New York Times Deal Book: Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan
From the New York Times Deal Book:
Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan
March 24, 2009, 6:23 pm
“Nouriel Roubini, a/k/a “Dr. Doom,” is giving the Obama administration’s new plan to buy toxic assets the thumbs up”
That may be surprising given how critical Mr. Roubini, the bearish economics professor at New York University, has been in the past regarding various government plans to fix the economy. But Mr. Roubini seems to have seen something he liked for a change.
“My take is generally positive, with a couple of caveats,” Mr. Roubini told DealBook about the new plan. He said he liked that the government was finally stepping up to clear the toxic assets off the bank’s balance sheet and that private capital would come in to make a market for it.
“Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay,” Mr. Roubini said in a telephone interview. “People say, ‘the government is putting in 95 cents on the dollar, so why not put 100,’ to do it all by itself. It’s because private-sector participants have the incentive to get the best price.”
It wasn’t all positive: Mr. Roubini said he did not like that banks have the option not to sell an asset after the auction concludes, as this would create confusion and frustration on the part of the buyers. He also believes the government should use its leverage over the banks to force them to participate, whether they want to or not.
In an opinion piece scheduled to be published Wednesday in The Daily News of New York, Mr. Roubini and a fellow N.Y.U. professor, Matthew Richardson, argued that “the reason that financial institutions should be “pressured” into participating is because that “they are the cause of the financial crisis.”
“They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place,” the two professors wrote.
But unlike many critics of the plan, like Paul Krugman, a Princeton economic professor and columnist for The New York Times, who prefers full nationalization of the banks now, Mr. Roubini believes that the Treasury’s plan does not preclude nationalization at all. Rather, he said, it will help to clear the way to full government takeover some troubled institutions.
“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.
In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.
Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.
He cited Tuesday’s Congressional testimony by the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner.
“The most important thing is what Bernanke and Geithner said today about the need for an insolvency regime for systemically important institutions,” Mr. Roubini said. “You are going to need that not just for the A.I.G.’s of the world, but also the bank holding companies as they go into Chapter 11.”
He added, “You are going to need that in shutting down, potentially, a bank like Citigroup.”
–Cyrus Sanati
So to clarify my viewpoint: I see the Geithner plan as being relevant only to banks that are solvent. For those that are found – after stress tests – to be insolvent I see as the proper solution – -as I have widely written – to nationalize them and thus clean them up to prepare them for re-privatization.
The stress test should do a triage between banks that are illiquid and undercapitalized but solvent given the provision of capital and liquidity and those that, under a reasonable stress scenario are effectively insolvent. Those that are insolvent should be nationalized.
Those that are solvent will still have many toxic assets that need to be disposed of; and the Geithner plan provides a way to properly dispose of the toxic assets of solvent banks. So my partial support of the Geithner plan – with all the appropriate caveats regarding forcing banks to sell toxic assets and accepting the results of the auctions – is consistent with the complementary idea of nationalizing the insolvent financial institutions.
The bad assets of insolvent banks that are nationalized could be separated from the good assets and then worked out by the government (but the government is not very good in that business); or they could be sold to private investors through an auction mechanism along the lines of the Geithner plan; or they could be sold – together with the good assets – to the investors purchasing a privatized bank that was temporarily privatized (along the lines of the Indy Mac deal where the investors purchasing the bank received a government guarantee on the bad assets after a first loss).
The toxic assets of the solvent banks still need to be disposed of as no private investor will participate in the recapitalization of solvent banks that are still full of bad assets. Of the four available options for disposing of the toxic assets of the of solvent banks (the government purchashing them in a reverse auction; keeping them on the banks’ book with a guarantee after a first loss (the approach talken with Citi and Bank of America); selling them to private investors with a guarantee after a first loss; or finally the Geithner plan) the Geithner plan provides a solution that is likely to be superior to the other three. If the government were to buy these assets it would be the only bidder in a reverse auction and price revelation problem would be severe. Keeping them on the banks’ books with a gurantee after a first loss has been a disaster – as the experience with Citi and Bank of America shows. Selling them to private investors with a guarantee after first loss would be very non-transparent in the price revelation objective. So, having private investors bidding for the toxic assets – as in the Geithner plan – ensure a better price revelation that would be impossible in a reverse auction where the government is the only bidder. Also note the the idea – supported by many including myself – of converting some of the unsecured debt into equity to recapitalize banks – works for insolvent bank that go through a receivership proces; it cannot be applied to solvent banks that need recapitalization. In conclusion the Geithner plan is not an alternative to nationalization: insolvent banks should be nationalized and the Geithner plan should not apply to them. But solvent banks still need to have their toxic assets disposed of; and for this banks the Geithner plan provides a solution that – all in all – is better than the alternative. Those who dont like the Geithner plan on the basis that they prefer nationalization are right – as i agree – that the insolvent banks should be nationalized. But they usually dont give an explanation of how they would dispose of the toxic assets of solvent banks. They seem not to like the Geithner plan because it would provide a subsidy to the investors. But ensuring participation of private investors in the risk and in the price revelation is worth that subsidy. Otherwise those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan.
