Pros and Cons of the New Bank Plan

Finally, some details.

And the details of Treasury Secretary Tim Geithner's new plan to rid banks of toxic assets actually aren't half bad. Some of the biggest fears -- such as having taxpayers taking on all the risk -- have been smoothed over to a certain extent. The plan is big. It's serious. It'll get private capital in the game. It actually has some teeth to it. And that's why the stocks of JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) and Goldman Sachs (NYSE: GS  ) were taking off this morning.

Still, this is hardly a silver bullet that'll usher in victory. It has some big faults -- we'll get to those in a moment. First, here are a few pros of the new plan.  

Fair is fair
Rather than having taxpayers give private investors a free ride to no-risk profits, the amount of equity put up to buy toxic assets from banks will be split 50/50. In other words, if private investors make money, taxpayers will make just as much. And if taxpayers lose money, private capital will, too. As Geithner said this morning: "We don't want the government to assume all the risk. We want the private sector to work with us."

That should make pricing a fair game
Overbidding for assets isn't likely, since private investors have as much skin in the game as taxpayers do. If taxpayers were accepting the brunt of the risk, private investors would systematically overpay -- a situation that would almost guarantee taxpayer losses. Since private capital can very realistically lose every dime it puts in, bidders will pay only bargain-basement prices for bank assets. That could turn out to be a boon for taxpayers, with realistic potential for big upside.

Leverage is cheap these days
Since Federal Reserve Chairman Ben Bernanke came out swingin' last week with the intent to buy $1 trillion or so worth of debt securities, interest rates are about as low as humanly possible. The plan also has a provision that allows buyers to issue debt guaranteed by the FDIC. That makes leveraging asset purchases incredibly effective. The lower the cost of capital is, the higher the price private investors will be willing to pay and still make it worth their -- and taxpayers' -- while. For banks, private investors, and taxpayers, that's a win-win-win.

Now for the bad news ….

Will it be enough?
The plan will leverage $75 billion to $100 billion of TARP funds into $500 billion to $1 trillion worth of purchasing power. That's a stupendous amount of money, but it might not be enough to get banks out of the mud. Last month, New York University professor Nouriel Roubini predicted that it would take at least $1.4 trillion to get back on a sustainable path. So although this plan is a big step in the right direction, there's no reason to believe it won't end up like every other bank bailout plan to date: too little, too late.

About that equity-sharing part …
Sure, it's awesome that a 50/50 equity split means there won't be a massive subsidy from taxpayers to private investors. Problem is, banks need a massive subsidy from someone. Private capital can already purchase these assets if it wants to; the market has ground to a halt because (a) there's no transparency in these assets, and (b) banks aren't accepting bids, because selling assets for too low a price means writedowns that they might not be able to swallow. This plan doesn't address either of those problems.

Hence, there's a chance that the gap between what private investors are willing to pay and what banks are willing to accept won't be met. Private investors might be willing to pay only $0.50 on the dollar for assets that banks will be willing to sell for no less than $0.80 on the dollar. The likes of Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) might not have the capital flexibility to accept anything less than premium offers. If that's the case (and it probably will be), the plan might simply spin its wheels and get nothing done.

Who wants to take part in this plan?                  
After the AIG (NYSE: AIG  ) brouhaha peaked last week with an emotionally fueled piece of legislation to retroactively tax bonuses, any rational investor will have some qualms about making Uncle Sam a business partner. No sane person will participate if he or she thinks Congress will stomp its feet and retroactively tax profits at 90%. As one investor colorfully put it this morning, "No one is putting any money to work because every time you dip your toes in, they get cut off." Don't be surprised if participation in this grand experiment comes up well short of what Geithner and Co. expect.

Your turn to chime in
For the first time since who knows when, the government introduced a bailout plan that the market -- at least at first glace -- seems to like. Did Geithner finally get it right this time? Feel free to share your thoughts and suggestions in the comment section below.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a former Motley Fool Income Investor selection. The Motley Fool is investors writing for investors.


