US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system. The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans. Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls”.

In his April 3 op-ed, NYT pundit David Brooks writes, "There are many theories about what happened, but two general narratives seem to be gaining prominence, which we will call the greed narrative and the stupidity narrative. The two overlap, but they lead to different ways of thinking about where we go from here....The greed narrative leads to the conclusion that government should aggressively restructure the financial sector....The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Brooks concludes, "The primary problem is not the greed of a giant oligarchy. It’s that overconfident bankers didn’t know what they were doing." In other words, Reagonomics is fine, it just needs some tweaking. Wrong. People backing Phil Gramm knew exactly what he was doing when he came up with a bill that killed banking regulations that had worked since the Great Depression. The system is not working, and simple adjustments aren't enough. As the above and following notes indicate, now that the bankers should have learned from experience, it turns out they're still featuring their same greedy behavior. It's in the nature of these scorpians.

If you think that the current economic disaster means that the wealthy financiers who run our economy have learned their lesson and will be more ethical in the future, think again. While Mr. Obama has promised meaningful regulation of banks and "groups", this stage of his recovery plan obviously has yet to begin, and it most likely will not be enough to harness the native greed of the bankers, given the folks who are running O's economic policies. Meanwhile, this new accounting method may allow zombie banks to avoid negative "stress test" results in late April. --Politex

..."The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made....Critics also said that since the rules were changed under heavy political pressure, the move compromised the independence of the organization that did it, the Financial Accounting Standards Board....One of the dissenters, Thomas J. Linsmeier, argued that accounting rules already allowed the “fiction all banks are well capitalized,” adding that the changes would “make them seem better capitalized.”

Although McCain was even worse, our take on the Obama presidential campaign was when Obama said "change," what he meant was what would be left in our pockets. For those who doubted us, here's Joseph Stiglitz's take on the Obama plan to get the country's financial institutions working again. Stiglitz, like Krugman, has won the Nobel Prize in Economics. Also like Krugman, he sees the Obama plan as a big waste of money and time, and by the time the country realizes it's been fleeced again, it may very well be to late to change our direction, which is presently a stagger into another Great Depression.

Here's how the Obama plan works:

"The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for). But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost."

And here's the bottom line:

"Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!"

This is the kind of plan that Bush would be proud of. Perhaps that's because Obama is trusting the same people that Bush used to get us into this recession/depression:

"Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

"Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

"The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was 'off balance sheet' financing."

The horrible realization is that the Obama plan is actually geared to screw the taxpayer:

"The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced. Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time."

At present, a majority of citizens support Obama and have confidence that he will somehow get us out of the financial disaster we're experiencing. But how will this happen, using the same people and the same bankrupt Reagan economic theories that have gotten us here? It doesn't make sense. Here's Stiglitz's explanation:

"Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan....What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess. So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder."

JoBama Watch will be on Spring Break until eary May, at which time we may have a clearer picture of what's happening, for better or for worse. --Politex

According to sources inside the room, President Obama just played peacemaker in a spat between French President Nicolas Sarkozy and Hu Jintao, President of the People's Republic of China....The exchange between Sarkozy and Hu got so heated, said a source -- who is not a member of the Obama administration -- it was threatening the unity of the G-20 leaders' meeting....Mr. Obama pulled Mr. Sarkozy aside, took him to a corner, "and discussed possible alternatives."...Mr. Obama, with the assistance of translators, suggested that he and Mr. Hu have a conversation as well. They, too went to the corner to talk. After a few minutes, Mr. Obama called upon Mr. Sarkozy to join them."Translators and sherpas in tow, they reached an agreement," the official said. "There was a multiple shaking of hands."

Krugman vs. Obama. Who's Right?, Evan Thomas, Newsweek

Reagan, Both Bush's, Clinton, Obama "Securitization" Invites "Frauds", Krugman

Obama Toxic Plan Announced, Alternative Questioned, Politex

What in the World is Wrong With Obama?

