In which I make a prediction

(9 am. – promoted by ek hornbeck)

The other day I was asking some questions about the alternatives to the current bailout plan by the Obama administration. I thank you all for your input. I have continued to read a fair amount about what’s going on and I want to make a fool’s prediction on what I think the next steps will be from the administration. I know this is dangerous territory. You all will have a written record on the intertubes to rub my face in when/if I’m wrong. But just imagine if I’m right – none of you will be able to abide the gloating that will ensue. LOL

We all know that the current plan is for the government to entice the private sector to buy bundles of the toxic (or so-called “legacy”) assets held by the big failing companies. As thereisnospoon so well described in an amazingly helpful diary at dkos this week, no one knows the value of these things and that is what’s freezing the credit markets right now and crippling the economy. I think the administration’s plan is to try to get someone to take those assets that “might” be worth something and get them back out into the economy to get the ball rolling.  

While that is underway, they’ll be working with Congress to pass new regulations on the financial industry. One of them includes this:

Hand in glove with this expanded oversight, the administration also is seeking the authority to seize these large firms if they totter toward failure.

Under current law, the government can seize only banks.

The administration yesterday detailed its proposed process, under which the Federal Reserve Board, along with any agency overseeing the troubled company, would recommend the need for a takeover. The Treasury secretary, in consultation with the president, then would authorize the action. The firm would be placed under the control of the Federal Deposit Insurance Corp.

I think that once the assets that might have some value are sold, the plan is to use these new regulations to put what’s left into receivership with the FDIC. That way parts of these companies (mostly the banking functions) can be sold and the rest will be shut down.

If we think that step one of selling off the assets was expensive, just wait until we get to step two. What obligations aren’t absorbed by creditors and bond/equity holders in these companies will have to go to taxpayers. And that cost will likely be enormous. That’s why step one is so important…it at least captures what value might still be there.

What I won’t make a prediction about is whether or not this plan will be successful. The biggest risk will be that the government spending that much money will fuel inflation. But after all I’ve read about what’s happening and what the options are, this does seem to be the plan that affords the most possibility.

We can rant all we want about bailing these companies out. But I think the message should be that this is what happens when we get complacent and don’t provide the kinds of regulations and oversight that are necessary.  


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  1. to be dangerous?

  2. the marks are in the house…..

    the real money knows that most of it is virtualy worthless….

    what they are waiting to see is if anyone(i.e. the taxpayers) can be foolish enough to be convinced otherwise and buy up this shit……

    and we are not admitting how much there actually is…..

    which by the way is way more than a couple of trillion dollars………..

  3. the regulations already there? Why don’t they put back Glass Seagal? Why don’t they use anti trust laws we still have them, to bust these corporate enron entities, that run across the board from finance to weapons, to media up? The fix for this is important but it seems to be just treating the symptoms of a market run amok with no real basis a casino that bets on debt. Who in their right mind would buy toxic CDO’s and CDS’s  

    My biggest problem and worry is that this administration seems hell bent on keeping the markets ‘free’. In order to sell these derivatives they must keep the market for them open, since they have no value other then what the market has declared. So in order to sell these black boxes of debt they  must keep faulty game going. The ‘products’ have no worth when taken out of the pyramid scheme.      

    I did not like Obama’s resistance to global regulation this weekend one bit. While it may be a big mess that needs unraveling retaining the same lassiez faire principles and players will not work. Why not as Jerome puts it, take away there toxic toys?

    Given all that, we have several routes:

       * one that gives a lot of money to banks that do not deserve it to solve their asset problem, but still do not make them creditworthy (the current Geithner plan), which gives stock markets a temporary boost, taxpayers permanent pain, and solves nothing;

       * one that does help them get rid of their real problem (huge contingent liabilities on bets that are turning sour), but is vastly more expensive than the mind-numbing numbers we’re throwing around already, and gives all the money to hedgies: the AIG route, multiplied ten or hundred-fold;

       * one that acknowledges that the issue is liabilities rather than assets, and that focuses on the fact that a lot of these liabilities are wholly unrelated to any economic or financial activity, and are contingent rather than actual – ie nobody loses anything if they are canceled. If a 100:1 bet you made is canceled, your actual loss is not 100, it is 1 – something that could be paid back to you.

    So far, the second route has been used when an emergency beckoned (AIG et al); the first route has been used massively but the Treasury does not seem tired of it yet, and the third one seems anathema.

    Of course, it means taking the shiny toy away from the hands of the hedgie kids.

    Why is that a bad thing, again?

    Providing an anti for the players to bet on a new hand in the same game, does not seem a solution. The best option we have? I doubt it. It does keep the illusion of a ‘market’   that should not even exist in place. Sorting itself out with nothing but our debts as a product, is repeating the failed Dutch Tulip disaster. I will believe that the government want;s to fix this when I see some real regulation, some trust busting and hear something other then the I believe in the free market, rationalizations from this administration. The purposed solution still leaves someone holding the bag that contains nothing but debt. Looks to me like it’s us, via the real economy and taxes.      


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