- On Wall Street, that is. So hyped by advance fanfare,
Timothy Geithner unveiled his Public-Private Investment Program (PPIP)
on March 23, the latest in a growing alphabet soup of handouts topping
$12.5 trillion and counting - so much in so many forms, in "gov-speak"
language, with so many changing and moving parts, it's hard for experts
to keep up let alone the public, except to sense something is very wrong.
They're being fleeced by a finance Ponzi scheme, sheer flimflam, and here's
how from what we know:
- -- $400 billion in taking over Fannie and Freddie;
- -- $42 billion for the auto giants; billions more coming
for their suppliers;
- -- approaching $200 billion for AIG with more coming
- -- $350 billion to Citigroup in handouts and loan guarantees;
- -- tens of billions to other banks, including $87 billion
to JP Morgan Chase for bad Lehman Brothers trades;
- -- $700 billion for TARP I; half the money released under
- -- over $200 billion and counting for the Term Asset-Backed
Securities Loan Facility (TALF) to extend government-guaranteed loans for
investors to buy "certain AAA-rated asset-backed securities (as a)
component" of the Consumer and Business Lending Initiative (CBLI),
established under the Emergency Economic Stabilization Act (EESA) of 2008;
- -- the $787 billion stimulus under the American Recovery
and Relief Act of 2009 (ARRA);
- -- around $300 billion under the Homeowner Affordability
and Stability Plan (HASP) - the so-called mortgage bailout plan;
- -- $50 billion backing for short-term corporate IOUs
held by money market funds - from the Exchange Stabilization Fund (ESF),
a vehicle established by a provision in the 1934 Gold Reserve Act for foreign
exchange intervention to stabilize the value of the dollar;
- -- $500 billion for various credit market rescues;
- -- $620 billion for industrial nations' currency swaps;
- -- $120 billion for emerging economies' currency swaps;
- -- $1.25 trillion for Fannie and Freddie mortgage backed
- -- $200 billion for Fannie, Freddie, and Federal Home
Loan Bank bonds;
- -- way more than the announced $300 billion for longer-term
Treasuries (mostly with 7 - 10 year maturities); the Fed's been buying
billions of them since last year;
- -- Fed-expanded overnight lending to $2.4 trillion -
free money at 0% interest;
- -- a reported $750 billion for banks in the FY 2010 budget
- yet to be voted on and appropriated;
- -- a proposed $470 billion increase for the FDIC to borrow
from the Treasury;
- -- perhaps hundreds of billions more in unannounced or
hidden handouts in amounts and to whom the Fed and Treasury won't say;
on March 14, AIG named its big counterparties for the first time with firms
like Goldman Sachs, Societe Generale, Deutsche Bank, and Barclays showing
up prominently; and now
- -- PPIP - the latest gift to Wall Street courtesy of
taxpayers getting none of the gain and all the pain.
- A Treasury Fact Sheet explains it on its web site. In
"gov-speak," it cites the "challenge of legacy assets"
comprised of (distressed commercial and household) "loans"/mortgages
and (toxic) "securities" (mortgage-backed and others) with a
new Public-Private Investment Program (PPIP) in conjunction with the FDIC
and Fed to finance and guarantee it. The idea is to "repair balance
sheets," encourage banks to lend, and "help drive us toward recovery."
It expands TALF "to bring private investors back into the market"
by offering deals too sweet to pass up:
- -- a public-private (open-ended) trillion dollar partnership
with Washington contributing up to 95-97% of the cash and investors the
- -- the Fed and FDIC (through low-cost loans and guarantees)
acting as middlemen to transfer "legacy asset" losses to the
public while buyers get government financing and guarantees (for no-risk
investments) to purchase them on the cheap for themselves and well above
fair value for the banks;
- -- PPIP particulars are for $100 billion in mostly TARP
and some private capital with Fed and FDIC $500 billion in leverage financing
to expand it to $1 trillion or more in purchasing power.
- In a March 23 Wall Street Journal op-ed, Geithner called
it "My Plan for Bad Bank Assets (to) increase the flow of credit and
expand liquidity (and do it by) shar(ing) risk with the private sector
(to) rid banks of legacy assets." These "policies will work,"
says Geithner, even though everything tried to date failed, and the only
achievement is what they planned - the greatest ever wealth transfer in
the shortest span of time, now increased by another trillion or more through
PPIP and whatever else the masters of the universe have in mind.