Axis of Error: Obama, Geithner Join the Zombies, Stiff Taxpayers, by Paul Krugman

Obama's Scorpions May Lead To His Defeat in 2012

Why Obama May Be A One-Term President, Politex and Kuttner

First Fifty Days: Obama Changes 25 Bush Policies

Obama Failing: Stimulus Plan Too Small, Too Cautious, by Paul Krugman

Obama's Cheneys: They Pretend Zombies Don't Exist, by Paul Krugman

Who is Killing the United States? by Jerry Politex

Are You Ready For The Second Great Depression? (Part 1), Jerry Politex

Addendum to Pt.1: Mr. O Has Not Learned From His Economic Blunder, Krugman

Are You Ready For The Second Great Depression? (Part 2), Jerry Politex

America in Denial Re Depression, Frank Rich

Obama Doesn't Want To Give Up Dictator Bush's Powers, Jerry Politex

SPIEGEL: Many people are comparing the financial crisis to the Great Depression. Will it really be that bad?
Stiglitz: It's going to be bad, very bad. We're experiencing the worst downturn since the Great Depression, and we haven't reached the bottom yet. I'm very pessimistic. Governments are indeed reacting better today than during the global economic crisis. They're lowering interest rates and boosting the economy with economic stimulus plans. This is the right direction, but it's not enough.
SPIEGEL: The American government has committed over a trillion dollars to save the banks and $789 billion to boost the economy. Do you think this is too little?
Stiglitz: I do. More than $700 billion sounds like a lot, but it's not. On the one hand, a large part of the money will first be given out next year, which is too late. On the other, a third of it is drained away by tax cuts. They don't really stimulate consumption, because people will save the majority of that money. I fear that the effect of the American economic stimulus plan won't be even half as big as expected.
SPIEGEL: [As for saving the banks,] what do you suggest?
Stiglitz: We have to reorganize our bailout system for the financial sector. For one thing, any bank that actually lends should get money from the government; more money to small and medium-sized banks in smaller towns and less to Wall Street institutions. The government must also accept the consequences when banks become insolvent ...
SPIEGEL: … and let them go bankrupt?
Stiglitz: No, they have to be saved, because the consequences to the monetary system would be incalculable. But as a countermeasure, these institutions have to be nationalized, which even Alan Greenspan is now demanding. Then the government can close those business segments that have nothing to do with lending and make sure that the banks no longer organize esoteric stock deals that they themselves do not understand. --read more of the interview with Nobel economist Joseph Stiglitz

In the paraphrased words of Jackie Gleason, "How sick it is!" Politicians representing states serving the auto industry are complaining that Daddy O showed tough love to GM and Chryser, while letting even more culpable corps like Citigroup off the hook. While it is true that the upper management of AIG, Fannie, and Freddie felt Daddy's ax, that was after bailout dough was given. Daddy says things will change in late April, once the stress tests are completed and the zombie banks are found to be without a pulse. We'll see. Meanwhile, Citigroup (when a "bank" becomes a "group," thanks to a bill by McCain eonomist Phil Gramm and a signature by Clinton, many controls go out the window) has gotten three infusions of taxpayer blood since October, and still no new CEO. That's because there's a "paucity of candidates" to replace him, sources say. Oh, so he's irreplaceable, like the "groups" are too big to fail? Replace failed CEO's, split up the "groups" into banks and insurance companies, and repeal the Gramm/Clinton bill that helped to got us into this mess in the first place. Meanwhile, Robert Gibbs, Daddy's Press Secretary, explained Daddy's love: "Pressed repeatedly to explain why [GM's] Wagoner was told to go but bank CEOs were not -- or, for that matter, why labor contracts for auto-workers were reworked when it was deemed illegal to revamp bonus contracts for AIG execs -- he declared a 'hesitancy' to 'look at every entity the same way.'" (HuffPost). After dismissing one reporter's question as "non-specific," then saying he didn't have specifics to answer other specific questions, a long explanation of the Detroit/Wall Street difference led one reporter to mutter, "that made absolutely no sense." The answer is pretty simple: they make things in Detroit, which has little to do with the fradulent activities that have been happening on Wall Street. We don't make things in the U.S. any more, we fashion con games that take people's money. --Politex

