record saying the plan wouldn't work. I wonder what happened to change his mind?

 

[Independent]

Note that this piece also says:

But let's not have any illusions. The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks.

Which is pretty much what jug said, but Geithner hasn't.

[In theory, the transfer takes place whether or not the economy gets worse. It appears that the gov't is giving the investors a put on assets which are extremely hard to value today. This put has a positive value before we know how things are going to play out.]

 

[Gone4Good]

It appears that the gov't is giving the investors a put on assets which are extremely hard to value today. This put has a positive value before we know how things are going to play out.

It's important to remember that the private investors in this deal still have 100% downside to their investment. They can lose everything. It's true the government takes a larger share of the total risk and only gets half of the upside - so it's a better deal for investors than for taxpayers. But I hear an awful lot of people talk about this as if the private investors' downside is limited. It's not, unless you consider a 100% loss to be "limited".

 

[jimbo17]

The Stock Research Portal on the poisoned chalice of redeeming “toxic assets”: “I can’t see where the incentive will be for private investors to ‘buy into it’ without government guarantees which, if offered, would be tantamount to the U.S. government simply buying the ‘toxic assets’ directly.”

 

[Gone4Good]

“I can’t see where the incentive will be for private investors to ‘buy into it’ without government guarantees which, if offered, would be tantamount to the U.S. government simply buying the ‘toxic assets’ directly.”

The link didn't work so I couldn't see the full explanation of this thought, but the "incentive" is to pick off distressed assets from (likely) forced sellers with below market, non-recourse, government financing.

What's not to like?