- "Toxic-Asset Plan Lifts Stocks," headlined
the Wall Street Journal, after surging around 7% on March 23 with banks
and other financials in the lead, buoyed by the prospect of more free money,
hundreds of billions for the taking, and plenty more where that came from.
- If It Works, A Win-Win for the Money Trust
- Here's how economist Jeffrey Sachs explains it:
- Geithner's plan will have the Fed and FDIC "subsidize
investors to buy toxic assets from the banks at inflated prices."
If done, it will be another in a series of massive wealth transfers in
the hundreds of billions of dollars "to bank shareholders from taxpayers."
If investors incur losses, the Fed and FDIC will absorb them, meaning heads
or tails they win.
- "The investment funds will have the following balance
sheet. For every $1 of toxic assets (bought), the FDIC will lend up to
85.7 cents, and the Treasury and private investors (only) 7.15 cents in
equity to cover the remaining balance. FDIC loans will be non-recourse,
meaning that if the toxic assets (bought) fall in value below the amount
of FDIC loans, the investment funds will default on the loans and the FDIC
will end up holding the toxic assets...."
- In other words, "The FDIC is giving a 'heads you
win, tails the taxpayer loses' offer to private investors.' " Economist
Paul Krugman agrees calling it a one-way bet, "a disguised way to
subsidize purchases of bad assets."
- Economist James Galbraith calls it another massive "ineffective"
giveaway to banks with taxpayers getting hosed from a repackaged trash
removal scheme that's been around since last fall when Geithner, as New
York Fed president, planned it with Wall Street CEOs. They see it as a
temporary liquidity problem (which it's not) so the idea is to clean up
the system and get banks lending again. But here's the rub:
- "If Geithner's plan to fix the banks would also
fix the economy," maybe the idea makes sense. "But no smart economist
we know thinks that it will." It's a giant swindle, but that aside,
Geithner has "five fundamental misconceptions:"
- (1) The trouble with the economy is that banks aren't
lending, he says.
- In fact, it's because businesses and mainly households
are way over-extended and "are now collapsing under the weight of
it. As consumers retrench (of necessity), companies that sell to them (must
also), thus exacerbating the problem. The banks, meanwhile, are lending,"
just not as much as they used to.
- "Also, the shadow banking system (securitization
markets), which actually provided more funding to the economy than the
banks, has collapsed."
- (2) The banks aren't lending because their balance sheets
are loaded with 'bad assets.'
- In fact, "banks aren't lending (enough) because
they have decided to stop making loans to people and companies who can't
pay them back" or don't want more loans in the first place. They're
also scared that new debt will cause more write-offs, greater losses, and
the threat they'll be wiped out entirely. So their strategy is hunker down
and wait for a better time to do business.
- (3) Bad assets are "bad" because the market
doesn't understand how much they're really worth.
- In fact, they're bad because "they are worth (lots)
less than banks say they are." A major factor is the near-30% drop
in house prices wiping out over $5 trillion in valuations. Lenders want
households to take losses because if they do it themselves they'll be wiped
out. So PPIP arranges it for them.
- (4) Once "bad assets" are off balance sheets,
banks will start lending again.
- In fact, banks will stay cautious until the housing market
and economy improve. So far, that's nowhere in sight.
- (5) Once banks start lending, the economy will recover.
- In fact, house prices are falling, savings have been
wiped out, huge job losses are continuing, and "consumers will have
debt coming out of their ears" that will take years to work off.
- Geithner's plan just shifts debt from lenders to taxpayers
"where it will sit until the government finally admits that a major
portion will never be paid back." Galbraith's conclusion: Geithner's
plan is "extremely dangerous" besides being a scam to cheat the
public. Why does Wall Street love it? Because it wrote it in the first
place, so the whole scheme is arranged for its benefit - if it works.
- It's a big "if" as investors want the lowest
possible prices and banks the highest. The question is will they compromise
and for what - the better quality junk investors want or the most toxic
stuff banks want to offload for whatever they can get.
- Even a Wall Street Journal editorial raised doubts about
"Geithner's Asset Play. At least it's an attempt to clean up bank
balance sheets," it said, but hold the cheers. "The best news
(is that Geithner has) a strategy. The uncertainty was almost as toxic
as those securities. Now all (he) has to do is find private investors willing
to 'partner' with the feds to bid for those rotten assets, coax the banks
to sell them at a loss, and hope the economy doesn't keep falling...."