Yesterday Rep. John Boner released the Republican answer to Obama's budget, and teachers at the press conference give its beautiful blue cover an A+. Unfortunately, the GOP Fudget was only 19 pages long, contained nothing but vague generalities, and had no numbers. Reporters in attendance were very disappointed, having been promised a budget, not a fudget. Said one: "There's one more picture of a windmill than there are charts of numbers. And there's exactly one picture of a windmill." In other Republican non-news, RNC's head, Michael Steele, 'the Inspector Clouseau of American politics,' claims that his Limbaugh attack and backtrack was faked for strategic purposes, and he's waiting for God to tell him if he should run for President.

[*] In the relevant Brooks piece, he describes how Obama and three other "senior members of the administration" try to convice him of their moderate credentials and point out that numerous Obama ideas are "Republican ideas....They do not see themselves as a group of liberal crusaders...They’re not engaged in an ideological project to overturn the Reagan Revolution....[They] feel they spend as much time resisting liberal ideas as enacting them....They say, Republicans should welcome the budget’s health care ideas...all Republican ideas....I got the impression they’d be willing to raise taxes on the bottom 95 percent of earners as part of an overall package." --Politex

[**] Obama surely knows how to pronounce Krugman's name. This is a bitchy, Bush-type response, and it's beneath Obama if he wasn't kidding around. --Politex

[***] This Obama argument is based on a lie: Krugman is asking for nationalization of "zombie" banks, not all banks. If our government can't take over failed banks because there are too many of them, the banking system must be restructured. Independent Senator Bernie Sanders has made this point. If financial groups are "too big to fail," they're to big to exist. Otherwise, the banks are calling the shots with little government control, as they morph into "financial instutions". This is pretty far up the road to fascism, according to FDR's definition of "fascism" (see top of Bush Watch home page). As to manpower and resources, the various bailouts suggest the resources are there if we want them to be, and Geithner's understaffed Treasury Department appears to me to be partly a choice: you can't nationalize many failed banks if you don't have top people in place.

With solutions similar to Krugman's, Harold Meyerson writes in the Washington Post, the "plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them. It's certainly not because Americans are dead set against bank nationalization: A Newsweek poll this month found that 56 percent of respondents supported it. Hell, Alan Greenspan supports it." --Politex

The leaked reports of the Obama administration’s bank rescue plan Krugman refers to in our previous piece appear to be correct, given the NYT report of the announced Obama plan: "For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, is that the auction will lead to realistic purchase prices." Here's the relevant Q and A at the Geithner press conference announcing the plan:

Q "Looking at the example you give in the fact sheet -- the first program -- you start with talking about $100 in bank loans, but the private investor only has to kick in $6 for -- seems to be on the hook for $6 at the end of the day, and the FDIC guarantees between there and whatever was paid for the bad loan.
"Do you think a person outside this room, outside the Beltway, looking at that would feel like that's a -- you know, you've gotten a good deal by getting someone to kick in $6 for a loan that is valued at a $100, that's being purchased for $84.

SECRETARY GEITHNER: "I'm very confident you and your colleagues will do a good job of framing this thing -- (laughter) -- but let me just come back to the basic point. Okay? The point is, relative to what? What our job is, is to try to fix this problem in our financial system at least cost to the taxpayer and ways to get the incentives right so we can have private capital come in and not have the government do all of it...." --Politex]

Fuller explanation here.

Here's Krugman's response:

...The whole point about toxic waste is that nobody knows what it’s worth, so it’s highly likely that it will turn out to be worth 15 percent less than the purchase price. You might say that we know that the stuff is undervalued; actually, I don’t think we know that. And anyway, the whole point of the program is to push prices up to the point where we don’t know that it’s undervalued. So default on those non-recourse loans is a substantial possibility, which means that there is a large implicit subsidy involved....We’re giving investors a big subsidy, so this has nothing to do with letting markets work. And a final point: If getting the prices of toxic assets “right” isn’t enough to rescue the banks, that doesn’t mean that we’re doomed; it means that we actually have to, you know, rescue the banks, Swedish style, rather than rely on fancy financial engineering to make the problem go away.