Read/Post Comments (28) | Recommend This Article (51)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2009, at 2:44 PM, Micaiah2004 wrote:

    Tens of trillions have been lent and/or given to these financial institutions, GSEs, corporations, and we are still in the big black hole....throwing more money at this problem. Incompetence is emerging as a conclusion for all these Fed/Treasury initiative that is not stabilizing or better still, cleaning up the mess. The total toxic assets are greater than the huge amount of debt incurred by govt (ultimately, the taxpayers). And worst of all, Nobama's strategy is wrong-headed. It does not get at the root causes of this financial crisis and begin the huge cleanup. So we will have more wasted monies and wasted time...until and if Nobama gets a clue on the right way of handling this Mess. He will not learn his lesson. And this nation will be in deep depression with probably hyper-inflation too boot.

  • Report this Comment On March 23, 2009, at 3:44 PM, FinancialFellow wrote:

    I don't think this plan is that awful. I like the approach of mixing private investment with taxpayer dollars. The reality, though, is that this is just a huge pile of toxic mortgages that needs to get dumped someplace. I don't know that anything will work that well and no matter what the solution even more taxpayer dollars will get plowed into the solution. If Geithner's plan has even a chance at an eventual upside for taxpayers then I think it's worth a shot.

    I think the banks will also be greatly helped by a turnaround in housing. As much as they are riddled with bad mortgage assets I suspect a turn in the housing market for the better - with more mortgages originated for qualified lenders will help the banks bottom line. Further, I think it could cause them to accept a lower amount on the dollar for their "troubled" assets.

    Just today news hit of an uptick in home sales. Coincidentally I was one of them: http://financialfellow.com/2009/03/23/how-i-sold-my-home-in-...

  • Report this Comment On March 23, 2009, at 5:26 PM, weewee3 wrote:

    does anyone know of a profitable government office ?

    seems that the taxpayer is always making up the LOSS - how can we expect the fools ( no pun intended) who helped create the problem to solve it ?

    if it's only worth 50 cents why should we pay 84 cents ? doesn't sound like a good deal to me

  • Report this Comment On March 23, 2009, at 5:34 PM, regulatethem wrote:

    It will take a few years to absorb the toxic assets, just make sure the toxicity still isn't happening. In the 50/50 deal, what will that do to the rest of the housing market? create more toxicity? I see a downward spiral here. As a private investor, I don't want the government as a partner, makes no sense, I might want to give the property to family members. It starts to get confusing really, think of estate planning laws, etc. I'd rather see write-offs addressed, they have to happen anyway. Obama says no to the 90% tax, yet his party's bill passed in the House and was a waste of Democrat time when they need to help people get jobs. Democrats need to work together. And we taxpayers are still OUTRAGED over the bonuses!!!

  • Report this Comment On March 23, 2009, at 5:35 PM, whereaminow wrote:

    I don't see how taxpayers will profit. Do you mean that I'll be getting some kind of rebate check? Will I see a decrease in my tax burden? Will the national debt be paid down?

    Exactly how am I profiting 50/50? Isn't more likely, and intellectually honest, to say that the government will collect any revenue gained and appropriate it to special interests and their own pockets?

    Again, I'd like to see EXACTLY how I am profiting.

    David in Qatar

  • Report this Comment On March 23, 2009, at 6:16 PM, maccdw wrote:

    In the 1930's Depression, the US was the largest creditor nation (lender) on the planet. Today, we are the largest debtor (barrower).

    We can't borrow our way out of this, but that's been the direction thus far.

    We need to construct a super-sized FDIC to take AIG et al apart in an orderly manner, salvage the valuable parts (there are some, as document here in Fool Land), and incubate the toxic gobs. That will force a capitulation, and will put a nasty, sudden, and profound end to this and will clear the deck for reconstruction.

