Nouriel Roubini: Geithner plan is OK.

[Teaser]

http://www.rgemonitor.com/blog/roubini/256157/new_york_times_deal_book_dr_doom_finds_promise_in_obamas_toxic-asset_plan

"My take is generally positive, with a couple of caveats," Mr. Roubini told DealBook about the new plan. He said he liked that the government was finally stepping up to clear the toxic assets off the bank's balance sheet and that private capital would come in to make a market for it. <...>

But unlike many critics of the plan, like Paul Krugman, a Princeton economic professor and columnist for The New York Times, who prefers full nationalization of the banks now, Mr. Roubini believes that the Treasury's plan does not preclude nationalization at all. Rather, he said, it will help to clear the way to full government takeover some troubled institutions.

hat tip Mark Matson on Openleft.

[flpoljunkie]

1. More from your link, "It wasn't all positive..."

It wasn’t all positive: Mr. Roubini said he did not like that banks have the option not to sell an asset after the auction concludes, as this would create confusion and frustration on the part of the buyers. He also believes the government should use its leverage over the banks to force them to participate, whether they want to or not.

In an opinion piece scheduled to be published Wednesday in The Daily News of New York, Mr. Roubini and a fellow N.Y.U. professor, Matthew Richardson, argued that “the reason that financial institutions should be “pressured” into participating is because that “they are the cause of the financial crisis.”

“They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place,” the two professors wrote.

http://www.rgemonitor.com/blog/roubini/256157/new_york_times_deal_book_dr_doom_finds_promise_in_obamas_toxic-asset_plan

[Teaser]

11. Nothing is all positive

.

[Beetwasher]

20. Especially In The Current Environment And That Would Be True Of ANY Plan

n/t

[EmilyAnne]

35. Sure is far from despair, though.

[flpoljunkie]

2. And, here's the closing paragraphs of the op-ed they wrote in the New York Daily News today...

http://www.nydailynews.com/opinions/2009/03/25/2009-03-25_give_credit_to_timothy_geithners_new_tox.html?page=0

Finally, we have to anticipate the likelihood that some banks will resist selling their loans and securities. Why? Currently, the government has been giving them the option to keep holding them with the hope that market conditions will improve.

Going forward, the government must insist on the banks' involvement in the new program. The reason that financial institutions must be pressured is that they are the cause of the financial crisis. They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place.

What happens if removing toxic assets from a bank's balance sheet at near-market prices shows it is effectively insolvent? Then we will have to face the elephant in the room. We may then have to start asking, "Why keep insolvent banks afloat?" And having asked that, we will have to search for ways to manage the ensuing systemic risk.

Either way, once the plan is fully implemented, we will be entering a new phase of the financial crisis. The water is choppy. Let's hope we are strong swimmers.

[leftchick]

3. on the other hand....

http://www.cnbc.com//id/29848741

<snip>


The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.

"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives", Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

Even if the plan clears banks of massive toxic debt, worries about the economic outlook mean banks could still be unwilling to make fresh loans, while the prospect of a higher tax burden to pay for various government stimulus plans could further undermine U.S. consumers, he said.

[EmilyAnne]

4. And on the other hand Brad Delong approves of the Geithner plan.

http://delong.typepad.com/sdj/2009/03/the-geithner-plan-faq.html

[leftchick]

5. Galbraith does not

http://www.patriotinternet.com

http://www.youtube.com/watch?v=4Z96HOE7o3M

Like it or not, many people seem to be resigned to the idea there's no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning. (Click here for part one of our discussion of the plan.)

That's hogwash, says University of Texas professor James Galbraith, author of The Predator State. Of course there's an alternative: FDIC receivership of insolvent banks.

Aside from being legally proscribed, the upside of FDIC receivership is the banks are restructured and reorganized for potential sale (either in whole or parts), Galbraith says. Such was the fate in 2008 of, most notably, Washington Mutual and IndyMac.

