EconoMonitor

Nouriel Roubini's Global EconoMonitor

Geithner Presents a Viable Plan to Dispose of the Toxic Assets…that Does Not Rule Out that Insolvent Banks Should be Taken Over

A similar piece, co-authored with Matthew Richardson, was published at the New York Daily News:

For the economy to be viable, the financial system must be healthy, and for this to occur, the financial system needs to be cleansed of its poorly performing loans and so-called toxic securities backed by loans, such as mortgage backed securities. This way, once creditworthy institutions and individuals come to the market looking for capital to borrow, financial firms will be in a position to lend them the money and more generally able  provide financial services to the economy.

Secretary Geithner’s recently announced plan is a step in the right direction in that it creates a “Public-Private Investment Program” to purchase the troubled assets of financial firms, in other words, to do this cleansing.

Up until now, with all the government bailouts, the financial system has been barely treading water. With this plan, it will be a hard swim, but, at least, there is a path to shore. This is the likely reason the equity market responded so well yesterday.

The plan essentially calls for private asset management firms  – private equity, hedge funds, mutual funds, pension funds – to invest side-by-side with the government.  The government will also lend up to an additional six times the initial money. The plan needs the government because there are so many bad loans and securities held in the financial sector that only the government’s balance sheet can handle taking them over. The government needs help from private investors so they don’t get hoodwinked by the banks.

Why would investors participate? The government’s loan is structured so that the firm will only be responsible for losses on their initial investment. This is a huge sweetener. The hope is that this “freebie” will induce many investors to participate. The competition among them will lead to higher offer prices for the loans and securities, thus encouraging banks to sell them.

A lot of ifs, but if indeed successful, the plan accomplishes mission number one, namely the removal of the bad assets from the bank’s balance sheets. Even if banks wanted to do this on their own, they can’t because the market for these illiquid assets has dried up.

But let’s not have any illusions.

The government bears the risk after first losses of the loans. If the economy gets worse, it could get

very ugly, very quickly. The administration should be transparent that there is still a wealth transfer taking place from taxpayers to investors and banks.

Also, while this is pretty clearly in the Treasury’s plan, many of the big guarantees are placed in the hands of the FDIC and the Fed. Why not only use Treasury facilities like TARP? Well, the administration would have to deal with Congress to appropriate more funds. While the events of last week and their ill-conceived compensation bill suggests this end around might make sense, there is something a little worrying about circumventing the legislative system in place.

Finally, a big problem is lack of transparency in the system – no one knows what the loans or securities are worth. Competing investors will help solve this by promoting price discovery. But be careful what you wish for.

Some banks will most likely resist selling their loans and securities. Why? Currently, the government has been providing them a free option to continue holding them with the hope that market conditions will improve.

The government must, however, insist on the bank’s involvement in the program. The reason that financial institutions should 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.

But what happens if removing toxic assets from the bank’s balance sheet at near market prices shows it is effectively insolvent? This is a real possibility.

Then we will have to face the big elephant in the room.

So far, due to the lack of transparency about the conditions of large banks, policymakers  have been able to throw around lots of money to  keep insolvent banks afloat in order to avoid systemic risk. But once the truth is revealed, perhaps we will have to start asking, “Why keep insolvent banks afloat?” And having asked that, we will have to turn our minds to a search for ways in which 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. Let’s hope we are strong swimmers.

To clarify my viewpoint: I see the Geithner plan as being relevant only to banks that are solvent. For those that are found – after stress tests – to be insolvent I see as the proper solution – -as I have widely written – to nationalize them and thus clean them up to prepare them for re-privatization.

The stress test should do a triage between banks that are illiquid and undercapitalized but solvent given the provision of capital and liquidity and those that, under a reasonable stress scenario are effectively insolvent. Those that are insolvent should be nationalized.

Those that are solvent will still have many toxic assets that need to be disposed of; and the Geithner plan provides a way to properly dispose of the toxic assets of solvent banks.  So my partial support of the Geithner plan – with all the appropriate caveats regarding forcing banks to sell toxic assets and accepting the results of the auctions – is consistent with the complementary idea of nationalizing the insolvent financial institutions.

The bad assets of insolvent banks that are nationalized could be separated from the good assets and then worked out by the government (but the government is not very good in that business); or they could be sold to private investors through an auction mechanism along the lines of the Geithner plan; or they could be sold – together with the good assets – to the investors purchasing a privatized bank that was temporarily privatized (along the lines of the Indy Mac deal where the investors purchasing the bank received a government guarantee on the bad assets after a first loss).

The toxic assets of the solvent banks still need to be disposed of as no private investor will participate in the recapitalization of solvent banks that are still full of bad assets. Of  the four available options for disposing of the toxic assets of the of solvent banks (the government purchashing them in a reverse auction; keeping them on the banks’ book with a guarantee after a first loss (the approach talken with Citi and Bank of America); selling them to private investors with a guarantee after a first loss; or finally the Geithner plan) the Geithner plan provides a solution that is likely to be superior to the other three. If the government were to buy these assets it would be the only bidder in a reverse auction and price revelation problem would be severe. Keeping them on the banks’ books with a gurantee after a first loss has been a disaster – as the experience with Citi and Bank of America shows. Selling them to private investors with a guarantee after first loss would be very non-transparent in the price revelation objective.

So, having private investors bidding for the toxic assets – as in the Geithner plan – ensures a better price revelation that would be impossible in a reverse auction where the government is the only bidder. Also note the the idea – supported by many including myself – of converting some of the unsecured debt into equity to recapitalize banks – works for insolvent bank that go through a receivership proces; it cannot be applied to solvent banks that need recapitalization. In conclusion the Geithner plan is not an alternative to nationalization: insolvent banks should be nationalized and the Geithner plan should not apply to them. But solvent banks still need to have their toxic assets disposed of; and for this banks the Geithner plan provides a solution that – all in all – is better than the alternative.

Those who dont like the Geithner plan on the basis that they prefer nationalization are right – as i agree – that the insolvent banks should be nationalized. But  they usually dont give an explanation of how they would dispose of the toxic assets of solvent banks. They seem not to like the Geithner plan because it would provide a subsidy to the investors. But ensuring participation of private investors in the risk and in the price revelation is worth that subsidy. Otherwise those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan.

235 Responses to “Geithner Presents a Viable Plan to Dispose of the Toxic Assets…that Does Not Rule Out that Insolvent Banks Should be Taken Over”

GuestMarch 26th, 2009 at 1:05 am

On the one hand it seems that Nouriel Roubini is finally having behind-the-scenes influence on the government.On the other hand it seems the cost of having him have such influence is that now he is willing to provide intellectual cover up for unethical and inefficient plans.I was happier before all this happennedUnbelievable: my keyword is Geith… as in Geithner 🙂

TurtleMarch 26th, 2009 at 10:41 am

I am very disappointed in Dr. Roubini. I think Roubini just sold me down the drain. Stiglitz and Sachs read the tea leaves correctly. I would not let the current or past crop of leaders sell at my table at the swap meet — nor would I take their check and I would take a good hard look at their excuse for cash.

FAMCMarch 26th, 2009 at 11:41 am

Also disappointed.I was a frequently writer on this forum.They are trying to artificially prop up assetprices in the short-term, when economic history showsthe long-term results of such actions can bedevastating.So that long-term this last plan (I do not remember how many “plans” these guys invented till now) will probably only benefit some “Robber Barons” and can bring poverty for may others.