62 Responses to “New York Times Deal Book: Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan”
xiao han • March 24th, 2009 at 6:40 pm
I am first.
Guest • March 24th, 2009 at 6:41 pm
first
kilgores • March 24th, 2009 at 6:54 pm
How long will it be, I wonder, before Mr. Geithner floats Part II of his plan: the part that would carry out the necessary nationalization of insolvent financial institutions? It seems to me that the longer the delay, the greater the likelihood of further harm to the economy.SWK
RED • March 24th, 2009 at 7:17 pm
A process to clean up the financial system looks to be emerging. Could it be that the “solvent” banks have seen their lows??
Guest • March 24th, 2009 at 7:19 pm
This appears to be a voluntary program and you can bet the banks will carefully plan their strategies.
Octavio Richetta • March 24th, 2009 at 7:19 pm
Professor, IMO, you provide the most balanced view on the toxic asset plan I have read so far. There is a lot of fear mongering among economists and financial writers (e.g. MF* who believes the TG plan makes nationalization impossible) as uncertainty is the kind of thing that lends itself to this kind of thing and there is no question there is lots of uncertainty out there.* http://www.ft.com/cms/s/0/1bdc2a28-1890-11de-bec8-0000779fd2ac.html
Guest • March 24th, 2009 at 7:33 pm
Can somebody explain to me why we, as taxpayers, should have to be exposed to ALL of the downside risk of this new Geithner plan?Why aren’t the bondholders of these banks taking it in the ass RIGHT NOW!!!!!IS ANYONE ELSE SICK OF BEING BENT OVER BY WALL STREET?!?!The solution to this mess is so obvious to me……Let all of these STUPID banks, hedge funds, mortgage companies, car companies and insurance companies that made STUPID, GREEDY, AND FRAUDULENT business decisions FAIL!!! Why is this so hard???? They made the bad and poor decisions…..let them fail!!!Am I missing something?There are PLENTY of well-run, ethical, and sound banks, insurance companies, car companies, mortgage companies that would GLADLY take all of the business that these failed institutions would create.”Too big to fail”….what a freaking lie!Does anyone see what is taking place right before our eyes????All of these STUPID, GREEDY, AND FRAUDULENT decisions that now DEMAND payment are being pushed onto the U.S. taxpayer and our dollar.They are going to bankrupt our entire nation!!!!!I see this as plain as day. We are approaching the most shocking, economic judgment that the world has ever seen.The music is going to suddenly stop, and EVERYONE in America is going to sh!t their collective pants.
villager • March 24th, 2009 at 7:43 pm
IMO, the Professor has sold his soul to the Administration. Having a different view does not mean a balanced view. It could be an erroneous view. Look at how his interpretation of assets differs from Joseph Mason’s whose blog appears elsewhere on this site. The fear mongering points out how easily this new plan can be “gamed” and neither Summers, Geithner or Bernanke elicit credibility. The critics are correct: the plan fails the “smell” test.