Crucially, FDIC receivership also means new management teams for insolvent banks; and Galbraith notes new leaders will have no incentive to cover up the fraudulent or predatory lending practices of their predecessors. Given the entire system was "massively corrupted by the subprime debacle," the professor believes criminal prosecutions on par with the aftermath of the S&L crisis - when hundreds of insiders went to jail - is a likely (and necessary) outcome of the current crisis.

But don't expect to see many "perp walks" if Geithner's current plan comes to fruition. That's one reason Galbraith called the plan "extremely dangerous" in part one of our interview.

So why isn't the Obama administration pushing for FDIC receivership? "Political influence of big banks," the economist says.

[chill_wind]

9. Nor Dean Baker.

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/the-geithner-plan:-billions-more-for-failed-banks/

[yowzayowzayowza]

10. Thx for all the snips & links!!!

:hi:

[BzaDem]

6. I guess it depends on how one sees the plan.

Both Krugman and Roubini insist that insolvent banks be nationalized. Krugman thinks that this plan will be used to avoid nationalization of any bank (and therefore doesn't like it), while Roubini thinks that this plan will be used just for solvent banks with nationalization of the insolvent banks (and therefore likes it). Time will tell what the administration is planning to do with the banks that are actually insolvent.

[Jennicut]

8. I agree more with Roubini in that it will be used as a step towards nationalization on a one at a

time basis.

[backscatter712]

26. Same here. This appears designed to make the nationalization process smoother.

It seems engineered to save the troubled, but savable banks, and creates a path for orderly disposal of toxic assets. Even if nationalization is inevitable, this plan seems designed to make it so the government doesn't have to nationalize as much as it would without this plan.

I'm pretty convinced that Obama's thinking twenty moves ahead - nationalization is something he's planning for, but he wants to try the less radical strategies first. The Geithner plan is designed to make it politically palatable to start nationalizing down the road - he can say "We tried the conservative approach, and it's not working - time for stronger medicine."

[Cronopio]

33. The only thing it is clearly engineered for is to move risky assets at bubble valuations ...

... from the banks to the government, where the taxpayer will eventually be responsible for. That is the only thing this plan absolutely guarantees.

Nothing in the plan guarantees or even suggests that:

1. The transaction will even take place if the buyers don't want to pay bubble valuations even with the massive taxpayer subsidy.

2. That this is a prelude to nationalizing the banks. On the contrary, the massive profits the banks stand to gain (much more than the private investors, who could lose money depending on later valuations of the assets) make it more likely that they will be able to claim that they are well on the road to viability. This will used as an argument against replacing the management, owners, or any kind of restructuring.

If you, Roubini, or anyone else disagree, I would love to see evidence or a solid rationale backing up that belief. I have seen neither yet. For obvious reasons, the media is reading way too much into Roubini's very qualified and relative endorsement of the plan.

"... less radical strategies ..."

Nationalization isn't radical. Most countries do very well with at least one central nationalized bank, and our financial system would function much better with one. The current U.S. system is actually more radical in its complete reliance on unaccountable private institutions.

[EmilyAnne]

36. Your two points don't really make sense to me.

No guarantees that the transactions will take place if the buyers don't want to buy? Well, yeah! That is what pricing them will look like. Not all assets will be bought, some assets will be lowballed and the banks will then refuse to sell at that price and the stay on the banks' books, some assets will be seen as valueless. Right now, regulators are reviewing the bank books and compiling information into portfolios that will then be viewed by the FDIC and the investors. Their bids will not be made blindly.

I think this is a prelude to deciding exactly what is going on in the banks. Once this is known, whether to nationalize or not will be on the table. Radical strategies are those that are implemented abruptly. We have a massive financial system. To compare Swedish banks to our banks is to compare a mouse to an elephant. Furthermore, from the beginning of the Swedish crisis, it was much easier to separate the bad assets from the good. As Krugman says over and over again, no one knows the value of these toxic assets. I believe this to be true. That, of course, then means that it is not easy to separate the bad from the good. This system proposed by Geithner will attempt to uncover the value. The profit incentive is big. The investors will want to make money on these assets. I think Geithner gets these people and this is why he thinks the pricing of the assets can happen with their help.

