Monday, March 30, 2009

Geithner's latest bailout.

What should we think about Geithner's latest bailout? Not much. This is the same plan they have been "accidentally" leaking for the last six weeks, just with a little extra window dressing. The Administration has been leaking different attempts at the same plan over and over again -- namely that we are going to purposely overpay for toxic assets, but we're going to do it in a somewhat complicated way so that Joe the Plumber doesn't get angry.

My good friend Nemo wrote a post the other day explaining how one could pay the banks 84 cents on the dollar for assets worth only 50 cents on the dollar, hold them to maturity, and still make a nice 16% profit while the taxpayer takes an enormous loss. I guess he struck a nerve, because that post was linked all over the financial world, including twice by Nobel Laureate Paul Krugman.

Nothing has changed. We're still going to overpay for toxic assets with taxpayers eating the loss. But the largest banks are still insolvent, and stress tests are still being conducted. When those tests show that the largest banks are insolvent, we will either need to put them into receivorship or bail them out some more. Congress is getting bailout fatigue, even with the Mesiah as President and his own party in the majority. There are limits to how many times representatives will do things that anger their constiuents.

In other words, what I am saying is that despite this stomach-churning plan, the banks that are too big to fail will still fail. Citigroup is the worst offender, and as we've seen time and time again (including this morning with GM) Obama likes sacrifical lambs. I believe Citi will be put into receivorship. They are finished. The question is what will happen to Bank of America. BAC should clearly be nationalized as well, but we don't know whether Obama will have one lamb or really take care of business and nationalize them both.

The bottom line is that this plan doesn't change the fact the largest banks still need to be nationalized.

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