GuestMarch 26th, 2009 at 1:00 pm

Nouriel Roubini says “ensuring participation of private investors in the risk and in the price revelation is worth that subsidy”. I wonder why he does not show the same analytical rigor that had charactherized him until now… in other words, why doesn’t him shows the cost-benefit analysis on which he bases his statement.Nouriel Roubini then says “those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan”. Well, just one example of such a solution can be found in the last two paragraphs of the following article by Jeffrey Sachs:http://www.huffingtonpost.com/jeffrey-sachs/will-geithner-and-summers_b_177982.htmlThose two paragraphs say:”There are countless preferable and more transparent courses of action. The toxic assets could be sold at market prices, not inflated prices, making the bank shareholders bear the costs of the losses of the toxic assets. If the banks then need more capital, the government could invest directly into bank shares. This would bail out the banking system without bailing out the bank shareholders. The process would be much fairer, less costly, and more transparent to the taxpayer.Banks that are already insolvent should be intervened directly by the FDIC, that is, temporarily taken into receivership. The shareholder value would be wiped out, except perhaps for some residual claims in the event that the toxic assets vastly outperform their current market expectations. As I’ve written before, the allocation of bank shares between the taxpayers and the current bank shareholders could be make contingent on the eventual value of the toxic assets (http://www.huffingtonpost.com/jeffrey-sachs/a-proposal-on-how-to-clea_b_166303.html), ensuring fairness between the shareholders and the taxpayers.”I just hope that Sachs, Stiglitz, Krugman ant others don’t sell out.

GuestMarch 26th, 2009 at 5:12 pm

It is possible that Nouriel does not see the obvious outcome? The “private investor” will be the bank itself. Our professor defending his friend Geithner.

wethepeopleMarch 25th, 2009 at 7:52 pm

Why wouldn’t the tax payer as lender/guarantor get first or preferred dividends (10-15%), followed by secondary position of Treasury/TARP followed then by equity investors participation 50/50 after preferred participating dividends have been paid. Equity gets nothing until lenders are current.

GuestMarch 25th, 2009 at 8:05 pm

And now, a little reality check:”Treasury Secretary Timothy Geithner tells us we are in a recession that will last for some time. Ben Bernanke, Federal Reserve Chairman says the economy would bottom this year. We do not think Ben is right but even if he was right he didn’t tell us how long we would bump along the bottom. If the bottom is in sight and Citigroup, GE, Hartford Insurance Lincoln Insurance, AIG, GM and Chrysler, etc. won’t need any more government funding. In fact banks are telling us they are going to make money in the first quarter. If all this is so, why is Mr. Bernanke monetizing $300 billion of Treasuries. We notice he has made no statement regarding the secret monetization that has been going on for four months. Needless to say, that is another state secret. He might also explain why there was enormous call buying in bond futures options over the three days prior to the announcement on Wednesday. Obviously there was a major leak to the anointed on Wall Street.While Ben Bernanke buys $300 billion in Treasuries he is contemplating another $300 billion. In fact there is an excellent chance that the $300 billion, or at least a large part of it, has already been spent. Between you and we, and the fence post, Ben will need at least $5 trillion for monetization. What is being done is to cover debt and save the financial system, not to revise the economy. At the same time, as you have gotten a taste of this week, the dollar was hit very hard. Also on the agenda is hyperinflation. We predicted this in 9/04 and here it is.These policies will continue to extend the time line for a collapse. Even Alan Greenspan says $1 trillion is not enough to remedy the financial system and economic ills. Here we are on the threshold of going Weimar, as free trade and globalization, collapses perpetual currency devaluations take place and virulent inflation stalks the world, a hyperinflation that will destroy all but the very rich, who will in the end beg for their lives.Mr. Bernanke knows all about Weimar, Argentina and other Latin experiments that were disasters. All similar to what we see in America today. Trying to overcome deflation with inflation is like shoveling sand against the tide. More and more holders of US Treasuries and new buyers are walking away just like they are walking away from Fannie Mae and Freddie Mac bonds.The idiot builders are at it again. Lots of condos will hit the market this year, as Fannie Mae has added new restrictions. They won’t guarantee condo buildings where less than 70% have been sold, up from 51%. They won’t back loans for sales where 15% of current delinquencies on association fees or where more than 10% of units are owned by single-entity.Bill Gross, Chief Investment Officer at PIMCO says the Fed’s purchase of Treasuries and toxic mortgage garbage will probably exceed $6 trillion.As we have said before the so-called solutions are being performed by the same criminals who caused all these problems in the first place. All we see is compounding problems. It is incredible that the central bank has not been held accountable. Washington’s fiscal policy and the policies of the privately owned Fed are completely out of control. The only real objective of Treasury and the Fed is to save the cabal that really controls our existence and that is Wall Street, banking and insurance.Our money Masters tell us there is little inflation and they supply us with bogus statistics to prove it. They tell us the trillions in guaranteed government debt will not cause inflation, which currently is 9% to 10%, and is headed toward Weimar proportions. In three months it will be two years since the beginning of the collapse. They talk about a short problem when it is already long term and it could last a score of years. None of the problems we have cited in the past have been adequately dealt with. It is all patch work and Rube Goldberg solutions. There is no longer a standard. The dollar is about to collapse and a basket of fiat currencies won’t do any better. Low interest rates compound the problem. Who wants to save? Inflation is 10% and interest is 2% or 3%. The whole marketplace is distorted by zero interest rates. This is all Ponzi finance and it can come to no good end.Manufacturing is and has been in decline for sometime now and it is going to deteriorate further. Worldwide reductions are 30% to 50%. The depth and speed of the plunge have been breathtaking and as we said on February 2, 2009, depression has begun.In Europe, where manufacturing accounts for 20% of GDP industrial production is down 12% yoy. Brazil has fallen 15% and Taiwan 43%. In China exports have fallen and 30 million workers have been laid off. This is the biggest, fastest decline since the great depression.From 9/16/29 until WWII, everything except gold and gold shares fell in value. At that time credit was tightened as consumer fears reduced demand for manufactured goods. As a result unemployment will continue to rise worldwide.Exports cannot be used to escape the problems created by the Fed, Wall Street and banking. Germany is off 20% yoy, Japan 40% and in the US 23.6%. The second Great Depression is in progress. This could last ten years or longer.Manufacturing in the US is 14% of GDP, 18% worldwide and 33% in China. Manufacturing makes up 2/3’s of exports for the US. What we are seeing is a race to the bottom. In India, handicraft exports have fallen, which accounts for 16% of GDP, some 55% yoy. Textile manufacturers have cut 500,000 jobs. More cuts are coming for future years and with them revolutions in many countries.Which would you rather have, a 2-year Treasury bill that pays 0.87% interest in a country with 10% inflation or gold coins, bullion or shares? The answer is pretty easy – the gold related investments, which have been in a bull market since 2000. Inflation adds to gold’s allure, but we are already seeing a flight to quality, as well as uncoupling from the dollar, other currencies and world stock markets. We find it ludicrous that our government and Wall Street would have us believe that US Treasuries are as good as gold. Even Queen Hillary tells us Treasuries are a safe bet. What else would you expect from a member of the Illuminati? The result is a massive inflationary undertow building that is going to knock Americans right off their feet. The dollar is headed back down and even though now decoupled from gold, its fall will tend to have a salutary effect on gold. Having mega-inflation will give gold a big assist as well.We predicted the recent announcement that the Fed was monetizing Treasury debt. Not only had they been buying Treasury debt for four months secretly, but as we pointed out over the years they were secretly buying Treasuries via offshore location, something over $100 billion worth in just late 2008. We can imagine what first quarter purchases looked like. Of course, you have no need to know what they are up too. It is another state secret. While this has been happening most other bonds, especially GSE, and toxic mortgage bonds find it hard to catch a bid and that is why hundreds of billions of dollars will be used by the Fed to buy them off the banks Wall Street and insurance companies, so American taxpayers can absorb their outrageous losses. In addition, we saw a vast dollar outflow and January almost $150 billion. We will soon find out if it was replicated in February. China has been bailing out of Agencies and buying short term Treasuries, which is not reassuring. Sooner or later some of those funds will find their way into gold.It looks like the dollar has finally begun its decent versus other major currencies. This puts the US Treasury and the Federal Reserve under additional pressure. The US and world economy has been knocked for a loop and the worst is ahead of us. All the manipulation they can muster will have little affect on where economies are headed. The Fed has had to admit they have to do the unthinkable and monetize debt. Before this is over the Fed will monetize more than $5 trillion as we follow-in the footsteps of Zimbabwe, where now only gold is accepted in payment. We are entering un-chartered waters and there is a big hole in the bottom of the boat.The first $1 trillion of Treasury purchases are underway and who knows how much has already secretly been placed in Washington and in hidden accounts in the Cayman Islands. The only weapon the Fed has left is inflation, if you can really call that a weapon. Falling asset prices have to be over come, along with a fall in consumer demand, foreclosures and rapidly rising unemployment. Those policies will expedite a flight from the US dollar and Treasuries. All buyers of dollar denominated assets know where this is headed and that is towards a depreciation of the dollar. That means losses in the dollars they hold – big losses. The question is who will break first and be a seller?As you know misery loves company and that is why the Bank of England is headed toward zero interest rates and as well is buying British long-term bonds. Their economy is sinking faster than that of the US. M4 money and credit is up 18.8%.Last week the Bank of Japan joined the party announcing quantum easing whatever that is. All three want zero long-term bond rates, which means very little savings will be accumulated and the economy will continue to suffer a lack of capital, that doesn’t come from a printing press. Incidentally, there are no free capital markets left, TARP is not working and the Treasury is looked at with disbelieved.The misnomer, known as quantum easing is not working and can only be thought of in terms of desperation, because the TARP and the bailouts are not working.The government and the Fed cannot make house and commercial real estate prices go back up to capture all that lost equity. The only way half of Americans can even make lower house payments is stop the payments, and give them the house, which we predicted five years ago would happen eventually. Even at 4%, 30-year fixed rate loans, the payments mean nothing if you have lost your job. Many people cannot even pay the interest on their debt.The Geithner Treasury plan is a recycling of the Bush plan called trash for cash. That is the program that was just abandoned six months ago, because it didn’t work. Now we have another team of experts that are equally out of touch with things financial and economic. Obama’s judgment is few really get it and that is we have a dysfunctional financial system.Both the Bush and Obama administrations want the easy way out and there is none.Geithner is about to push the lie that bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. They think their true value is so high that if they were properly priced, banks and Wall Street wouldn’t be in trouble. Someone should tell these crooks that because you say it is so, doesn‘t make it so.Subsidized purchases of bad assets with taxpayer funds to drive prices of toxic assets up stinks. Geithner’s plan will fail and Congress won’t supply any more subsidies.In the Treasury’s new 3-part program to cleanse the US financial system of toxic assets that are clogging bank’s balance sheets won’t work.An entity will be set up that the FDIC will use to offer low-interest rate loans to private interests for buying up bank’s soured assets, many of which are tied to mortgages that have fallen in value.Treasury will hire outside investment managers to run public-private partnerships that could invest for potential profit for troubled mortgages, with government capital matching private capital contributions.TALF, Team Asset-Backed Securities Loan Facility, will buy so-called legacy assets, which we assume is purchases from New York’s money center banks.The program is a rehash of the Paulson program of six months ago that proved to be a failure. Even Paul Krugman and James Galbraith have trashed the plan.The Plan is a sweetheart deal for toxic mortgage buyers. Government will supply 95% of the funds from the taxpayers. These buyers will be supplied non-recourse loans, loans secured only by the value of the mortgage assets being bought, worth up to 85% of the portfolio. Investors will supply as little as 20% of the money. In the final analysis government would fund 97% and private investors 3%. The program is to enrich the rich on Wall Street and allow the public to pay for it. The program is a fraud and it will end up a zombie. After this the cries will be so loud that there will be no further giveaways.Don’t be fooled by the existing home sales numbers: 45% of the sales were foreclosures and short sales, or banks dumping properties and speculators buying. The big inventories signal much lower prices down the road from massive over supply.GM and Chrysler that didn’t need any more money last week will need more than the $21.6 billion in aid they requested. Where is the SEC?Mr. Bernanke says it will take a lot more taxpayer money to fix things just as political sentiment has shifted away from spending more money. The chances of the Congress approving additional money right now for TARP is about nil. Without trillions more we could end up with a 15-year depression. Whether the experts and the public know it or not the political system is in the process of being paralyzed. No more Washington bailouts; bankers and Wall Street screaming at Congress and the public screaming at Congress to stop giving money away. Our conclusion is the system will fall further into depression and inflation will rage simultaneously. The result will be higher gold and silver prices and a fall in Treasury prices and the dollar.Keep in mind that the Fed can only monetize so much debt before we are Weimarized. They cannot continue to buy fresh Treasury debt and buy existing debt from foreigners who are offloading. The Fed will certainly be overwhelmed. Debt levels are so high and so out of whack that we are really beyond re-flating and retaining a stable currency at the same time. Dollar holders already see this and that is why the dollar has broken down from its recent highs – treasuries are next. It is now only a matter of time before real interest rates rise strangling commerce and the government. That will send banks reeling again as they have to foreclose on commercial real estate that is plunging in value. Insolvency will reign.”http://theinternationalforecaster.com/International_Forecaster_Weekly/America_Potentially_The_Next_Weimar_or_Argentina