- "Other than that, general, how (did) the siege of
- In a front of the paper article, a trio of Journal writers
said "visions of vilification of Wall Street executives on Capitol
Hill remain fresh in the minds of potential (bad asset) buyers....numerous
(ones) express(ing) concern that they, too, might be hauled before Congress
for a grilling, or be subjected to new taxes if they profit from partnerships
with the federal government."
- They quoted Washington lobbyist, Lendall Porterfield,
whose clients include hedge funds and banks, saying: "There are still
some very serious reservations about doing business with the government,
because you don't know what the rules may be tomorrow, next week or next
- Economist Nouriel Roubini wants two firmly in place:
- -- force banks to sell toxic assets at true value and
take the losses; and
- -- shut down the insolvent ones.
- For his part, Financial Times writer Martin Wolf expressed
deep concerns about PPIP in his March 25 column headlined: "Successful
bank rescue still far away." He's "ever more worried" and
- -- he expected a "popular new president to be decisive;"
- -- he fears a "Congress indulging in a populist
frenzy" and an administration "hoping for the best;"
- -- instead of letting businesses succeed or fail on their
own, "bailouts have poured staggering sums into the failed institutions
that brought the economy down;"
- -- PPIP is a "vulture (investor) relief scheme,"
cash for trash, with Washington putting up most of the money, bearing nearly
all the risk, while private parties get all the gain - if the plan works;
- -- PPIP masks a "more fundamental problem"
of "chronic under-capitalization of US finance" and it may make
achieving it harder - given growing public anger, a "timid" president,
Congress on the "warpath," and being less likely to put up the
kind of money needed to do it;
- -- enriching vulture investors may "convince ordinary
Americans that their government is a racket run for the benefit of Wall
- -- when all is said and done, PPIP may not work.
- As a result, "Nobody can be confident that the US
yet has a workable solution to its banking disaster....If this is not frightening,
I do not know what is."
- Economist Jack Rasmus calls PPIP a "win they win
vs. lose they win proposition -- i.e. free money with which to leverage
to make even more money" with government taking nearly all the risk.
It's "an offer that no capitalist speculator could ever refuse"
with nothing for the public except the bill.
- It's why Dean Baker, co-director of the Center for Economic
and Policy Research, called it "another Rube Goldberg contraption
intended to funnel taxpayer dollars to bankrupt banks...." However,
the process plays out, "much of the toxic waste (will) stay on the
banks' books (since it's) likely that the gap between the asking price
and the offer (won't) be closed for a large portion of these assets, even
with the government subsidy."
- So what's next? "The Obama administration will be
forced to go to Congress with yet another bailout proposal. (It's) hard
to understand this plan as anything other than a last ditch effort to save
Wall Street banks. (Obama) seems prepared to risk his presidency on their
behalf" and odds are he'll lose.
- Whatever happens going forward, the uncertainties and
dangers are enormous:
- -- Eurointelligence refers to "Geithner's trillion
dollar gamble" despite the positive market reaction;
- -- will taxpayers stand for it, how long, and at what
- -- will enough buyers settle for the best deals they
can get, and/or will banks compromise enough to matter; put another way
- will government "grease" attract enough buyers willing to invest
at valuations banks will accept; so far, they've stubbornly refused to
take losses, preferring instead to keep junk on their books at fictitious
values hoping eventually they'll be real or close enough; another disincentive
is talk that the Financial Accounting Standards Board (FASB) will ease
mark-to-market accounting rules to legitimize fake values;
- -- whatever they do, can banks offload enough to matter
or are they so over-indebted that nothing can work;
- -- how much in the way of deficits, money printing and
dollar debasing can the nation stand, and how long will sovereign and
private debt buyers put up with it;
- -- going forward, how many banks are too weak to survive
no matter what's done to save them - that is, ones big enough to matter
(like Citigroup), not others targeted to be bought up or closed down -
and globally that's what's behind this scheme in the first place;
- -- what about the CEOs that caused the global crisis
and left their banks insolvent; issues of fraud and bailouts aside, why
weren't they fired long ago; why are they still in charge drawing big salaries
and bonuses; why wasn't the main demand to fire these guys and replace
them with responsible managers; and
- -- skeptics call Geithner's plan much like Paulson's,
except for some differences in details.
- On March 24, Dan Roberts in the London Guardian headlined:
"US follows UK - on the wrong road." Geithner's plan "aims
to achieve roughly the same as the British government's (bad loans) insurance
for the Royal Bank of Scotland and Lloyds. So how do the two schemes compare?"
- Details aside, they "work on the same principle:
that banks will (behave) normally again and (benefit) the economy (once)
they're protected from past mistakes. But these responses underestimate
the scale of the crisis." Geithner's plan covers not just toxic assets
but many ordinary bank loans as well.