Ty • March 24th, 2009 at 7:50 pm
http://market-ticker.denninger.net/archives/894-Open-Letter-To-The-FDIC-Ombudsman.html“…The FDIC is the entity that will both guarantee the debt issued and vet the bidder list……There is a potential problem here.Let’s say that I am a bank (“financial institution”) with $100 billion in “toxic assets”. I have them on my balance sheet at 80 cents on the dollar. The market has them marked at 30 cents. We do not know what the held-to-maturity performance will be, since that requires knowing the future, although for the moment let’s assume that they are cash-flowing at the present time.What I (the bank) do know, however, is that if I sell them at 30 cents I take a monstrous loss – perhaps enough to force me under Tier Capital limits and thus render me subject to an FDIC enforcement action. I therefore will not sell for 30 cents so long as I have any belief whatsoever that the cash flow – or any government subsidy – will exceed that value.If I, as a “financial institution” can participate as a bidder in these auctions I can foist off my loss onto the taxpayer. Here is how I can rig the game so as to avoid an otherwise-inevitable loss:* I become a “bidder” and “bid” on my own assets at 75 cents.* I am providing 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.* The loan, ex my contribution, is non-recourse. That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.Now the “assets” (a passel of CDOs?) turn out to be worthless. I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that’s all.The taxpayer gets hosed for the remaining $71.25 billion dollars…”______James Galbraith, noted economist in his own right, and son of John Kenneth Galbraith, among many other respected and not-necessarily-always-establishment-conformist economists, described this same massive potential (likelihood) for abuse of the PPIF in this interview:http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner%27s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=^gspc,^dji,c,bac,jpm,WFC?sec=topStories&pos=2&asset=TBD&ccode=TBDPart 2 of the interview is also worth viewing:http://finance.yahoo.com/tech-ticker/article/216480/Part-II-Geithner-Obama-Kowtowing-to-%22Massively-Corrupted%22-Banks-Galbraith-Says?tickers=XLF,FAS,SKF,C,BAC,JPM,^DJI______Basically, banks, by using “intermediaries,” bid up the prices of their own toxic derivatives in these PPIF “auctions,” thereby, massively lowering their ultimate losses.First, according to this article (and, with obfuscatory government schemes such as these, some of the most salient details are released in the earliest reports, before the PR machine is able to fully control information dissemination), private firms will put up 7% of capital, and the government will put up the remaining 93% (Treasury matches the 7%, and the Fed and the FDIC put up the rest). The “loans” are non-recourse, so the losses to private firms are limited (if that, since there are reports that all the risk of potential losses is being borne by the government) to this 7%:http://finance.yahoo.com/news/Administration-moves-against-apf-14722723.html“…Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan…”Other reports indicate that, while confirming the above report of private investment will be less than 10%, 50% of the profits will go to the private investor, with all of the risk of losses being borne by the government (this view is supported by many, many reputable evaluations of this PPIF program out there):http://finance.yahoo.com/tech-ticker/article/217878/%27Win-Win-Win%27-vs.-%27Robbery%27-Wall-St.-Loves-Geithner%27s-Bad-Debt-Plan-But-Taxpayers-Should-Hate-It?tickers=WFC,GS,XLF,FAS,JPM,BAC,C?sec=topStories&pos=8&asset=TBD&ccode=TBDSo, then, here’s a hypothetical scenario:I am JPM. I have a tranch of toxic derivatives that have a cost basis of $100 billion. They are currently carried on the books at $80 billion (80% of cost, as, at this point, most of these worthless junk are currently being carried by major banks at about 80% of cost — so much for *fudgeslappin* mark-to-market accounting rules, eh?…). I, JPM, via “intermediaries,” bid up the price of this tranch during its PPIF auction to, say, $70 billion. Given that these junk “assets,” if the sale of Lehman’s (and sundry European CDS auctions) CDSs are any indication, are worth less than $0.10 on the dollar, and that, currently, the private market will not touch them for more than $0.20 on the dollar, if this tranch ends up “realizing” its true worth of, say generously, $0.10 on the dollar, I, JPM, will realize a net “gain” of $65.1 billion on this transaction ($70 billion [$80 billion currently carried on books, less ~$10 billion, which is what they are actually worth] – $4.9 billion [7% of the $70 billion fictitiously bid up during the PPIF auction]). And this is assuming that the government will not assume 100% of the downside, which, at this point, appears to be what it is guaranteeing.______To those still doe-eyed, as apparently now Roubini has become (either that, or he is becoming more and more accepted into the “mainstream” banking oligarchical establishment, and therefore is becoming more and more empathetic to this class), to those that doubt that the Fed would “permit” the gaming of the PPIF auctions as described above, WAKE TF UP, and realize that the leadership of “our government” and the oligarchs/Wall Street are one and the same. They are simply lining their already fattened pockets with trillions upon trillions of dollars from the present and future public Treasury. The Fed has already, time and time again, refused, on the grounds that it is not a part of the federal government (which is true — it is a private bank, run for the fiduciary benefit of its private banker owners), to reveal detailed information concerning its “bailout” activities. Do you seriously think that the Fed will provide any more transparencies during these upcoming PPIF auctions? If these banks indeed use “intermediaries” to artificially bid up prices in the auctions, do you think we the taxpayers will ever find out about it from the Fed?Effin pathetic. And that goes for you, too, Roubini.
PhilW • March 24th, 2009 at 7:58 pm
NR “The bad assets of insolvent banks that are nationalized could be separated from the good assets…”I take it that this talk of “good assets” and “bad assets” is a simplification and that there is really a range from the effectively worthless to high grade. Presumably also as the recession gets worse and more debts are defaulted, the value of all the assets will fall.