SoftwarengineerMarch 26th, 2009 at 1:32 pm

A LOT OF GOOD FACTS GUESTI’d add the following to the “What Bottom In Sight?” rationale:THE APPROXIMATE 8% UNEMPLOYMENT RATE IS HALF-SIZE AND EXCLUDES GIVE UPS AND UNDEREMPLOYEDIn America, the post 1998 halfsize unemployment rate is like 8%. But this is totally deceptive and doesn’t capture the true pre-1998 method of unemployment calculation that the 17% Great Depression unemployment in our history books references [or that we currently compare to]. We’re clearly kidding ourselves. See the proof in part from the BLS data base:Feb. Jan. Feb. Feb. Oct. Nov. Dec. Jan. Feb.2008 2009 2009 2008 2008 2008 2008 2009 2009U-6 Total unemployed, plus all marginally attachedworkers, plus total employed part time foreconomic reasons, as a percent of the civilianlabor force plus all marginally attached workers.. 9.5 15.4 16.0 9.0 12.0 12.6 13.5 13.9 14.8The rest of the BLS URL:http://www.bls.gov/news.release/empsit.t12.htmNotice the real unemployment rate went from 13.9% to 14.8% with Geithner/Obama at the helm.

ex VRWCMarch 25th, 2009 at 8:10 pm

I will repeat this – The real goals of Turbo’s plan:Turbo and his crew have devised a shell game in order to move bad assets from one bank (or pseudo bank) to another. Turbo’s Magic PPIF Plan. The only incentive to doing any of this is that, in the course of the move, the taxpayer gets stuck with the downside. Otherwise there is no reason to move the assets. Because, in the end, the goal is not for these assets to recover, for they are debts. The goal is to move their downside from the current holders (big, politically important companies, overseas interests, etc) to you and I before they are eliminated. Then, what Roubini, et al really want can happen. They want a massive writedown of all the debt. Roubini has called for this constantly. They think it should be wiped out, Jubilee, start over. But, before they can do so, they need to ensure that the politically favored class gets the downside off of their backs and on to the backs of you and I and our children first.Then, they dress it all up with a big bow that reads like this: ‘Government knows best. The greedy bankers and the traders have ruined everything with their unregulated greed, so government needs to step in and fix it’. And Joe Sixpack says – ‘well they have to do something.’Just remember, in the end, what the goals are. Do not fall for the red herring that ‘we need to set a market price’ for this toxic waste, or for the even more laughable assertion that the government might actually make money on this. Absent the government (that means you and I and our kids) guarantees, there is no market. Therefore the assets are worthless. The plan is to transfer the risk of holding worthless assets from bondholders (PIMCO, Saudis, etc) to the US taxpayer.What has happened is that Roubini and others see chilling economic data, and react like economists, devising Keynesian schemes and governmental machinations to rescue us from the results of our folly. But they don’t necessarily comprehend the political calculus and power plays underlying all of these moves. That is for us to do – to hold their feet to the fire.