- "Similarly, the assets put forward by Lloyds in
the UK insurance scheme include every buy-to-let mortgage issued by HBOS,
not just the ones already in default. Judge the banks on their actions
(not just their words), and you would conclude this crisis has some way
to go. Yet both governments assume banks (suffer) from a crisis of confidence
(simply cured) by removing (toxic debt) uncertainty. What neither seems
willing to acknowledge is the likelihood that much of their lending has
gone for good; that this is not a liquidity crisis, but a solvency (one)."
Britain's plan didn't work and neither will Washington's.
- No comment from the Journal except to say: "Whatever
the Geithner plan's pitfalls, we sincerely hope it works. The feds so thoroughly
botched the TARP and (other) bailouts that Treasury has few options left."
- Indeed so. No accounting magic can erase losses, inspire
investors, and turn a sick economy around. Especially since all Washington
schemes make it sicker, and now Geithner's thrown more fuel on the fire.
Problem one is reducing the huge debt overhang and helping beleaguered
households. His solutions:
- -- help Wall Street, not people and
- -- pile on more debt but hope bank "operating"
results improve enough to create an illusion of recovery.
- It won't work, and at the same time, the latest Fed Flow
of Funds data show trillions in vanished household wealth - $12.9 trillion
from real estate, savings, investments, and other personal losses. So while
insolvent banks are partying, the crisis is deepening. It's far from being
resolved, at best has a long way to run, so Bank of America's Richard Bernstein
advised clients to sell bank stocks after their rally because PPIP won't
stop their profits from falling.
- Worse still, according to financial expert and investor
safety advocate Martin Weiss, Washington greatly underestimates the "magnitude
of the debt crisis." He cites the following:
- -- the current FDIC "Problem List" includes
252 banks with $159 billion in assets;
- -- from his analysis, he lists 1568 troubled banks and
thrifts by name with $2.32 trillion "at risk of failure" - because
of "weak capital, asset quality, earnings, and other factors;"
- Last year when TARP was announced, Treasury officials
thought it would stabilize the economy and improve the health of recipients
like Citigroup. However, it quickly learned that Citi and other major
banks needed emergency capital to keep from collapsing - for their credit
default swap (CDS) problems alone.
- AIG's $2 trillion CDS portfolio triggered a government
takeover, but it's not alone. Citi has $2.9 trillion, JP Morgan Chase $9.2
trillion, and the Bank of International Settlements reports a global $57
trillion burden, much of it toxic and plenty to sink holders of enough
- The problem in America is so great that "the money
available to the government is too small for a crisis of these dimensions."
Forced mergers, buyouts and handouts have done "little more than shift
toxic assets like DDT up the food chain." Further, Washington's "promises
to buy up the toxic paper have done little more than encourage banks to
hold on, piling up even bigger losses."
- Another CDS is also worrisome, one no one talks about
but should, on US sovereign debt - Treasury bills, notes and bonds. "A
small but growing number of investors are not only thinking the unthinkable,
they're actually spending money on it, bidding up the premiums on Treasury
bond (CDSs) to 14 times their 2007 level" because they're worried
about the Treasury's credibility and borrowing power.
- Their message is clear and important - "there's
no free lunch; the government (can't) bail out every failing giant with
no consequences; and contrary to popular belief, even Uncle Sam must face
his day of reckoning with creditors."
- Also, "the public knows intuitively that (too much
debt) got us into trouble. Yet the solution being offered is to encourage
banks to lend more and people to (save less and) borrow (and spend) more."
The only way forward is to change course because there's "no other
choice....We have to bite the bullet, pay the penalty for our past mistakes,"
and make hard sacrifices for a sound recovery.
- That includes shuttering insolvent banks and other companies
(even big ones), not bail them out. Even Kansas City Fed president Thomas
Hoenig recommends that:
- "public authorities....declare any financial institution
insolvent whenever its capital level falls too low to support its ongoing
operations and claims against it, or whenever the market loses confidence
in the firm and refuses to provide funding and capital."
- The wrong choices are trillions more in handouts, reckless
money creation, dollar debasing, and an eventual inflation destroying the
purchasing power for millions. So far, that's where Congress and Obama's
money managers are heading us, and already the bill for their actions is
- Stephen Lendman is a Research Associate of the Centre
for Research on Globalization. He lives in Chicago and can be reached at
- Also visit his blog site at sjlendman.blogspot.com and
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