He could still be completely wrong, of course. But this is economics, after all. A liberal art masquerading as a science.

[Cronopio]

37. "A liberal art masquerading as a science."

Very true. With a big dose of bogus statistics and propaganda thrown in.

"... some assets will be lowballed and the banks will then refuse to sell at that price and the stay on the banks' books..."

You have competing motivations in this plan on the part of the buyer. It is true that, with the subsidy, the buyer may have little motivation to hold out for the lower price and likely the sellers will get bubble valuation for their securities, but the buyer also has to think about how they are going to trade these assets in the future when they're the seller. The viability of all of these securities are unknown - they're default bombs waiting to go off at some unknown date in the future. Some will default quickly, others little or not at all depending on how they were retranched. The buyers know this, and the subsidy doesn't change that situation - it just makes *this* transition much less risky.

So it's not a given that transactions will take place. The buyers may - and actually *should* - demand some sort of haircut on the valuations for the risk they're taking. The sellers may say "Hey, you're essentially getting a huge subsidy so that entitles us to a bonus on the bubble valuation." They may actually demand a profit. Geithner's implicit guarantee that this plan will "grease the wheels" of the transaction is not true. Transactions involving huge public subsidies don't operate in the market in the same way as transactions involving the assumption of normal risk.

"I think this is a prelude to deciding exactly what is going on in the banks."

Now I don't know what you're saying here. What do you mean by "what is going on in the banks"? Geithner's plan doesn't address the financial viability or the viability of their holdings. It's stated intention is simply to transfer risky assets from the larger banks with the taxpayer being put on the hook for any devaluation and the buyer and seller set to make out like bandits.

"Once this is known, whether to nationalize or not will be on the table."

What has Geithner or Obama ever said or implied that leads you to believe this will happen? Their responses to the question conclusivey show that both of them have flat out rejected the idea of real nationalization of the largest banks under *any* circumstance.

Note that I say *real* nationalization, not just nationalizing the financial risk of the bank's diciest assets, as we are already doing.

"Radical strategies are those that are implemented abruptly."

I used the common definition of radical, which means "beyond the norm". It has nothing to do with the speed of implementation.

"To compare Swedish banks to our banks is to compare a mouse to an elephant."

This is Obama's and Geithner's argument, and it holds little if any water. Of course, our system is larger but that doesn't mean that the same principles of transparency and integrity of market operations don't apply. No one is saying that adjustments won't need to be made to the Swedish/Nordic/Dutch approach but its main ideas are sound and proven. We should be building off of that instead of reinventing the wheel.

And again, the FDIC is - right now - essentially following that approach with the smaller banks it is taking into receivership. A variant of that approach has been successfully used in our system to bail out the S&Ls in the 80s with the formation of the RTC.

"That, of course, then means that it is not easy to separate the bad from the good."

Of course. No one believes it will be easy, but it is inevitable. Those assets *will* be valued - either blindly and inaccurately through hugely leveraged transactions or based on more accurate information about the security. Geithner's plan puts a huge wrench - temporarily - in the valuation process simply to move the assets once. The entranched loans will default in the future at an unknown rate and the value of the holding securities will go down. I'm sure that no *private* bank will pay the money and take the time to separate the chaff from the gold, which is another reason to create a public bank right now.

"This system proposed by Geithner will attempt to uncover the value."

No, it won't - for the reasons I've mentioned. Again, what is bringing the buyers and sellers to the table isn't information about the securities themselves, it's the assurance of profits through a massive taxpayer subsidy. Geithner's plan doesn't set the stage for normal financial transactions - just forced parodies of transactions. The viability of the securities are never seriously evaluated in this plan because there is no incentive to do so.

"He could still be completely wrong, of course."