Leo70March 25th, 2009 at 9:37 pm

I agree 100%. I’d just note that there is no “risk of holding worthless assets”, they are worthless. What is being transferred is not risk, but a loss. The thing that annoys me the most ,is this constant non-sense that we need the banks, hence we need to take all their losses. We do not need the banks, they need us. All the banks that are insolvent or even just illiquid could fail tomorrow, and absolutely nothing will change. FDIC will pick them up, divide them up, and sell them off. All debts that they had will be wiped out, and so other banks will end up in the same way. There are literally thousands of banks that have no exposure to the toxic stuff, and they’ll keep doing fine. As far as the Saudis, Chinese, etc. that bought this stuff, I could hardly care less.

GuestMarch 25th, 2009 at 11:20 pm

of course Geithner’s plan is transfer loss. who on their right mind will be willing to transfer profit to strangers but to himself?

GuestMarch 25th, 2009 at 11:40 pm

I dont think Chinese and Saudis are exposed to banks’ toxic waste. These two countries are exposed to Treasury and agency debt. With agency debt, I think USA gov removed credit risk and at the same time compensated creditors with very well cash-flow. Just ask PIMCO guys, his total return strategy is all agency. It is like robbing candy from a baby. At the same time, these two countries are probably shrinking agency and long dated Treasury and swap into short-term Treasury to prepare for nasty inflation from all this quantum easing.

economicminorMarch 26th, 2009 at 10:41 am

Back from vacation and exile. When I came back, I found out I had expired. I asked what was up and that was all I was told. I am not an institution, just an average guy who doesn’t have a whole lot of money so paying big fees to participate here was never going to happen. I had been given access before with them knowing that but then I expired?After asking what to do and not receiving a reply I went and put in an alternate email address and got to log in. They may kick me right back off? Or not! So any of my posts may be my last.I still think that there is more to this than just the big banks being insolvent. I think that if the toxic assets were allowed to be marked to the real market value that pension funds and insurance companies all over the country would be collapsing. Same reason to support AIG.I just don’t think the realization of who actually owns the assets has hit home with most people. Sure the banks devised all these structured assets but they sold most of them. The big institutions are in trouble because their current business model is junk and none of this patch work asset support system is going to fix that. What they need to survive is for lending to resume to the levels before the crash and for insurance companies, pension funds, FCB, private equity firms and hedge funds to return to the table and purchase new secularized assets. They really don’t know that this isn’t going to happen for to many reasons to list here right now.BUT the real underlying issue with keeping the economy from going straight into the tank is that those who rely on the income from the toxic assets have neither income nor asset value and the people at the end of the chain are the retirees, current and future, plus insurance companies who bought hundreds of billions of dollars worth of AAA rated securities with their supposedly liquid assets.If this system isn’t supported, then our entire economic system fails.It may happen anyway because the collapse of the real economy continues which continually brings loans into default which wouldn’t happen under more normal times . There was a NY Times article yesterday about the acceleration of defaults on commercial loans. Residential real estate inventories are remaining very high and as more and more people are laid off while REOs flood the market and depress prices, this sector is not going to improve meaning further deterioration of the toxic assets.We’ll know this year whether the experiment by Ben, Tim and Larry works or doesn’t. I personally don’t see how it can but that is an opinion from the wilderness of Southern Oregon and not from any main street of any big city.

TfTMarch 26th, 2009 at 11:18 am

economicminor,I got an email saying my subscription expired last week. I replied to the sender of the email and stated that Professor once said that access to his blog will always be free. Within hours, my access to Professor’s blog and other free contents was re-enabled.As to your thought, what the difference would be if US Gov’t go after the producers, sellers, promoters, rubber-stampers of these toxic assets for frauds and get them to pay for their acts, monetary or otherwise. Then use the funds to compensate legit pension funds etc. plus possible bailouts as appropriate? Thanks.

economicminorMarch 26th, 2009 at 12:15 pm

TfT,I think there is an element of blackmail inside the hierarchy of the big institutions that has coerced the administration into working for the interests of the big institutions. There is also groupthink as mentioned later in this blog by PhilT. There is also a large measure of the foxes watching the hen house. Put all together, it isn’t likely that the banksters will be prosecuted until after this period of chaos is resolved one way or the other.Trying to go after any of the purps right now would be like going after a mob boss who has pictures of the police chief and most of the judges with hookers or young boys and proof that most of the detectives are on the take.And wishing isn’t going to get it done.As of today, I think the most likely outcome will be a total financial melt down and angry mobs in the streets with more than pitch forks. Corrupted people can justify anything but in doing so, they never see that their actions kill the host or put him out of business. Greed and Privilege warp people’s minds to the point where they really believe they deserve because they are better and smarter than the rest of us. The American Revolution was about just these same issues. Privilege, Greed and Corruption among a ruling class that had no care or realization of their effects on the population they lorded over.

Leo70March 26th, 2009 at 8:25 pm

EM, if what you say is true, then they should just let the banks fail, sell off their assets, and take care of the pension funds. It makes no sense to save the banks and the pension funds. In the end they’ll have to nationalize all pension funds, and confiscate all 401k, IRAs, etc., so giving money to the pension funds now wouldn’t make a difference in the long term. But throwing money in that endless sinkhole that are the megabanks is utterly pointless (and borderline criminal).

Wolf in the WildsMarch 25th, 2009 at 8:13 pm

Sir,I respectfully disagree with you on this point. There are a lot of ways to remove toxic assets, but putting the losses squarely on the tax payers is the worst possible way. And there will BE losses. If the taxpayer is to be the one bailing out the banks, then all the upside should belong to them, not private investors who can game the system.Geithner is not a Hero and he is far worse than a Zero. He has not achieved the role of his office: to protect the American tax payer. Actually he has done the complete opposite. The argument that the banking system needs to remain in private hands is beginning to sound stale. These banks should be nationalised, with a toxic asset/equity exchange. Captial stakeholders will be given upside participation via warrants into common equity, and convert their Tier1 and 2 holdings into common equity. After the cleaning up the balance sheet of these banks, the governmet can look to reprivatise these entities under a better regulatory framework.By making taxpayers of the largest debtor nation in the world bear the cost of the losses, you are endangering the country. We are seeing the effects via the oversized budget deficit and the crowding out of private borrowers. There will be consequences, all of which are worse than letting stakeholders bear the cost.I do not follow how you can support this measure. It is grand larceny, and it reflects the corruption within the US government. And I know corruption when I see it. I live in Asia.I hope you will reconsider your views on this.

PayamMarch 25th, 2009 at 8:40 pm

Actually if you read his previous 2 posts you’d see that he supports nationalization of insolvent institutions while in his opinion the Geithner program is actually to sell the assets of the solvent illiquid, scared institutions.