Portfolio's Felix Salmon just doesn’t see the plan for toxic assests, now being called "legacy" assets by Geithner, actually selling: "[T]here’s no indication whatsoever that this whole scheme will, you know, actually work. Private-sector investors want to pay as little as possible for these “legacy assets”, in order to maximize their returns. But the banks will not sell any of their legacy assets unless they can do so at a price close to the level to which they’ve already been marked down. Is there any reason to believe that there’s a private-sector bid out there for legacy assets at their current marks? Not really. But if there isn’t, the banks will simply refuse to sell, and there won’t be any money or assets changing hands at all."

On the flip side, some see Geithner's plan as being safer than the alternative, bank nationalization, the plan that Krugman favors: "Bank nationalization will be complex, costly, and contentious. To work, it will almost certainly have to include a broad guarantee of all bank system obligations, something the public won’t be happy about. Congressional support won’t be easy to come by. Geithner’s plan will either work or else it will pave the road for that support. It might not be pretty, but that makes it a plan worth trying." --Kevin Drum

Further, perhaps Geithne's foot dragging on filling the Treasury Department's top desks has something to do with preventing his department from being able to take on the job of nationalizing the banks:

"No one knows if the Treasury Department has the technical capacity or simple competence to swiftly assume control of much of the United States banking sector. If Treasury seems unable to simply build out a banking plan and claw back bonuses, what makes anyone think they can run the banking sector?" asks Ezra Klein>

On the other hand, Klein argues that support for nationalization will be stronger than it is now, should the Obama plan fail:

"No one knows how bad the downside is if you botch receivership, or if receivership doesn’t work. It is easier to abstractly argue the virtues of successful nationalization than contemplate the consequences of unsuccessful nationalization. As such, it should be the absolute last resort. And this plan preserves it as such. There is a non-trivial chance, after all, that the banks will not sell to the private investors because the private investors will not buy the assets at a price that makes the banks solvent. If the private market determines the assets are worth 30 cents on the dollar but the banks will collapse if they’re not bought for 45 cents on the dollar, then the auctions will reveal insolvent banks that cannot be rendered whole through market measures. In that scenario, nationalization will become a consensus strategy, and as such, lose much of its downside.

I've been thinking that what's wrong with Obama is his reliance on a belief in an idelized bipartisanship to get things done, even when those supposed bipartisans he selects don't have his best interests at heart. Paul Krugman has touched on another Obama flaw: his obsessivness. It's ok to have faith in yourself and fight in the face of adversity, but how much negative feedback do you need to know when you've made a mistake? In Obama's case, the answer is "too much." Perhaps hubris is a part of Obama's character, as well. Here's what Paul Krugman writes about the Obama administration’s bank rescue plan:

"Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. This is more than disappointing. In fact, it fills me with a sense of despair.

"There’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive." --Krugman

The plan is basically Robin Hood in reverse: private investors buy toxic assets at auction. If the assets go up, the investors make a profit. If they go down, taxpayers will cover most of the loss. "So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets," writes Krugman. The "problem with this plan is that it won’t work....If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place."

The Bush/Obama solution is the opposite of what has gotten countries, even our own, out of similar economic disasters over the centuries: "As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books....But the Obama administration, like the Bush administration, apparently wants an easier way out," and it begins by unreslistically overvaluing the toxic assets Obama wants to sell to private investors."

But wait, it gets worse: "An alarming aspect [of the laterst version] of the plan is that private investment companies will manage the process on behalf of the government, despite the fact that government is providing most of the capital and insuring most of the risk, writes Robert Kuttner. [This supposed aspect of the plan has yet to be verified after the Obama announcement of the actual plan. --Politex] "Basically, the Treasury is colluding with private speculators to create off-balance sheet entities, to offer new windfall profit opportunities and disguise the true degree of risk. If this all sounds vaguely familiar, Geithner's Treasury, with no sense of irony, is offering a reprise of the several abusive and opaque gimmicks that produced this crisis, a tour that winds back down Memory Lane, from AIG to Enron. --Politex