I believe this a matter of Geithner's motivation. He believes that getting the Big Four financially well by current accounting rules is the key to ended the credit embargo because banks need to fill in their debt holes by cutting costs and drastically increasing revenues before they can start lending normally again. (A public bank wouldn't be under this limitation, by the way - which is why creating a new public bank isn't even being discussed right now) When the banks get well, they will start lending more and the investment economy will recover. So his only concern is getting the risky assets away from the largest banks and into a situation where the taxpayer will be forced to take the loss, not the private sector.

From his myopic viewpoint, it will solve the problem restarting the investment economy but not the general economy.

[Barack_America]

7. "it will help to clear the way to full government takeover some troubled institutions."

And that's just what Treasury is now asking the permission to do. I wonder if Krugman realizes that Treasury does not yet have the right to take over non-bank investment houses. How does he expect the toxic assets of these institutions to be addressed via nationalization?

[Guy Whitey Corngood]

12. Even though he still has some criticisms this makes me feel a little more comfortable. nt

[Kurt_and_Hunter]

13. I generally agree with that, which means I disagree with the administration

Most economists who "agree" with the plan see it as a step toward things the administration says it is NOT a step toward.

So once again we are in the "Obama can't say it out-loud but I know what he's up to" zone that has defined our politics for about sixteen months already.

Counting the "this will make nationalization easier" group as being in favor of the plan is disingenuous.

[Guy Whitey Corngood]

14. Good point, but they might also be saying these things in public to

avoid certain distractions that the pukes will certainly try to use their advantage.

[Beetwasher]

17. When Has The Admin Said It's NOT A Step Towards Nationalization?

:shrug:

Just because they haven't explicitly stated it IS a step in that direction doesn't mean they are explicitly saying it ISN'T.

The word "Nationalization" automatically sends the financial world into spasms, especially at the scale we would be talking about. It WOULD have to be done VERY carefully.

"Counting the "this will make nationalization easier" group as being in favor of the plan is disingenuous"

Wrong. There's nothing wrong w/ recognizing the plan as a possible intermdiate/mitigating step towards nationalization, with the hope that if the plan is successful, it won't HAVE to come to that. And there's nothing wrong or disengenous about Obama and Geithner NOT advertising that possible aspect of the plan. If they did, imagine the ensuing panic from the big financials.

[Kurt_and_Hunter]

21. A Simple Thought Experiment:

Say that last night a reporter asked: "Is one of the good things about the Geithner plan that it's a necessary intermediary step in the move toward nationalization of some of the big money-center banks?"

Obama would have answered in th negative -- artfully and intelligently, but still in the negative.

That wouldn't prove anything because there are, as you note, important reasons to keep nationalization off the table, publicly.

But the answer would leave us having to assume that the real answer was something different.
And once you start assuming someone doesn't mean what they say then it becomes a guessing game as to what they DO believe.

You say it is not disingenuous to tailor statements in light of public reaction.

Sorry, but that is the very soul of "disingenuous."

You are explaining why the administration has good reason for being disingenuous (and I agree).

[Beetwasher]

22. Well Thank You Mr. Kreskin For Telling Us What Obama WOULD Have Done

In your hypothetical situation!

Again, I ask you WHEN has the Obama admin said this plan is NOT a step towards nationalization?

So you make up a hypothetical situation in which you decide Obama would disingenuous and declare that that hypothetical situation in fact makes him disingenuous! :rofl:

Dare I say that that's pretty, umm, disingenuous of you? :rofl:

[Kurt_and_Hunter]

24. You are being silly now

I note that you do not suggest he would have said something different.

If you are expressing what you really think, rather than arguing for the fun of it, it begs questions like:

When has the Obama administration ever said it wasn't going to rendition Beetwasher to Syria?

But that doesn't mean it's on the table.

[Beetwasher]

25. I Suggest He Would Have Answered That He's An Alien From Kazaak And He's Going To Eat Your Brains

That's my hypothetical answer to your completely made up hypothetical situation.