  • Report this Comment On March 23, 2009, at 6:24 PM, billdick6 wrote:

    Prior plans have failed as price banks can accept buyers will not pay. Here is plan that does not need to set ANY price on the toxic assets:

    Have FHA buy (for price of unpaid mortgage balance) ALL homes going to foreclosure that do not sell for that amount (and then usually** rent back to occupant) instead of trying to sell these "toxic assets" to investors. This makes ALL mortgage based assets non-toxic as ALL mortgages in the tranches will be paid in full. These now valuable* assets can be sold by Banks etc. to raise funds for new loans, etc. – A perfect and cheaper antidote.

    “Cheaper” as most mortgages in the tranches are being paid. – No need to buy or find buyers for ALL the mortgages in the tranches. It also avoids needing to set any value on the toxic assets. Also keeps these houses off the "for sale" market for a few years. (Stems the slide down of home prices.) Tax payers get real, rentable assets for their dollars with probable capital gains in a few years, not “toxic trash.”

    Even the cost of foreclosures (typically more than $10,000) can and should be avoided: Underwater owner simply sends deed and mortgage to FHA, which pays off mortgage, month-by month, and takes title to house. If owner just walks away he remains in debt. Also a few years later, when FHA sells house back to private owner with capital gain, 50% of “excess profits” after recovery of ALL costs, including interest on the FHA’s investment plus (rent – repairs, etc.) are returned to the original owner to encourage him to avoid foreclosure losses. This route to becoming debt free plus the hope for some eventual gain will make most under underwater owners who cannot pay send title and mortgage directly to the FHA. This permits the FHA’s cost to be spread over all the remaining years of the mortgage instead of paying full mortgage balance at a foreclosure auction - another reason why this plan is superior way to met all five objectives above.

    --------

    *Actually slightly more valuable than owners of the tranches had hoped as the tranches had an assumed default rate in their structure, but the default rate is now zero with FHA making the monthly payments.

    **If the current owner cannot even afford to rent the house he was trying to buy, he pays FHA what he can to live there for up to 12 months while looking for housing he can afford. (If need be, only a rented trailer.) The unpaid part of his fair market rent accumulates as an FHA extended line of credit, which he must pay back with market interest over next five years. Thus, it is in the former owner's interest to relocate as quickly as he can. This helps to avoid "eviction rage" which via smashed toilets, burn holes in rugs, etc. usually costs many thousands of dollars to fix. It also helps the former owner to keep his dignity – the neighbors need not know he sent deed and mortgage to the FHA and moved away.

    For more detailed discussion of how the five objectives are achieved, See:

    [url]http://www.sciforums.com/showpost.php?p=2025940&postcoun...

  • Report this Comment On March 23, 2009, at 7:27 PM, tselliott1963 wrote:

    50/50?! Are you nuts? Can't read? Brainwashed?

    ==================

    .

    Monday, March 23, 2009

    Geithner's Galling (and Dangerous) Plan For Bad Bank Assets

    The long awaited details of Geithner's "plan" for dealing with bad bank assets is finally out. Githener's plan is disingenuous at best. If people want to be outraged at something, it should be over Geithner's plan.

    The Wall Street Journal has the story in Timothy Geithner: My Plan for Bad Bank Assets.

    The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions. No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk.

    My Comment: Actually the root cause is simple to understand, micro-mismanagement of interest rates by the Fed, Fractional Reserve Lending, and Congressional spending run rampant.

    The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

    Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

    The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

    The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

    Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

    My Comment: The Government has agreed to finance 93% of the loan, and it is a no recourse loan. This provision is in place for one reason only: To insure that investors overpay for bad bank assets, at taxpayer expense.

    Please see Geithner's Plan, a Gigantic Confidence Game for more details.

    The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

    My Comment: The PPIP will not do anything for the value of bad assets on bank books. Moreover, if PPIP is "successful" all that really will have taken place is to offload risk (swindle) taxpayers, for the benefit of Geithner's banking buddies. For comparison purposes, this swindle makes the Savings and Loan Scandal look like a picnic in the park.

    Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

    My Comment: The government (taxpayer) is taking 93% of the risk. In my opinion that makes claims of sharing the risk a blatant lie.

    Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation.

