In Case We Need Reminding [Reader Post]


Yup, here we have it again, another reasonably clear exposition of what the Obama admin is doing wrong.

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”


The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses.

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.


Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long run solution. It’s a solution that says let’s kick the can down the road a little bit.”

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

So what is the impact on the markets? We’ve had a nice relief rally, when some sort of rescue plan was put in place(previously there was no coherent plan at all), now we have to see whether the plan actually works.
My guess is after this market rally, we’ll see your markets have some pullback or stagnate for sometime. We’ll only see a sustained uptrend start in your markets if there is a perception that Obama is on his way out.

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Good entry Sigmund!

Funny how the “news” media suggests that the Republican Party is the party of the rich and big business and yet Obama is the #1 recipient of campaign funds from Wall Street big wigs.

We’re bailing out all of Obama’s campaign contributors and asking the taxpayers to sit and wait for the economy to recover.

QUOTE: The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

Never attribute to malice that which you can attribute to stupidity.

They’re just a bunch of incompetent crackpots.

This is an interesting spot because I’ve just sold off half of my carrying positions, and I am looking to see whether it was the right move.
They aren’t US stocks but asian banks and associated stocks. The markets here look tired to me and there’s lots of selling altho the local indices are still near their recent highs.
Looking at how your leading stock Citi reacted after its results, I would say it is no longer going up but at minimum gone flat or perhaps ready for some staydown time.
The other banks look roughly the same to me. Could be wrong of course.

Good to see some mention of the six week rally in the markets – as this good news has been pretty minimal on here.

Here is another article by this guy titled “Obama’s Ersatz Capitalism” written in NYT.

Obama’s Ersatz Capitalism

Published: March 31, 2009

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

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.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” 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!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. 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.

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.

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

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.


I think conservatives have to work the internet to show that the democrats are now the party of the rich and crooked. Nothing wrong with being rich, but you should get there through honorable methods and not cheat people or take advantage of them.

What happened with the investment banks was greed run riot, these guys took enormous risks with other people’s money knowing if they crashed it, the most would be, they would be fired.

But if they made it, they’d get a huge bonus. So never mind if the bank loses money or even busts, let’s leverage to the max at the worst possible time.

Nobody ever does that with his own money.
When I trade other people’s money I never do anything with it I would not do with my own money.

A lot of these guys running the banks can’t even make money when they invest themselves, yet here they are trading billions of the bank’s money(other people’s money). I never put my money with anyone else or with any bank to manage or in any product because a lot of these guys are just conmen.

There is an honorable way to do investment and trading, which is always to put your clients first before your own enrichment. These bankers did not practice it.

When I was younger, I worked for a short while with ML(Merrill Lynch).
The previous ML boss had embezzled the company’s money and absconded to HK, where he got caught. There was a big shake up and basically chinese(locals) replaced the caucasians.
They kept asking me to push these products to clients, but these were products I would never have invested in myself. So after a while, I decided, I can’t stay with them.

Thus, it is also the banking culture. There is pressure placed on you to do dishonorable things, to make your quota, not get sacked, or enrich yourself with a huge bonus. Thus people get creative, introduce subprime mortgage backed securities, credit swap derivatives, every half- baked new idea they can think of, to make money and generate business. Invent a new product and you are genius.

In any case I find it more peaceful and interesting to run a fund and do simple, direct investment and only get paid(or not) for performance rather than get paid for bringing in business with no regard to performance. With the bulk of my own money in the fund, it also hardens the safeguard that I will not take excessive risks just to enrich myself thru performance bonuses.