Ty • March 24th, 2009 at 7:59 pm
Yes, villager, you get it.Not that I ever revered “Dr. Doom” anywhere near as much as he has of recent been revering himself, as well revering the adulation that he’s been lavished with from world media, nevertheless I am very disappointed with this latest turn of endorsing this riskfree, utter giveaway of taxpayer trillions to the banksters.
Ty • March 24th, 2009 at 8:00 pm
You’re right, of course.This is so effin disgusting…
PeteCA • March 24th, 2009 at 8:22 pm
“I see this as plain as day. We are approaching the most shocking, economic judgment that the world has ever seen.”Yep. And for a different point of view … please see the following link by Jim Quinn who has done a number of good articles recently.http://theburningplatform.com/economy/when-america-ruled-the-world James Quinn article This is the first direct call I have seen encouraging Americans to consider well-informed civil disobedience. I’m sure it won’t be the last.So, got your toothbrush and your striped pajamas? Is it time to do a stretch in jail – in honor of Henry David Thoreau????PeteCA
PhilT • March 24th, 2009 at 8:46 pm
On the point of the PPIP being a necessary step towards bank nationalization – I simply disagree.If anything, it is further delaying the inevitable bank nationalization / resolution process, while providing further oppty. for gaming/looting the federal till by those who created the problems.It will also enable the survival of the “healthiest insolvent” institutions as the others wither during the shennanigans.
Guest • March 24th, 2009 at 8:47 pm
Read Jim Jubak’s piece posted today on MSN. Very, very informative.The reason that no one is paying attention to the mounting, collossal debt is because the powers that be in Washington these days, are seeking to transfer absolute power to the Gov’t. They would love nothing more than to see a collosal collapse necessitating ultimate control for all economies into their hands. And lest we forget, what libs love to do is tax. Don’t anyone think that huge tax increases aren’t on the menu down the line.Our way of life, as we have known it for most of our lives, is changing before our eyes.
Hayes • March 24th, 2009 at 8:57 pm
it would appear that that notwithstanding the Monday 497pt gain on the Dow that the markets are less than enthusiastic about Turbo’s fix of the day – futures less than positive after a late day sell-off (I am long unfortunately)as for the prof’s comment:”Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay,”I guess the question is who those five people are – Bill Gross (a paragon of something…) is lined up to be one of the five and apparently some of the good folks in hedgeland are also in the same line. I for one am 99% confident that such decent types known for their character and values would never ever try and ‘game’ the PPPIF; not a chance, never in a million years…Watched much of the Obi spectacle this evening – at best a 5 out of 10 performance – the highlight for me was the CNN White house correspondent, Ed Henry breaking ranks and persisting on the question; “why the delay on the outrage on AIG” – the terse response – “we want to get our facts straight, that’s why” — (I suspect Ed has had his last ride on AF1)
Hayes • March 24th, 2009 at 9:02 pm
Quinn is a smart guy – his call early last year of a consumer crash is evolving much as he predicted – the anger in Amercia is palpable and growing
Anonymous • March 24th, 2009 at 9:05 pm
Professor – I see your end point but I am absolutely hating the route we are taking to get there. The taxpayer is getting screwed royally in this plan. It encourages private investors to overbid on the assets by limiting – extremely – their downside risk; while simultaneously allowing them to participate significantly in the profits. Meanwhile the taxpayer is on the hook for the vast majority of any experienced losses.The solution is simple – why go through all the hoops to get there?And you are thinking to highly of Timmy G. He is on the record basically saying he believes this is a liquidity problem (i.e. not a reduced cash flow expectations issue). Everything I’ve heard from him does not ensue confidence that he will be willing to unwind the banks until it too late – until our situation get much worse than it already is.
PeteCA • March 24th, 2009 at 9:10 pm
Hayes: “the anger in Amercia is palpable and growing”Here’s one idea …How about if we divide the USA into two separate halves. Maybe we’ll use the Mississippi as the dividing line.On the east side – we’ll put all the Keynesians.On the west side – we’ll put all the Austrian economists.And anybody left over we’ll stick in Texas.And be done with it !PeteCA
FEDup • March 24th, 2009 at 9:13 pm
Believe me, many of us totally agree. I have argued for over a year now that when a business in a particular industry fails, there are 5 more ready to take it’s place. The only logical explanation for the seemingly irrational choices made by our govt is that our politicians are bought and paid for by even more powerful corporate elites and exposing even part of the truth would result in a mass revolution not only in this country but worldwide; hence, the modus operandi appears to be: “keep the current power structure intact at whatever cost because workers can be imported or jobs exported as necessary!” And the sheeple think we have overcome slavery!