    My Comment: Geithner and Bernanke clearly do not understand the problem. The reality is are few credit worthy borrowers to lend to and therefore no reason for banks to lend. Moreover, with rampant overcapacity and a slowing economy there is no good reason for credit worthy borrowers to borrow.

    Thus, the idea that credit will start flowing again if bad assets are removed from bank balance sheets is patently false.

    This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders.

    My Comment: Looking at the details of the program, one might easily assume the sole plan was to enrich executives and shareholders at taxpayer expense.

    We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little.

    My Comment: This is more disingenuous nonsense. The real danger now is the Fed or Congress forces banks into more reckless lending.

    Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage.

    Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.

    What Our Nations Deserves

    Our nation deserves the Fed, the Treasury, and Congress to stop acting like socialist fools. That's what taxpayers deserve. Geithner's galling plan is as far removed from that ideal as possible.

    Details on Public Private Partnership Investment Program

    The Treasury Department has Details on Public Private Partnership Investment Program. Inquiring minds are looking at one of the examples.

    Sample Investment Under the Legacy Loans Program

    * Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

    * Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

    * Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

    * Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

    * Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

    * Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

    The example shows that taxpayers are on the hook for $78 out of every $84, in other words 93%, slightly better than the 97% number floating around yesterday.

  • Report this Comment On March 23, 2009, at 7:40 PM, xetn wrote:

    What utter stupidity! These assets are classified as toxic because they are WORTHLESS! So, why doesn't the government just let them die? The reason is they are protecting not the American citizen/taxpayer, but their friends in the banking industry. The vary same ones that are receiving billions of bailout dollars at the expense of every citizen (it is our money, not the governments). What a joke 50/50 partnership. It is no partnership when we have already given the "partners" the money through the bailouts for their "half".

  • Report this Comment On March 23, 2009, at 9:18 PM, tk333 wrote:

    Some really serious discussion here, but I missed the part of conversation where private investors were not taxpayers. It seems to me that private investors stand to lose twice in this shell game, so why would anyone spend their money on this?

  • Report this Comment On March 23, 2009, at 9:27 PM, jomueller1 wrote:

    If the banks are not willing to sell the toxic assets they already wrote down (I believe they did) then they should just go bankrupt. That will make them sell. No more bonuses or whatever new name they find for ripping off customers and shareholders.

    Congress should be impeached for breach of public trust and existing law. I call it robbery if laws are activated retroactively. It completely destroys the trust in the legal system if that trust ever existed. Everyone in this country should be protected from arbitrary legal changes. What do these senators think who they are?

  • Report this Comment On March 23, 2009, at 9:41 PM, CAPTAINWACK wrote:

    Come on fools. Who is buying into this? Your listening to the same people who told us the recession started....uh...nine months later. Every week Blowbama barfs out a new message of hope and the stock market goes wild. This administration is just trying it's best to pump up the market and wish all our problems away. When the smoke settles, we are still buried in debt at the federal, state and local government levels. Not to mention that our credit cards are maxed too. The feds are printing money as fast as the presses will go. We are finally seeing the truth to where our insurance premiums go. You wonder why health insurance is off the wall? Take a close look at that industry during the bonus round. Washington is infested with corruption with wall street feeding it more cash then it can handle.(see Chris Dodd's treasure chest). Blowbama is Jet-setting around the country burning 100's of thousands of gallons of jet fuel going from preacher hall to preacher hall. The only thing that will get the country moving forward is more money in everybody's pay check. Why would I need another loan if I can't pay the one I have know? Here's a stock tip... buy stock in the company that produces the clothe that money is printed on.

  • Report this Comment On March 23, 2009, at 9:49 PM, anyfreeusername wrote:

    Shuffling the deck chairs on the Titanic...

    There is an incentive for the banks buying these legacy assets to bid the price up as high as possible, even though they may be worthless. The guys at Citigroup will pay top dollar for Bank of America's legacy assets knowing full well that Bank of America will buy up Citigroup's rubbish assets.

