Monday, March 23, 2009

WSJ spins for Geithner

The WSJ today (here, here and here), after being leaked details of the new government buyout plan for troubled assets at banks (as did other media), neglects to raise the key issue that's already been raised with the new public-private buyout plan: Is the deal a huge giveaway to private interests? And isn't it just the original TARP, just repackaged? That program died 'cause it was a giveaway and would not have done anything to build banks' balance sheets.

The NYT, too, neglected to ask the key question about the new plan, even though their columnist Paul Krugman has been critical. The Washington Post, too, failed to have anything prepped in the way of substantive criticism.


(Bloomberg, though, gets it: It report's Krugman's critique, and quotes Dino Kos, managing director at Portales Partners LLC in New York and former executive vice president at the New York Fed, who says: “The big question is what is the incentive for the banks to sell? What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?”

The Treasury is spinning this public-private deal as doing two things: 1) avoiding overpayment if bureaucrats ran the program, and 2) avoiding having the taxpayers take all the risks.

But the risks being taken on by private investors would be small--the loans to finance the assets are backed by taxpayers, who then share the profits equally (?) with the private investors. And, the overpayment problem is isn't a problem for government-owned banks: If we overpay, the dollars just go into a bank we own already. Plus, banks are unlikely to sell troubled assets at less than what they're marked down to already (because that would cause losses for the selling banks), hence this program is not likely to create real steals for investors and taxpayers. Assuming anything is sold under this plan, the prices will be too high and the taxpayers will take the loss.