Wolf in the WildsMarch 25th, 2009 at 8:45 pm

@PayamBut we all know it will not work that way. We can all hope for them to do that but given their penchant, it is more likely to dump losses on taxpayers. As I said, the system is corrupted and a corrupt system will benefit the corrupt.The professor can hope for only viable institutions to be saved but more likely, the viable ones will be paying the price (via FDIC contributions).

SigmundMarch 25th, 2009 at 8:38 pm

Nobody in their right mind can really be confident that Bernanke or Geithner have a workable solution to the banking crisis, which is critical to restoring the economy and sustaining any stock market rally. While Dr. Roubini compliments the Geithner bailout as the best among alternatives, this does not mean it has a good chance of succeeding. There are so many moving parts, there is so much that could go wrong, there is so much uncertainty its hard for me to have much confidence. Therefore,I remain defensive and put the odds of this bailout succeeding, without major alteration, at no more than 25%.

GuestMarch 25th, 2009 at 10:18 pm

I agree. Bernanki, Geithner, and Paulson have done and are doing all the tricks, but they have done all wrong in worst possible ways and it made so much worse for our financial prospect, economic system, and social psycology, including massive burden on the taxpayer, bailout money loss and Congress corruption, worsening economic crisis, moral hazard, debasing of dollars, instability of our political system and damage to the psycology of people. We should stop all the bailouts and let bankruptcies take on insolvent, useless financial institutions.

GuestMarch 25th, 2009 at 8:41 pm

Nouriel has repeatedly stated that the 4 big banks are insolvent – C,BAC,JPM,WFC. Bernanke and Geithner have repeatly stated that they have “no plans whatsoever” to nationalize these big banks. I assume that Nouriel fully expects the 4 banks mentioned to fail the stress test. Nouriel has said that the banks are insolvent by an amount of up to $400 Billion (-$400 Billion). He has also stated that he might have over estimated their insolvency by as much as $400 Billion which would leave the banks flat in the better scenario. Bernanke has stated that he wants to preserve the “franchise value” of the banks. So my question is what makes Nouriel think that they are going to put the banks into receivership? Even if they are found to be $400 Billion insolvent (as opposed to flat) what is going to stop the FED from recapitalizing these big banks and pass the bag to the taxpayer as they have doing all along? The FED have been thumbing their noses to the American people up to this point (with little or no negative consequences) so what’s to stop them continuing in their merry ways and not wipe out the shareholders of these big institutions?

GuestMarch 25th, 2009 at 9:00 pm

Nouriel is confused and torn between his loyalties with his buddy Geitner and being honest with himself, or Nouriel knows something we don’t.

GuestMarch 26th, 2009 at 2:12 am

I picked up on that as well. This raises the probability that it might just well be a correct assumption.

GSMMarch 25th, 2009 at 8:47 pm

NR- “The administration should be transparent that there is still a wealth transfer taking place from taxpayers to investors and banks.””Finally, a big problem is lack of transparency in the system – no one knows what the loans or securities are worth. Competing investors will help solve this by promoting price discovery.”Don’t hold your breath. This scam is a rather poor viel for more bank giveaways.Who will set the price at auction for the securities? What if the banks don’t want to transact at the discovered price? NR, this is a very big leap of faith that “price discovery” will all be above board.Smoke and mirrors- a plan within a plan. Let the proletariat believe that the program works, while all the time it’s working AGAINST them. By transferring yet more taxpayer treasure into the coffers of the Banksters, the US Administration avoids the nasty confrontation with the Banks over mark to market.Better to stick it on the neck of the citizens. A much easier and manageable target.And let’s be clear. 1 Trillion is a drop in the bucket when there are dozens of Trillions in toxic paper oustanding. Is this the loco at the front of a VERY LONG train?Lack of transparency? What is not transparent. This is a blatant theft, carried out in broad daylight, on the Treasury of the US. It’s not even attempted to be hidden, such is the arrogance.This of course is all a big red herring. It facilitates the massive transfer of taxpayer/citizen wealth into the hands of the Bankster elite- the Pigmen. And what then? Once cleared of these toxic debts then banks will merrily lend again?To whom? For what? More idle production? More empty houses, malls and office buildings? Margin lending to speculate? (YES!)Who will borrow? Those consumers who make up 70% of US GDP – who now have seen their wealth destroyed through asset price collapse ? Corporations who cannot export as their customer base collapses? Manufacturers, with no buyers or worse- cheap overseas competition? Speculators (YES!!)The portion of prior growth and demand that was fuelled by debt and credit is gone. Consumers will be forced to live out of cash flow (income) and savings. As the accrued debt deflates and with it consumer demand ,the economy will adjust lower and is now adjusting to a much lower level of GDP. How much US prior economic growth was fuelled by debt/credit extended by greedy banks? I recall some stats provided by John Mauldin a while back- I believe it represented something like 50% of all consumer expenditures in 2005-2006. FIFTY PERCENT. (From Mortgage equity Withdrawal, the housing boom etc)Perhaps NR can publish them?The economy is adjusting lower to meet much lower demand. Not because Banks cannot lend. But that is something TPTB do not want to be known yet, lest the sheeple panic. In the meantime , the looting continues.

economicminorMarch 26th, 2009 at 11:13 am

The wealth transfer IMO is to the end users which are the existing retirees. Sure the big boys are skimming off billions. They think it is their due. Their minds are corrupted with the belief that they deserve but IMO those at the end of the chain are the real beneficiaries. IF this massive transfer wasn’t going on just think what happens to all those millions of retirees who are living off the system.Yes there are FCBs and Private Equity Firms and Insurance Companies who are also benefiting along with others. Follow the money. Where is it going?And what are the options IF the support was taken away?Sure Geithner and Bernanke did a real poor job in designing the bail outs but they were also being blackmailed by the institutions. Do this or else….Very interesting dilemma with very unclear outcomes. Many many systems are failing at the same time. Can Obama be the hero or will he be a villain? I think he is a hero who is way over his head. I hope he is strong enough and smart enough to lead us through this but I have to say, I am not impressed with many of his advisers. Only time will tell and the story is still being written.Fascinating to watch! Just wish it was happening on someone else’s watch and it didn’t affect me so dramatically.

HayesMarch 25th, 2009 at 9:02 pm

from tax cheat and NY Fed President to ……… Hero?only history will tell.”The plan essentially calls for private asset management firms – private equity, hedge funds, mutual funds, pension funds – to invest side-by-side with the government.”side-by-side implies equal -NR goes on to say:”Why would investors (private asset management firms – private equity, hedge funds, mutual funds, pension funds) participate? The government’s loan is structured so that the firm will only be responsible for losses on their initial investment. This is a huge sweetener.”makes sense to me…when you make a post it requires a Confirmation Keyword, the keyword for this thread is somewhat ironicFromZ – “Z” as in Zimbabwe I assumeThe Prof goes on:”To clarify my viewpoint: I see the Geithner plan as being relevant only to banks that are solvent. For those that are found – after stress tests – to be insolvent I see as the proper solution – -as I have widely written – to nationalize them and thus clean them up to prepare them for re-privatization.””In conclusion the Geithner plan is not an alternative to nationalization: insolvent banks should be nationalized and the Geithner plan should not apply to them. But solvent banks still need to have their toxic assets disposed of; and for this banks the Geithner plan provides a solution that – all in all – is better than the alternative.Those who dont like the Geithner plan on the basis that they prefer nationalization are right – as i agree – that the insolvent banks should be nationalized. But they usually dont give an explanation of how they would dispose of the toxic assets of solvent banks. They seem not to like the Geithner plan because it would provide a subsidy to the investors. But ensuring participation of private investors in the risk and in the price revelation is worth that subsidy. Otherwise those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan. “with all do respect: how about a plan that cannot be gamed by the thieves that created this crisis.