    In return they only have to risk a few bucks, but get to clear billions of dollars off their books. And the best thing is it's underwritten by the govt so even if the assets turn out to be completely rubbish it doesn't matter because they've sold them in the market to get their money. Meanwhile they've bought another bank's legacy assets in the market for only a few bucks.

    So in the Treasury's example, Citi would receive $84 (on something they originally bought for $100), then they use $6 to go and buy another bank's legacy assets. If they get lucky and the assets they've bought aren't rubbish then they'll make money on it. But if it is rubbish then their maximum total loss (including the asset they've sold for a loss) is only $22 ($16 from selling the asset below par and a further $6 from the punt on the other bank's legacy assets).

    My guess is these scrubbed up legacy assets will go for top dollar. And the market and politicians will make the wrong assumption that this is a good sign for the market!

    Think about it, if these legacy assets were that good, why are the banks so keen to get them off their books? And why is no-one prepared to buy them without a government guarantee?

  • Report this Comment On March 23, 2009, at 9:51 PM, jerryguru69 wrote:

    For those who have a strong stomach, the full gory details can be found at

    http://www.financialstability.gov/

    I think Geithner’s plan is very clever. If my 99¢ calculator is correct, for every $1 of purchase price, the buyer only has to put up 8¢; Uncle Sam will match that, and the rest gets guaranteed by the FDIC. BUT, I also had a similar opinion of Paulson’s original idea of a reverse dutch auction: it ran into the buzz saw of the gap between what should be paid and what the seller wants for his MBS stuff, and I am willing to bet that the PPIP will have the same problem. One key provision is that a financial institution can offer a toxic security for sale under PPIP, but can decide whether or not to accept the bid: the seller can simply take a hike if the price is not high enough.

    Glad to see the stock market likes the plan, but I am rather more skeptical.

  • Report this Comment On March 23, 2009, at 10:42 PM, ybckorea wrote:

    I liked the guy from St. Pete who said:

    Take gov't money and give everyone over 50 the chance to accept 1 million from the gov't.

    In exchange:

    1. everyone who accepts quits his job - job crisis solved.

    2. Everyone who accepts buys NEW car. Car crisis solved.

    3. Everyone buys a house - housing crisis solved.

    Only costs gov't about 40 million - a whole lot less than one trillion or more.

  • Report this Comment On March 24, 2009, at 12:59 AM, JSergeant wrote:

    ybckorea said

    <i>I liked the guy from St. Pete who said:

    Take gov't money and give everyone over 50 the chance to accept 1 million from the gov't.

    In exchange:

    1. everyone who accepts quits his job - job crisis solved.

    2. Everyone who accepts buys NEW car. Car crisis solved.

    3. Everyone buys a house - housing crisis solved.

    Only costs gov't about 40 million - a whole lot less than one trillion or more.</i>

    The only problem with the guy from St. Pete and you is that you can't do math. There are about 87 million people in the USA aged 50+. If you give them each $1 million, that would come to $87 trillion - not $40 million.

    There is so much right wing nut job misinformation out there it is incredible.

    JSergeant

  • Report this Comment On March 24, 2009, at 2:40 AM, FOOLTHISFOOL wrote:

    Bank loans already below value of property and banks will be asked to discount further for investors - I think they will not be too willing to accept big reductions. The investors may have rehab costs to contend with.. but then again, they are not putting in a big stake into each deal. But investors will also have carrying costs i.e; maintenance, insurance, taxes. So I expect that they will push hard for less than 50cents on the dollar. Banks will resist.

    It is anyone's guess how soon economy improves and jobs become more plentiful and "qualified" borrowers are willing to take on mortgage debt. This is not a quick fix and I don't expect any taxpayer dollars flowing back quickly to reduce the deficit........Obama will continue to increase spending and the deficit in other areas....We will still be facing higher taxes and inflation.

    Fat Cat Hedge funds are again being given the opportunity to take advantage of economic crisis for big gains at taxpayer expense.