Guest • March 24th, 2009 at 9:21 pm
I’m good with that, already being in the west.
M. Munigant • March 24th, 2009 at 9:29 pm
First, bitches.
FEDup • March 24th, 2009 at 9:35 pm
very educational, pragmatic and gutsy!
TfT • March 24th, 2009 at 9:40 pm
Professor,It seems that you think Treasury’s stress tests are credible. However, this is in contradiction with the tracking records of FedRes and US Treasury since Bear Stern’s fall. As Yves Smith at NakedCapitalism said back to Feb 2009 (see here and here, Treasury’s stress tests are very possibly fixed. In addition, you stated in your earlier posts that several big-name financial institutions are effectively insolvent. What would your thought be if these institutions that you claimed to be effectively insolvent pass the stress tests (which I suspect most, if not all, will pass)? Would it because of things like “misunderstood” assets? I am also a little puzzled about Turbo’s plan would be an approach toward triage you advocated a while ago. My impression to what you meant before seems quite different from what you said in this post. Well, things do and can change or I may well be wrong in interpreting your comments. But this looks like a hard turn to me. It would be highly appreciated if you could address the CREDIBILITY issue of Treasury’s stress tests. Thank you.
villager • March 24th, 2009 at 9:48 pm
“Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay”, calling the government “clueless” is a pretty cheap shot Dr. Roubini. Given the mess that has been created, the financial sector has yet to prove that it has a clue. Have you considered that maybe those 5 private sector, business people should be put in jail for fraud. If you want to play with stereotypical images, you could have said: “Having five con artists …”. Of course, your opinion can be discounted because it comes from an “academic”.
Octavio Richetta • March 24th, 2009 at 9:58 pm
Stress test, toxicasset plan, bank recapitalization:It seems it is all starting to fit toghether:http://www.ft.com/cms/s/0/0e14664a-18bc-11de-bec8-0000779fd2ac.htmlUS banks face big writedowns in toxic asset planBy Francesco Guerrera in New York and Krishna Guha in WashingtonPublished: March 24 2009 23:31 | Last updated: March 24 2009 23:31The government’s toxic assets plan will force banks such as Citigroup, Bank of America and Wells Fargo to take large writedowns on their loans, requiring them to raise more capital from taxpayers or investors, executives and analysts have warned.Senior bankers say the authorities’ latest drive, announced on Monday, to cleanse financial groups’ balance sheets by encouraging investors to buy troubled residential and commercial mortgages will prompt banks to record losses on those portfolios.The government will also use its “stress tests” to force banks to take more aggressive provisions on these loans, creating a stronger incentive to sell. This process will increase the pressure on banks that have large loan portfolios to raise fresh funds from investors or the government if capital markets remain frozen.The possibility of further government injections is set to weigh on banks such as Citi, in which the authorities are about to buy a 36 per cent stake, BofA, Wells and other recipients of federal aid.“The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,” said an executive at a large bank.Citi and BofA declined to comment.Wells said it would support “any plan by the Treasury that helps financial institutions efficiently sell troubled assets while still providing an investment return to the US tax payer”, but said it had not seen all the details of Treasury’s proposals.Accounting rules allow banks to carry loans on their balance sheets at their original value and set aside a percentage of the losses expected over the lifetime of the loan.However, the government plan, which offers investors generous financing to buy banks’ distressed assets, will force institutions that sell loans at a discount to take a writedown equal to the difference between the original value and their sale price.Some analysts believe the potential writedowns would deter banks from taking part in the plan, which was unveiled by Tim Geithner, Treasury secretary.Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: “[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.”But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made “in consultation with regulators” – a sign that the authorities might put pressure on banks to sell toxic assets.Policymakers say the Geithner strategy is intended to fix the disconnect between the market and the banks by restoring investor confidence in their financial statements.Outside investors and bank executives are miles apart in their assessments of the true capital position of the banks, making it impossible for them to agree a price at which to recapitalise.By forcing a more realistic and forward-looking assessment of expected losses on bank loans through the stress test, and creating a secondary market that establishes the expected credit losses on loan portfolios, the authorities intend to force banks to write down these loans.