Wolf in the WildsMarch 25th, 2009 at 9:48 pm

Agreed. Actually, the Prof is wrong on who is getting the subsidies. It is not the investors. The money is going to the banks.

economicminorMarch 26th, 2009 at 11:20 am

What we need here is a forensic accountant to follow the money. We sure don’t have the transparency that we were told we were going to have.As much as I don’t like Geithner, I don’t know who could do a better job. It is a very complicated mess and the players are strong and willful. What is needed is a champion chess player who understands banking and accounting and has no personal desire for money or abuse of power…We have a war going on and the American people’s interests are the collateral damage.

HayesMarch 25th, 2009 at 9:15 pm

Obama’s bank plan could rob the taxpayerBy Jeffrey SachsPublished: March 25 2009 23:14 | Last updated: March 25 2009 23:14T he Geithner-Summers plan, officially called the public/private investment programme, is a thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks, by buying toxic assets from the banks at far above their market value. It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalization of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries…FromZ(imbabwe)

hMarch 25th, 2009 at 9:12 pm

They seem not to like the Geithner plan because it would provide a subsidy to the investorsinvestors as in “management firms – private equity, hedge funds, mutual funds, pension funds”Who could possibly not like the Geithner plan on the basis of subsidizing hedge funds et al. >FromZ(imbabwe)

HowardMarch 25th, 2009 at 9:25 pm

Wouldn’t this plan appear to be more “fair” if borrowers were given the opportunity to pay off their loans for a reasonable premium to what the government/hedge funds paid for the loan? If say the PPIP pays 30 cents on the dollar for a loan, the government should allow the borrower to repurchase the loan for 50 cents with government financing, if he can afford it. Alternatively, they should allow the borrower to designate a creditworthy friend or relative to buyback the loan. At least this will somewhat offset the billions of dollars hedge funds may make from this program. In addition it will offset the ugly situation of the government to be in the position of foreclosing on thousands of loans that result from the crummy economy and the fact that 4 million net jobs have been lost in the past year.

James HoganMarch 25th, 2009 at 9:26 pm

I am very sorry to have to vehemently disagree with the esteemed professor Roubini, but the Geithner plan is nothing more than a plan to shove all the trash onto the public.If the assets were worth what the banks claim they are worth, wouldn’t the banks already have sold them? Of course they would have. They didn’t because they couldn’t because they aren’t worth what the banks want to get for them. Simple as that. Requires only the ability to count.James Hogan

RcoutmeMarch 26th, 2009 at 7:52 am

Although in many cases you may be right; there are instances where you don’t understand what is going on. The banks routinely sold the loans (CDO’s, etc). When the subprime problem hit, CDO’s went out of vogue. Many of them are still performing quite well. No one is willing to buy the things because they are so complicated to figure out. That does NOT mean they are worthless. In fact, some are worth quite a lot.

James HoganMarch 26th, 2009 at 1:27 pm

I didn’t say they were worthless. I said the banks are trying to sell them for more than they are worth. This scheme is a method for leaving the US taxpayer holding the bag. It’s wrong. We can spend this money in a much more productive manner.

Average JaneMarch 25th, 2009 at 9:28 pm

I can’t believe the professor said this:”The administration should be transparent that there is still a wealth transfer taking place from taxpayers to investors and banks.”We should just lie back and enjoy it, I guess.

HayesMarch 25th, 2009 at 9:32 pm

via DrudgeI’m having a very good crisis,’ says Soros as hedge fund managers make billions off recessionhedge fund manager who predicted the global credit crunch has said the financial crisis has been ‘stimulating’ and the culmination of his life’s work.George Soros, who predicted the global financial crisis twice before, was one of the few people to anticipate and prepare for the current economic collapse.Mr Soros said his prediction meant he was better able to brace his Quantum investment fund against the gloabal storm.But other investors failed to take notice of his prediction and his decision to come out of retirement in 2007 to manage the fund made him $US2.9 billion.And while the financial crisis continued to deepen across the globe, the 78-year-old still managed to make $1.1 billion last year.’It is, in a way, the culminating point of my life’s work,’ he told national newspaper The Australian.Soros is one of 25, top hedge fund managers from across Wall Street who have defied the credit crunch crisis to reap a total of $11.6billion (£7.9bn) last year.The managers made their profit by trading above the pain in the markets, according to Institutional Investor’s Alpha Magazine.Former maths professor James H. Simons, who has made billions in hedge fund Renaissance Technologies, earned $2.5 billion running computer-driven trading strategies.And John A. Paulson, who made his fortune by betting against the housing market, came in second earning $2 billion….http://www.dailymail.co.uk/news/worldnews/article-1164771/Im-having-good-crisis-says-hedge-fund-manager-1billion-world-plunged-recession.htmlnext upthe Geithner Plan…FromZ(imbabwe)

Marlene K.March 25th, 2009 at 9:38 pm

Dear Professor Roubini, could you please make your book “Bailouts or Bail-Ins: Responding to Financial Crises in Emerging Markets” available on Kindle (amazon.com)???? Thanks!

PhilTMarch 25th, 2009 at 9:53 pm

Otherwise those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan.

Groupthink is a type of thought exhibited by group members who try to minimize conflict and reach consensus without critically testing, analyzing, and evaluating ideas. Individual creativity, uniqueness, and independent thinking are lost in the pursuit of group cohesiveness, as are the advantages of reasonable balance in choice and thought that might normally be obtained by making decisions as a group.[1] During groupthink, members of the group avoid promoting viewpoints outside the comfort zone of consensus thinking. A variety of motives for this may exist such as a desire to avoid being seen as foolish, or a desire to avoid embarrassing or angering other members of the group. Groupthink may cause groups to make hasty, irrational decisions, where individual doubts are set aside, for fear of upsetting the group’s balance. The term is frequently used pejoratively, with hindsight.(from Wiki)

economicminorMarch 26th, 2009 at 11:28 am

it is a problemin some cases, it is a very negative downside to human nature. In others, it brings the community together.this is why we have cycles. Everyone is bullish or patriotic and then that can turn into negative mob action and the market crashes or wrong person gets hanged.