  • Report this Comment On March 24, 2009, at 4:53 AM, esotericrajen wrote:

    I think that the overriding assumption in the plan is that these "toxic assets" have some value so someone is willing to buy them. The banks' assertions, by keeping them on their books, is that eventually they will be worth what the books indicate. I would content that the value of these assets is based on a crumbled housing market that is going to take a very very long time to get to the valuations necessary to get the assets back to par value. I too have stocks that I think will eventually get to the value that I paid for them just before the crash. How realistic is it for the banks to keep these around, and hide behind them, just to keep themselves from booking losses?

    I think the government is trying its best to prise that part of the bank open in order to see what is inside. The banks are keeping things tightly shut because they *know* that what they have is virtually worthless and it will force them to take write downs.

    How realistic is it for the government, and the taxpayers, to keep on pouring more money into this bottomless pit with the faint hope that maybe the banks will confess and we can get back to reality? I think we have to break one part of this intricate web and let gravity force things to settle into a more stable setup instead of trying to keep everything up in the sky and trying to backfill concrete into the foundation with the hope that maybe things will stabilize.

  • Report this Comment On March 24, 2009, at 5:12 AM, Docjools wrote:

    I have to disagree that the government does not have the taxpayer's or main street's interests at heart: does anyone realize that the AIG bailout, this PPIP and other plans serve to maintain confidence in the US financial system? I am talking about the kind of confidence that, once spooked, will see the greenback become worthless as trillions are withdrawn from the financial system. Imagine a run on Citi, BAC, AIG etc etc all at once.

    By the way, in the example given, doesn't anyone realize that the $72 FDIC guaranteed loan gets first priority when the purchased asset is sold? That is why the $12 equity partners (Uncle Sam and private partner) need to make sure the purchase price makes profit sense. I think if the plan is to hold these assets, then I am wondering if the ballpark purchase price of any asset will be north of $50, which means selling banks will need to raise capital asap.

    Yeah, the question is what will be the price....

  • Report this Comment On March 24, 2009, at 9:51 AM, anyfreeusername wrote:

    >does anyone realize that the AIG bailout, this PPIP >and other plans serve to maintain confidence in the >US financial system?

    Ahhh... so the key to financial success is having the confidence to spend more money?

    How long can a faulty system be propped up by the government? Shouldn't it be replaced by one that actually works?

    When slogans and 'confidence' become more important than the actual reality and fundamentals, I can't help but recall another country that decided that it's government could run things better than the private sector, to really make sure it's citizens would be taken care of and everyone would have a job. It was called the Soviet Union.

    Capitalism works along the same lines as evolution. Survival of the fittest. That is exactly why it is the most sucessful method of economic organization. It implies death of entities who cannot adapt to an ever changing environment. Not everyone can survive, or there won't be enough resources for new entities to emerge. Activity will stagnate. Progress will slow. Just like the dinosaurs needed to be wiped out by a cataclysm in order for mammals to emerge as the dominant life form on Earth, so too the 'too-big-to-fail' firms asking the government for money need to be allowed to fail in order for a more functional financial system to emerge. One that is not dependent on government handouts.

  • Report this Comment On March 24, 2009, at 10:22 AM, CAPTAINWACK wrote:

    Boy, that guy has big ears.

  • Report this Comment On March 24, 2009, at 2:18 PM, steveherb wrote:

    50/50! We pay you how much to come up with that idea? Lease option to buy those homes. Then at least you would be discussing a 40/40 split until the asset is sold. Private investors aren't worried. They jacked up the rental costs.They still make money. Play the game! Lease option those homes with no money down. Low rental cost means economic increase. Pass a law stating dwellings must not be left vacant for a maximum period of time. If left vacant goes beyond maximum, costs to be lowered until first qualified tenant is available.

    Not a bad idea? Even I had to make and pour my own coffee to come up with that one.

  • Report this Comment On March 24, 2009, at 2:40 PM, texjammer wrote:

    I think the biggest problem is still being overlooked. The toxic mortages are bad enough, but the money for this plan is coming out of thin air. There is no one left on Planet Earth who will buy our Treasury Bonds, so we buy our own debt. Then we print even more money to buy the banks bad debts, along with private investors. "Private investors" should be read as Chinese government, since they have already stated they wouldn't buy any more US debt w/o hard collateral.