Guest • March 24th, 2009 at 9:59 pm
Give ur guys a simple example why private investors will over pay it.Assuming that the toxic asset with 100$ face value are still paying interest at 6% and will default with 10% recovery in 3 years. so, the total cashflow from it will be 28$ (18$ interest+10$ principal). Its price should be less than 28$ considering time value of money.Now, private invesotr bid it at 60$, out of which, 51.6$ are funded by FDIC with 2% interest(i believe it may be even lower), 4.2$ from Geithner and 4.2$ from private investor’s pocket. Now, if u do a simple calculation, u will know that Private Investor will receive totally 7.452$ in 3 years!!! representing 177.43% return!!!So, how much can FDIC and Treasury receive? 13.096$! YES! 13.096$ by investing totally 55.8$. And the Loss will be robbed from Taxpayer’s pocket. Under 1 trillion plan, taxpayer will lose 558bn. What a good idea for me if i am a BANKER!AND, what a better idea if this PRIVATE INVESTOR is MY intermediary! I make money from these TOXIC Assets rather than Lossing Money. Will i lend money to urs after this? No, dear folks, ur financial profile is even worse as u bear hudge loss here!!!! the probability that you will not repay my loans is even higher than before. So, sorry, Deal Folks.
Rohelio • March 24th, 2009 at 10:00 pm
Days like these we need some grounding on the truth of doublethink methinks. Numbing…marvelous!“The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them….To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary.Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”
Leo70 • March 24th, 2009 at 10:07 pm
Maybe with clueless government he was referring to Geithner and Bernanke…
Octavio Richetta • March 24th, 2009 at 10:13 pm
Agree! PC was bery boring OR am I sick and tired of the subject:-)?
Octavio Richetta • March 24th, 2009 at 10:15 pm
Obama’s first 100 daysTreasury resale may prove best optionBy Julie MacIntosh, Aline van Duyn and Deborah Brewster in New YorkPublished: March 24 2009 20:16 | Last updated: March 25 2009 00:22The US government’s efforts to jump-start its toxic asset resale programme by luring investors with debt financing has prompted criticism that private funds will not shoulder enough of the risk. But it may be the best way to bring markets back to health and making good on government investments…http://www.ft.com/cms/s/0/e85053f8-18af-11de-bec8-0000779fd2ac,dwp_uuid=a4559040-e7c3-11dd-b2a5-0000779fd2ac.html
PeterJB • March 24th, 2009 at 10:25 pm
“Over the top”: Geithner’s explanation (from Mish)as how he needs more (‘allo, ‘allo?) extended powers over the “crisis”; you know that ‘fix’ ‘that doesn’t need ‘ability’ but only will’ That is, as the FedRes assumes total power of the World as “Cash City”: (see previous posts)”The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.”Now I know that Congress_men/women can’t and don’t read, but are they really this dumb?This is supposed to build “confidence”?Comment: remarkable!Ho hum
Guest • March 24th, 2009 at 10:45 pm
Some further grounding”Who wields power is not important, provided that the hierarchical structure always remains the same.”"The state is only the political ruling organ of the economic rulers.”I’m disappointed at NR’s assessment of the bankster plan. I consider it to be a heist…period!Does the professor want a coporatist state since he has such disdain for the government? It is treacherous hacks such as Geithner, Summers and Bernanke that undermine true representative government. The Geithner plan is going to drown the government forever in a bathtub of insolvency. Grover Norquist will be proud!What we are witnessing is a coup by the financial oligarchs who are seeking expanded powers. Remember that fascism has to expoit either a foreign people or its own people; it has to have money, and if it must pay off the top subsidizers this means it has to destroy its millions of smaller helpers……
PeterJB • March 24th, 2009 at 10:52 pm
“They are going to bankrupt our entire nation!!!!!”Take another look – they have already bankrupted your entire Nation. What is going on now it that they are getting some cash to the boys, to survive the next decade or so – so as to support “Cash City”. -It is called “Get F’K'D Money” (Nobel House)Ho hum
Guest • March 24th, 2009 at 10:59 pm
Finite age of the universe; the origin of all light is a finite distance awayEdgar Allan Poe was the first to solve Olbers’ paradox when he observed in his essay Eureka: A Prose Poem (1848):”Were the succession of stars endless, then the background of the sky would present us a uniform luminosity, like that displayed by the Galaxy –since there could be absolutely no point, in all that background, at which would not exist a star. The only mode, therefore, in which, under such a state of affairs, we could comprehend the voids which our telescopes find in innumerable directions, would be by supposing the distance of the invisible background so immense that no ray from it has yet been able to reach us at all.”
abra Ka dabicus • March 24th, 2009 at 11:12 pm
pjb,wouldn’t a simple majority of the board suffice?why two thirds?i guess it is a question of balancing representationand clear conviction? a sign of good governance butthe presidents participation seems a trifle redundant.
Guest • March 24th, 2009 at 11:21 pm
Looks like big money near-term will not be so much in alternative energy but in Spying On Citizens…A log of *everything*
The UK Government wants to have a log of every email and phone conversation you have made – just in case it needs to check you out for anti-terrorist investigation.