Octavio RichettaMarch 25th, 2009 at 10:06 pm

Profossor, U Da’ Man! Over the weekend, when the plan leaked, I did say that, in terms of the market, the plan was dynamite. I bit exagerated, I accept, but in impulsive blog rant world a suitable indicator I believed the move was in the right direction and had chances of success (as opposed, e.g., to Krugman’s blog entries). The equity market rallied approx. 7% when they opened on Monday.I am a bit late on my reading of Shiller’s book “The subprime Solution”. I was hesitant to buy it las Xmas as I thought there would not be anything about subprime for me to learn in there.I am glad I bought the little book as I was very mistaken. I am about 2/3 done with the reading. So far I have learned 2 very important things:1. Things I didn’t know about the psychology of bubbles.2. The role of bailouts. What exactly they are and their role in saving an economy from collapse.Bailouts, BY DEFINITION, involve favoring entities that may have caused the problem. They will always posses elements of unfairness, AND they will always involve the use of taxpayers funds; and, the public eventually (i.e., in steady state) will always pay for them via e.g. higher taxes, cuts in future benefits, etc.See for example:http://freakonomics.blogs.nytimes.com/2008/10/14/shillers-subprime-solutions/In my last post, I focused on what we still don’t know about the causes of the subprime crisis.But here I’ll tell you about six solutions proposed by Robert Shiller in his book The Subprime Solution. (He has also recently published an op-ed in The Washington Post and an op-ed in The Wall Street Journal.)Shiller separates the short-term need for a bailout from the need for long-term solutions. Much is being written now about short-term bailouts, and Shiller presciently has a chapter in his book on the inevitable need for cleaning up the past.But this post responds to Shiller’s suggestions about what we should do prospectively to make sure this doesn’t happen again. For the long term, Shiller proposes “six major ways of improving the information …The WP editorial:http://www.washingtonpost.com/wp-dyn/content/article/2008/09/26/AR2008092602838.htmlEverybody Calm Down. A Government Hand In the Economy Is as Old as the Republic.By Robert J. ShillerSunday, September 28, 2008; Page B01It has become fashionable to fret that the current crisis on Wall Street marks the end of American capitalism as we know it. “This massive bailout is not the solution,” Sen. Jim Bunning (R-Ky.) warned Tuesday. “It is financial socialism, and it is un-American.” It is neither. The near-collapse of the U.S. financial system and Washington’s sudden and massive intervention to try to shore it up certainly mark a major turning point, but a bailout would represent a thoroughly American next step for our economic system — and one that will probably lead to better times.Americans may assume that the basics of capitalism have been firmly established here since time immemorial, but historical cataclysms such as the Great Depression strongly suggest otherwise. Simply put, capitalism evolves. And we need to understand its trajectory if we are to bring our economic system into greater accord with the other great source of American strength: the best principles of our democracy.No, our economy is not a shining example of pure unfettered market forces. It never has been. In his farewell address back in 1796, 20 years after the publication of Adam Smith’s “The Wealth of Nations,” George Washington defined the new republic’s own distinctive national economic sensibility: “Our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.” From the outset, Washington envisioned some government involvement in the commercial system, even as he recognized that commerce should belong to the people.ad_iconCapitalism is not really the best word to describe this arrangement. (The term was coined in the late 19th century as a way to describe the ideological opposite of communism.) Some decades later, people began to use a better term, “the American system,” in which the government involved itself in the economy primarily to develop what we would now call infrastructure — highways, canals, railroads — but otherwise let economic liberty prevail. I prefer to call this spectacularly successful arrangement “financial democracy” — a largely free system in which the U.S. government’s role is to help citizens achieve their best potential, using all the economic weapons that our financial arsenal can provide.So is the government’s bailout a major departure? Hardly. Today’s federal involvement offers bailouts as a strictly temporary measure to prevent a system-wide financial calamity. This is entirely in keeping with our basic principles — as long as the bailout promotes, rather than hinders, financial democracy.Which, so far, it seems to. Congressional critics may be right to demand more help for homeowners and more accountability for Wall Street blunders, but the core idea of the plan is sound: to protect the financial infrastructure. Remember, Fannie Mae used to be a government entity, and by taking it over, the federal government is merely returning to the status quo ante. The measures to take toxic debts off the hands of financial and insurance firms are intended only to deal with a crisis, not to transform our financial system. The proposals do not represent any landmark change in the American way of prosperity. Everyone should take a deep breath. Changing our thinking about finance does not mean abolishing capitalism, but it does raise questions about what the changes mean.Whenever the public endures a crisis, ordinary citizens start to wonder how — and whether — our institutions really work. We no longer take things for granted. It is only then that real change becomes possible.So the current crisis got me thinking back to 1990, the year before the collapse of the Soviet Union, when I worked with two Soviet economists, Maxim Boycko and Vladimir Korobov, to try to understand the different belief systems in their country and mine. We carried out identical surveys in Moscow and New York, comparing answers about fundamental notions of capitalism, and published our results in the American Economic Review. We expected to find that the Muscovites possessed scant understanding of how capitalism really works. But we found that they actually understood free-market dynamics better than the New Yorkers. We concluded that the Muscovites had proved more savvy precisely because their system was in crisis — something that encouraged them to rethink their most fundamental notions.We Americans are going through a similar change right now. We no longer think that our financial future will be determined by securities brokers or inhumanly large investment banks. The most important question is not, “What form should these temporary bailouts take?” It is, “What are we really learning from all this?”We should be learning a great deal. The current crisis offers us a singular opportunity to reevaluate fundamentally the safety and permanence of the master financial institutions that we have come to take for granted as part of the national economic landscape. Over these past few turbulent weeks, we have learned that the monolithic investment banks are mortal: They are mostly gone, or absorbed by other banks. We have learned that what we called “cash” and considered perfectly safe is not necessarily so secure.So we are groping around for something else to trust. We should be open to thinking about a new set of financial arrangements — a better financial democracy — that can restore the public’s faith in the economic principles espoused by Washington more than two centuries ago. Here are some key features:1. Handle moral hazard better. The term “moral hazard” refers to the pernicious tendency some people have of failing deliberately if they think it’s advantageous to do so. Moral hazard is used to justify teaching people a lesson for their failures — the same logic that once justified “debtors’ prisons.” (Yes, we really did have them.) But over the course of the 19th century, Americans grew more realistic about laying blame for economic catastrophes and started eyeing other parties besides the hapless and the bankrupt. The demise of the debtors’ prisons reflected Americans’ changing ideas about the meaning of a contract.By rescuing Wall Street tycoons who succumbed to the lure of an irrationally exuberant housing bubble, the bailouts today do pose something of a moral-hazard problem. But we can more than repair it by defining a new generation of financial contracts, with a continuation of our evolving thinking about moral hazard, reflecting greater enlightenment, greater understanding of human psychology and the means to deal with financial failure. For example, I have proposed replacing the conventional mortgage with what I call the “continuous-workout mortgage” — one that would spell out in advance the conditions under which borrowers would see their debt reduced in a rocky economy. These conditions would be designed to minimize moral hazard: The borrowers would not be able to make the debt reduction happen deliberately.2. To limit risks to the system, build better derivatives. Some of today’s derivatives — the complex bundles of toxic real estate loans that helped drag Lehman Brothers down — turned out to be “financial weapons of mass destruction,” as the legendary investor Warren E. Buffett warned back in 2003. The problem isn’t derivatives per se but a certain kind — derivatives that spun a massive web of over-the-counter contracts, relying on the solvency of countless banks and other institutions, and ultimately endangered the entire financial system when they fell apart. Some kinds of derivatives, such as those maintained by futures exchanges using procedures that effectively eliminate the risk that the other party in the agreement will default, are more useful — and far safer — than others. It is high time to redesign derivatives to avoid what Buffett called “mega-catastrophic” risks.3. Trust markets, not Wall Street titans. If institutions can be said to have charisma, such giants as Lehman Brothers and Merrill Lynch certainly had it in spades. But these firms proved not to be the sole source of financial intelligence. They were merely meeting places for smart, financially savvy people — and for some reckless folks besides. We need to learn to trust people and markets rather than institutions. This means developing better markets that will allow us to hedge against the kinds of risks that dragged us into this crisis, such as real estate gambles.4. Ideas matter. Maybe next time, we will listen more closely to financial theorists who think in abstract, general terms. Consider the Long-Term Capital Management debacle in 1998, when the Federal Reserve leaned on financial titans to rescue a massive hedge fund and stave off global fallout. Lots of people hold that the moral of the LCTM story was the failed thinking of two of the firm’s founders, Robert Merton and Myron Scholes, both of whom were Nobel Prize-winning financial theorists. In fact, the collapse of LTCM was largely due to the overconfidence of bond trader John Meriwether and some of his other LTCM colleagues, who were gambling in the markets. The disgraced Merton has been working for the last decade trying to build better risk-management systems, mostly to little avail. Maybe he will be heard now. People still seem to want to trust businessmen who have made bundles and have a huge investment bank behind them, rather than listen to experts who are thinking about the fundamentals of risk management. We would have been better off this month if we’d been ignoring the former and listening to the latter.These and other improvements in the contemporary economy — a better financial information infrastructure (so that people can gauge risks better), broader markets (so that people can manage big risks, such as real estate loans) and better retail products (such as continuous-workout mortgages) — will need to be discussed, debated and delivered in the days ahead. If we move smartly, Americans can have a better, more robust financial democracy along the lines of the system envisioned by our first president. The current crisis does not mean the end of American capitalism. But if we are lucky, it will mean an important step in its evolution.robert.shiller@yale.edu

Octavio RichettaMarch 25th, 2009 at 10:13 pm

So my suggestion is that it is better to try to learn the reality of bailouts and their role in the economy. Bailouts, of course, need to be planned/done well. But make no mistake, no bailouts, just letting the system fix itself, IS NOT a better solution.if you understand this, you will be less angry, you will adapt better to the new realities, you will be a happier person.Of course, I am also aware there are people who will enjoy continued whining about bailouts. Well, you will continue to whine because a lot more is unfortunately coming.