    Since Obambi and Gesundheit have started destroying the US Dollar, the rest of the world wants to dump it and create an new world currency. Doesn't anyone else see this as the bigger problem??? The US government must IMMEDIATELY STOP SPENDING AND PRINTING MONEY THAT DOESN'T EXIST!!

    If you thought that the Gold Standard was obsolete, it's making a rapid comeback!

  • Report this Comment On March 24, 2009, at 7:09 PM, steveherb wrote:

    Which half these toxic assets is the tax payer getting? THE LAIRS OR THE LOANS?

  • Report this Comment On March 24, 2009, at 10:30 PM, cutterpen wrote:

    Recovery....to what? Ample credit...for who?

    The manufacturing sector of the economy is diminishing as fast as AIG has been burning money. World no longer needs "Made in USA" products, as they can be manufactured far cheaper elsewhere. Something to be said about the fairness of various WTO membership countries toward USA with regard to international trade practices.

    The bulk of service industry was based on sucking juice out of the "phantom economy" bubble, which will never recover to what it was and neither it should.

    Discretionary spending, such as paying $399.95 (on sale at Pier-1 Imports) for weird looking pair of wrought-iron legged bar stools made in Sri Lanka for a cost of $5.00 is almost extinct now.

    All this translates into rising unemployment!

    Most people hold their peace for now, hoping that the Grand Stimulus will cause the value of their investments and tangibles go up.

    Wait for them to realize that they have been had.

    Dividents are on the way out, earnings are shrinking

    Sure, many essential companies will be kept running, albeit with their share prices running south.

    I took my time to develop respect and degree of admiration for Obama's quick grasp of matters presented, his youthful energy laced with seeming innocence and compassion.

    Now I increasingly consider him a puppet on a string

    performing for the benefit of Wall St. wolves.

    He had a chance to take a new approach, but didn't have the guts to tackle the premises, instead he is mired in trying to fix the details, putting trillion dollar

    band-aids on a rusty old pressure boiler that should be discarded. Now I firmly believe that if Republicans had won the White House, John McCain would be serving the same pizza, with the same ingredients, only the amount of the ingredients

    would vary a little.

    Still, the Americans expect way too much of their presidents and increasingly so.

    Generally speaking, their morale is falling, but they demand that the president's morale be impeccable and that he solve all the problems for them, totally disregarding to contemplate weather these problems

    may be based on their personal immoral behavior, such as: Greed, Love of money, do it all for a profit.

    O.K. it's easy to criticize, all you need is to read what other people have to say, after a while it feeds on itself.

    Recently I got involved in a discussion with a group of people (all Americans) about the mess the US has fallen into and what is the solution to it.

    My voiced opinion was that the US needs a genuine change of heart and change of some rules of the game.

    Hints!...... Ask not what America can do for you, but what you can do for America.....

    .....America produces 95% of what it needs and consumes 95% of what it produces.

    And there in lies America's continuing International image of strength. No other developed country is equally blessed, yet the red lights are flashing, the alarm bells are ringing, the warning sign says:

    Possible fall of the Empire.

    P.S. The stock market is going down, down and it will shrink, maybe by as much as 60-70%

  • Report this Comment On March 25, 2009, at 1:49 AM, lostinthebushes wrote:

    Seems to me like the correct action from day one of this mess would have been a seizure of the failing financial companies by whatever govenment agency regulates them followed by a slow sell off of the companies assets. I believe this was done with the S&L mess in the 80's and it seemed to work fine. I have an issue when I hear that something is to big to fail. Most of the financial companies that have been considered to big to fail seem to have some ties with members of Congress or on the Whitehouse executive staff. Is this what makes them to big to fail? I think not.

