Monday, March 23, 2009

Geithner Unveils Public-Private Rip-Off Plan

Treasury has finally come clean with its latest plan to save its friends in the financial community, which can be viewed at

Here are some preliminary thoughts, pending a review of commentary from various sources.

1.  If this is a good deal for big money investors, then the public should be allowed to participate, such as through an exchange-traded stock vehicle or a mutual fund.  The fact this is almost certain to not happen is strong evidence that this is a deal for the benefit of the big money financial community.

2.  The press release repeatedly describes the "legacy" securities as having dropped to "fire sale" prices.  Treasury is lying.  There are only fire sale prices after a fire or similar event, in which damaged goods or a damaged facility means that "everything" must go.  What we have here are securities which have potential buyers, but the owners of the securities, the large "banks" (more on that later) simply have used their political clout to avoid selling them at market prices.  These champions of the free market made horrendous decisions to put the dreck they sold around the world on their own balance sheets, and now they want the taxpayer to take them out of their positions.  But where's our bailout?

3.  The press release describes these large complex financial institutions as banks.  However, what they really are, to varying degrees, are gambling holding companies which have a subsidiary or two that engage in plain vanilla depository functions.  The old rule is that whoever controls the vocabulary controls the debate.  So, people will support helping "banks".
They would not support bailing out Citigroup, which engages in all sorts of systemically unimportant functions, principally gambling (usually with a stacked deck).

4.  Why do the owners of the corporate debt of these companies continue to be made whole?  Why should working people subsidize these investors whose investment is impaired?

5.  The FDIC is itself facing bankruptcy and will likely need a vast bailout.  This plan relies onan  FDIC backstop.  This in turn places further strain on the good guys, the plain vanilla community banks that tended to their knitting, who because they mostly only engage in traditional deposit-based banking functions, pay a much higher percentage of their revenues than does Citigroup, which derives most of its revenues from other functions, for which FDIC assessments do not come into play.

6.  Because private money is going to be leveraged with taxpayer/FDIC money, the private investors will overpay for the assets.

7.  The entire justification for this plan is wrong.  Taxpayers and the entire banking system are supposed to continue to throw lots of money at the very companies that finally lost at the roulette table, allegedly so that these companies can resume making profits by lending us our own money.  Let us keep our money in the first place.  Any assistance should go not to the money center villains but to the much more virtuous smaller banks, who never robbed their shareholders or the public and are well positioned to grow in a sound manner.

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