PeteCA • March 24th, 2009 at 11:38 pm
The British have always had a problem with personal privacy. They don’t have the laws protecting privacy that we (supposedly) do in the USA. Of course, under George Bush those US laws were flagrantly flaunted anyway, with no respect for how it might undermine the Constitution. Hence the NSA wound up wiretapping all of our e-mails too, and probably our phone records as well.PeteCA
paul94611 • March 25th, 2009 at 12:01 am
One moment it is a “Ponzi” economy. Then it becomes a pathway to sustainability once it is embraced by trusted business associates. In this situation the Bill Gross premise, that is determine what the government is going to do-get there first-shake hands with it when it finally arrives is the strategy that will survive the next few months of this situation. I just wonder what will be the solution when many realize that the problem is not toxic assets, but toxic liabilities?Which makes me wonder who is writing and entering into new CDS’s on the structured products about to be placed in the PPIP? I am sure that we will be paying the down side on these within the year.All of this leads me to ask; Which economy are we dealing with here Nouriel?
Duelinomouldheight • March 25th, 2009 at 1:27 am
奥巴马回应周小川：没必要设立新全球货币
son of the paul • March 25th, 2009 at 1:39 am
good news.
Mah • March 25th, 2009 at 1:45 am
Should i enter the market now? He still believes in the bearishness of the economy? im waiting for the job numbers to stabilize. What your thoughts on that?
K Ackermann • March 25th, 2009 at 3:13 am
Do you know what would bring things to a fast conclusion?A bank run.
K Ackermann • March 25th, 2009 at 3:21 am
How about doing something productive with the money.Start a business that makes something. People would probably love it, and then maybe you could hire some of those people.
Anonymous • March 25th, 2009 at 4:42 am
Get insolvent banks to sell their toxic waste at marked down prices (but not marked down to their real values due to tax-payer funded subsidies) and then re-capitalsing those banks with tax-payer’s money? Why not just nationalise the lot in the first place?Price discovery based on market mechanisms? How is that supposed to work? If you give me a 100% non-recourse loan at zero percent interest I’d be willing to buy up any asset at inflated prices based on a minimal chance that the price of the asset might go up and I’ll make some money. And if the price of the asset goes down I’ll walk away. Yes, it’s win-win solution where I’m no worse off whatever happens. You on the other hands might lose all your money and have no chance of upside.This is just blowing more bubbles using tax-payers to fund the bill. Somehow the dice seem to be loaded. The game appears to be avoiding losses to certain interested parties at any cost. Geithner has done the improbable: turn a massive potential loss for some speculators into a new opportunity for them to make money.Time to call the Treasury’s bluff and exchange your dollars for gold before they become completely worthless?
Octavio Richetta • March 25th, 2009 at 5:37 am
New thread!
Guest • March 25th, 2009 at 9:21 am
Hello,most asset are valued with the mark-to-modell-method, because there are no market values obtainable. A lot of crap is valued with the purchase price at the moment. If some private investors will buy these toxic crap (stimulated by Geithner’s “plan”), there would be a market price. Due to that the banks will have to use these market prices to value their assets.Assumably, the banks who hold these assets will have to write them down, or they will have realized losts.So, I do not understand, why banks should be interested in doing so. Am I totally wrong?? Please help me…Kind regards Steffen
sns • March 25th, 2009 at 9:42 am
so the govt now willingly offers loopholes for the auctions — you bid and win and the bank decides not to sell — this is not only a flaw in execution but also in the general approach and a sign of more missteps to come. i enjoyed Obama’s metaphor about a toaster blowing up in your face and how credit cards and other financial deals like mortgages should be warranted like toasters to not blow up in your face. the CC and mortgage warranty will too have a clause that indemnifies the banks when their products blow up in your face.Roubini my biggest concern now is the TIMEFRAME. How long does a zombie stumble around trying to eat flesh and spew contaminated sputum and blood before you take him out? There should be not only the stress test for these institutions but also a timeframe test.
kilgores • March 25th, 2009 at 9:51 am
And I in the East! 