    Our government has lost sight of what it was designed to do. In my opinion, the functions of our government is to provide infrastructure, help to settle disputes between the states, defend our borders and interests overseas, and above all protect the terms of the Constitution. I have read the Constitution and nowhere does it give the government power to help bailout private industry when a private industry screws-up. The free market will take care of the screw-ups. Sure there will be jobs lost, homes lost, and retirement accounts reduced but life is a gamble. But then again isn't that just what we are seeing now with the goverment meddling in just about every aspect of private business? Pretty much looks like that to me. So it all comes down to lead, follow, or get the heck out of the way. There wasn't much leadership through the Clinton or Bush administration. There is even less with President Teleprompter. The current administration and Congress will never follow since they have severe Napoleon complexes which translates to mentally small people with delusions of grandeur. So the only option left is the third one. So how about getting the heck out of the way by doing this.

    1. Institute a flat tax or national sales tax similar to the Fairtax without the goober prebate. Make some allowances for low income people but don't get ridiculous about it. People would then have more disposable income to pay off debt or save thereby providing liquidity to the banks or buy things thereby creating a demand for businesses. Small businesses would see an increase in income allowing them to expand their benefits, staff, or cut prices.

    2. Drop the corporate tax rate to 15% but remove most corporate deductions. For example, I don't get to write off the cost of my personal vehicle or gas to drive to and from work so why should corporations be able to write off company jets? What would the corporations do with an approximate 20% increase in revenue? I don't know maybe create new jobs, move jobs back to the US, or give people raises? Sure they will line their balance sheets to pump up their stock price and pay dividends to those evil rich people but I don't care as long as it benefits the average Joe also. I am sure outraged screams against trickle down theory will be inserted here. But, let's face it corporations don't pay taxes - ever. They just pass taxes on to the consumer in some way. How do I know that? Because that is what I would do in a business and if I couldn't pass taxes on to the consumer then I would reduce employee benefits or wages or just plain lay people off. Read most corporate mission statements. Usually at the top of the list you will find that the primary mission is to provide value to the stockholders. Nowhere in there will you find anything about providing value to the employee. You can pretty much say the same about small businesses except substituting owner for stockholder. You can complain all you want about it but not liking a law of nature is not going to reduce the impact of that law of nature.

    3. Decrease federal spending by doing a complete review of the budget. In other words balance the blasted budget. Instead of tax breaks, allow incentives to private companies based on grants awarded in contests similar to the DARPA challenges. This would increase transparency, direct research and reduce the waste of tax dollars.

    4. Pass term limit laws for the House and Senate. I really do not think that the founding fathers ever believed that we would have politicians that would make careers out of being politicians. In their day, civil service was burden not a perk. Except in rare circumstances no one could afford to to be a full time politician as they had real businesses to run. This is in my opinion one of the biggest mistakes made when the Constitution was drawn up.

    5. I could go on about health care, border security, foreign policy, and the prosecution of some of the jokers that created this economic mess but that can be saved for another rant.

    I am sure in the long run the economy will get back on it's feet and people will prosper. What scares me is how much this country will change in the process. We can only hope for the best and prepare for the worst. Live long and prosper... : )

  • Report this Comment On April 01, 2009, at 9:50 PM, martins222 wrote:

    Morgan, Morgan, Morgan

    What HAVE you been smoking? How are you able to say it is a 50/50 split when the govt is putting up 93 % of the price as a non recourse loan and some equity money ? How are you able to say pricing will be fair when the what the banks get to keep as a purchase price is 13 times what is lost as an equity share? So easy to pay off the loss and keep the rest.

    Why are you carrying the water for plans that guarantee that the banks rip off the American citizen?

  • Report this Comment On April 01, 2009, at 9:51 PM, martins222 wrote:

    Morgan, Morgan, Morgan. tsk tsk

    How are you able to say it is a 50/50 split when the govt is putting up 93 % of the price as a non recourse loan and some equity money ? How are you able to say pricing will be fair when the what the banks get to keep as a purchase price is 13 times what is lost as an equity share? So easy to pay off the loss and keep the rest.

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