Yes, of course I'm being silly because you deserve to be mocked for just making shit up out of thin air because you have nothing tangible on which to base your statement that the admin. is being disingenuous.

[BootinUp]

27. meanwhile...

they pursue authority to shutdown massive bank holding companies.

[Teaser]

18. Sola scriptura.

In the text of this quote, and the larger essay to which it is cognate, Roubini isn't predicating his support on that aspect alone. For example, he says

Excerpt 1)

“My take is generally positive, with a couple of caveats,” Mr. Roubini told DealBook about the new plan. He said he liked that the government was finally stepping up to clear the toxic assets off the bank’s balance sheet and that private capital would come in to make a market for it.

and

Excerpt 2)

Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay,” Mr. Roubini said in a telephone interview. “People say, ‘the government is putting in 95 cents on the dollar, so why not put 100,’ to do it all by itself. It’s because private-sector participants have the incentive to get the best price

are aspects of the plan he supports. He does not make his support of these points contingent on bad banks being nationalized.

Later he says

Excerpt 3)

“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.

In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.

Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.

There is no logical equivalence between the qualified support offered in 1 and 2 and the hope he expresses in 3. Now, admittedly, he believes that 3 *may* be necessary, and *if* it is and *if* we don't follow through 1 and 2 will be meaningless.

Then in his NY Daily News essay, he says this

What happens if removing toxic assets from a bank's balance sheet at near-market prices shows it is effectively insolvent? Then we will have to face the elephant in the room. We may then have to start asking, "Why keep insolvent banks afloat?" And having asked that, we will have to search for ways to manage the ensuing systemic risk.

and his rgemonitor.com interview, regarding authority for bank takeover

He added, “You are going to need that in shutting down, potentially, a bank like Citigroup.”

But these are conditionals, not certainties. It is a contingency, and he supports the Geithner plan because

a) it contains several positive features (features that, I note, many DUers have slammed)

b) it *does not exclude* the contingency he warns of. A contingency which *may not* be necessary (and his conditional in the text indicates as much).

[Kurt_and_Hunter]

23. I am not an enemy of the Geithner plan

And obviously if the same results could be achieved by the least dramatic means that is better.

I generally agree with Roubini on the positives you cite. They are not inconsistent with saying I disagree with the administration.

The question whether the plan can be a net positive (which I think it can, in a limited way) does not incorporate opportunity costs.

The plan is okay.

It is not optimal.

So one can say the plan is okay in and of itself while also saying the plan constitutes a bad development in the bigger fiscal/financial/political picture.

It is better than nothing. Some say it is worth than nothing and I disagree with that.

As a forced binary choice, I am for the plan.

[Nicholas D Wolfwood]

15. Time for a Roubini-Krugman CAGE MATCH!! (nt)

[Guy Whitey Corngood]

16. SUNDAY!! SANDAY!! SUNDAY!!........... ........ ........nt

[Nicholas D Wolfwood]

28. TWO ECONOMISTS ENTER - ONE ECONOMIST LEAVES.

Then the other economist leaves, with a slightly bruised super-ego, but no less deflated sense of self-importance.

[chill_wind]

29. Roubini vs KrugmanGalbraithStiglitzBaker?

He's a little outweighed in that matchup.

[Nicholas D Wolfwood]

30. Well, the other three aren't certified DU All Stars.

So they'll have to be worshipped a bit more before they can fight.

[chill_wind]

32. Anybody can be an All Star among some on DU if they hate Krugman enough

The popcorn eaters took off once his less than apparent "bona fidas" were uncovered, but the silent recs still keep coming in.

:-)

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x8290625

[chill_wind]

34. And to clarify, I'm referring to the relatively obscure ex-investment banker

(and not the DU Poster.)

[Beetwasher]

19. Yup, I've Been Saying This Over And Over And Over Again

Thanks Teaser! Good find!

[chill_wind]

31. Joseph Stiglitz: A Bank Bailout That Works

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=61569&mesg_id=61569