Funny, Pete!SWK
Anonymous • March 25th, 2009 at 9:57 am
I find it very difficult to accept any economist’s solution as credible with regards to this financial crisis without addressing the taxpayer’s financial crisis as part of the solution. Asking that the government (the taxpayer) to solve the crisis without dissecting the impact on the revenue source for such solution (the taxpayer) is akin to investigating a car pileup without interviewing any of the drivers much less examining them for signs of intoxication.It therefore becomes not a viable solution and certainly only a piecemeal one at that. Professor, I expect better from you.AM
Anonymous • March 25th, 2009 at 10:01 am
…..which in effect the bidders on these assets flip a coin: “Tails I win, heads taxpayers lose.”Let’s discuss probabilities shall we?AM
CLake • March 25th, 2009 at 10:46 am
Why are the loans non recourse ? This creates moral hazard and a potential huge rip off for the tax payer, a potential exposure of $700 billion.Keep the plan as is, but don’t make the loans non recourse. Then banks won’t use intermediaries to overbid for their toxic assets and transfer most of the writedowns to the taxpayer. This is a much fairer pricing mechanism.The only way to arrive at a fair pricing mechanism is to have an auction where the private investors share in a comensurate manner the risks of overbidding for these assets with the tax payer.This also answers Prof. Roubini’s question, for an alternative.The current Geithner plan is a fenomenal rip off for the tax payer, a transfer of wealth from the American tax payer to the banks shareholders and bondholders.
Guest • March 25th, 2009 at 10:51 am
What’s there NOT to like (for the “system”)? Banks get off with little or no loss. Private investors who contribute an extremely low amount of capital stand to gain a great deal if it works and stand to lose very little if it doesn’t. Taxpayers lay 95% of the total on the line. If it all goes south, taxpayers pay. This is junk debt beyond junk debt that no one on the whole planet will touch so take a fat guess what is going to happen. We are living in a “pretend” world people. This is a pretend economy.
Guest • March 25th, 2009 at 4:22 pm
On the one hand it seems that Nouriel Roubini is finally having behind-the-scenes influence on the government.On the other hand it seems the cost of having him have such influence is that now he is willing to provide intellectual cover up for unethical and inefficient plans.I was happier before all this happenned.
Guest • March 25th, 2009 at 4:41 pm
You are absolutely right.I do not believe that Nouriel can’t see it.
Nisim Heletz • March 25th, 2009 at 4:58 pm
Mr. Roubini,Geithner’s plan if there are enough buyers, will changes the status of some banks from insovent to solvent.Many banks including Citi may fall into this category.For some banks it may be temporarily change from insolvency into solvency… for others permanent.So after a year or two another stress test (or reality) will reveal which banks have to be nationalized…What do you think about this scenario?Nisim Heletz
Guest • March 26th, 2009 at 12:58 pm
Nouriel Roubini says “ensuring participation of private investors in the risk and in the price revelation is worth that subsidy”. I wonder why he does not show the same analytical rigor that had charactherized him until now… in other words, why doesn’t him shows the cost-benefit analysis on which he bases his statement.Nouriel Roubini then says “those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan”. Well, just one example of such a solution can be found in the last two paragraphs of the following article by Jeffrey Sachs:http://www.huffingtonpost.com/jeffrey-sachs/will-geithner-and-summers_b_177982.htmlThose two paragraphs say:”There are countless preferable and more transparent courses of action. The toxic assets could be sold at market prices, not inflated prices, making the bank shareholders bear the costs of the losses of the toxic assets. If the banks then need more capital, the government could invest directly into bank shares. This would bail out the banking system without bailing out the bank shareholders. The process would be much fairer, less costly, and more transparent to the taxpayer.Banks that are already insolvent should be intervened directly by the FDIC, that is, temporarily taken into receivership. The shareholder value would be wiped out, except perhaps for some residual claims in the event that the toxic assets vastly outperform their current market expectations. As I’ve written before, the allocation of bank shares between the taxpayers and the current bank shareholders could be make contingent on the eventual value of the toxic assets (http://www.huffingtonpost.com/jeffrey-sachs/a-proposal-on-how-to-clea_b_166303.html), ensuring fairness between the shareholders and the taxpayers.”I just hope that Sachs, Stiglitz, Krugman ant others don’t sell out.
Rael Gorelick • March 27th, 2009 at 8:18 am
Sachs’ plan is a non-starter. What he doesn’t seem to understand is that there simply isn’t enough private capital to move the estimated $1t of assets off bank balance sheets. The government needs to come in either in the form of debt or equity (or both) to provide the purchasing power.The point of the leverage is twofold: (1) to increase the risk adjusted return to draw private investors into the space & (2) to increase the purchasing power from $100b to $1t.
3055582 • May 30th, 2011 at 2:35 pm
3055582 beers on the wall.
501654 • May 30th, 2011 at 2:35 pm
501654 beers on the wall.
gpswatch • June 1st, 2011 at 10:42 pm
Attractive issue. Would love to learn about this.
Lynetta Yaun • June 16th, 2011 at 8:46 pm
TY, nice post! This was the stuff I had to have.