Wolf in the WildsMarch 25th, 2009 at 10:22 pm

OR,It is not about bailouts. It is about the right kind of bailout. The kind that can lead to a recover, vs the kind that will drive the country to the ground. I think what is proposed serves to only achieve the latter. The approach of a bailout should ALWAYS be to achieve its end, and get upside at some later stage. What they are doing is nothing more that transferring wealth from one side (taxpayers) to another (banksters) without achieving the relevant recovery. On top of that, it jeapodizes the financial state of the nation, making a more severe economic crisis more likely. That is the point. I am not saying that government don’t do anything. I am saying the government should do the RIGHT thing. Unfortunately, this plan is not it.

methinksMarch 26th, 2009 at 11:05 am

@ORHow arrogant and cavalier you sound. Have you any idea how people at the bottom of this dung heap will suffer for something they had no control over? Haven’t you learned anything from your own experience in Argentina?This debate is not about a bailout, it’s about how it is being done. This bailout should be from the bottom up. You don’t protect and secure the fortunes of those who created this crisis. As it stands now, those who swindled the world will come out of this with even more wealth and power. Wake up!

PeteCAMarch 25th, 2009 at 10:31 pm

I’ll respectfully disagree with Shiller here. The scope of the losses to the public in this latest proposed bailout is on a scale that was never envisioned in the “American System” he describes. If we were to commit these vast sums of money (public debt) to any venture, then surely re-building of key facilities in the private sector would have been the critical step. America does not just face a collapse in our financial sector. We are about to hit a brick wall in terms of our energy policies, and our industrial sector needs a complete revolution to become competitive. I fear those opportunities are likely to be permanently lost at this stage of the game. In the absence of bailouts, let the bond holders of the banks take the losses – and at the same time make all efforts to shrink the size of the government as much as possible. We have too many people in Washington DC who think they know “how to lead the country out of trouble”. In truth, none of them have the slightest clue.PeteCA

Pecos BankerMarch 26th, 2009 at 10:43 am

Isn’t it ironic that the solution to the problem created by the banks is to use taxpayers’ diminishing/remaining wealth to bail them out. I mean, this is really rich! Who could have imagined the people could be hoodwinked on such a scale? This is really one for the history books for the next thousand years!

GuestMarch 25th, 2009 at 11:17 pm

ok, his point 1, 2, 3, 4 are pointless.point 1, handle moral hazard better? what about avoid it entirely?point 2, build better derivatives? LOL.point 4, listen more closely to financial theorists? you mean, those who gets wrong most of time?point 3, Trust markets. That is more like it. trust market forces to sort out any mess. Market forces always yield optimal result.

Octavio RichettaMarch 25th, 2009 at 11:33 pm

Those points are on the long term stuff. I was focusing on the short term bailout stuff…

The AlarmistMarch 26th, 2009 at 5:14 am

Blah, Blah, Blah.The problem is that so many people turned to the political class for a workout to an otherwise uncomfortable situation.1) Once people saw they could walk away from debts with no consequence, the flood gates opened … hypothesis of Moral Hazard is seemingly moved to status of theory;2) LOL also. The derivatives weren’t broke, the counterparties were, and therefore the derivatives were not the problem, but their resolution was. The people who should have known about counter-party risk and how to price it in never got a chance to take their lumps. I seriously doubt the whole system was going to collapse, given that most of the open positions would have been netted and the contracts torn up and very little real damage would have been done. In that respect, the Lehman workout was the success that ISDA claims it was.3) Trust markets? How about trust, verify, and price in risk accordingly.4) Listen to theorists more closely. Sure, I agree.You know, this “Wild West Capitalism” might actually work if it followed the “Wild West Model” with various players figuratively strapping on six guns and enforcing the rules in the glaring absence of regulation being cited by everybody. Crime in the streets was far lower in the days before we had professional police and regulatory agencies to shoulder the burden of being an interested and active citizenry.

Wolf in the WildsMarch 25th, 2009 at 10:17 pm

Otherwise those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan.Dear Prof,There has been a lot of idea on a solution all over the intelligent world. The main problem is that this corrupt administration would not take the real steps necessary to solve the problem, the steps that require the people who took the risks to pay for the risks. I have come up with this idea 8mths ago, and it has not changed:1. Govt takes over toxic assets in exchange for common equity2. Tier1 and tier2 capital converts to common equity (was haircut before, but now the situation is so far gone, they have to be fully converted).3. Govt fully guarantees deposits for 2yrs4. Give existing stake holders upside participation in toxic assets with warrants.5. Revamp banking/investment regulation back to basic principals of credit6. BREAK UP TOO BIG TO FAIL ENTITIES7. Restablish Glass-Stegall8. Reprivatise banks.It is not difficult to achieve and it doesn’t require a single cent of taxpayer moneys. Stimulus can go to real economic activity vs burdening the nation with a huge black hole.So Prof, there are solutions. They are just not solutions that Wall Street likes. Hence it will not be implemented.

GuestMarch 25th, 2009 at 10:40 pm

http://www.garynull.com/gnStimulusPlan.html.and more solutions…A Progressive Stimulus Package for America’s Future Sustainabilityby Gary NullMarch 11, 2009There is no doubt that a stimulus package is urgently needed at this critical time of a global economic meltdown. Predictably, the economic downturn is leading to a depression equal or worse than The Great Depression of 1929. Recessions and depressions have a way of going into automatic pilot and progressive economists are almost unanimous in warning against slow, indecisive action as a means to slow a depression’s momentum. However, the last thing a stimulus package should focus upon is injecting enormous tax dollars into the coffers of private Wall Street banks, these institutions’ executive bonuses, investment and insurance firms, and the heavily lobbied special interest groups that do not benefit the public at large.An examination of the current stimulus proposal that was passed through Congress has clear signs of failure for the long term. It shares many commonalities with the original Bernanke-Paulson TARP plan that has since proved wasteful in light of the lack of oversight, which should be mandated before promising so much to a shadowy, non-transparent industry. Although the new stimulus package contains some valuable benefits and increases investment on Main Street, including the setting of a course for more progressive policies towards healthcare, energy and job creation, many noteworthy economists are quick to criticize it for being too partial towards the financial institutions and short-handed in aiding average Americans. David Korten draws a clear distinction between the “phantom wealth” of the financial institutions, such as derivatives and credit default swaps, and the “real wealth” of Main Street, and Ralph Nader emphasizes repeatedly the need for any stimulus package and taxpayer expenditures to target solutions for real wealth. Former Chief Economist of the Senate Banking Committee, Robert Johnson, has called the Administration’s stimulus plan “intravenous drip capitalization” because it neglects to harness the enormous losses and debts on the financial industry’s balance sheets. The plan continues to follow the basic principles of Friedmanite and Greenspan trickle down economic theory; that is, by dumping money into the system to reinvigorate loans and increase consumption, the road to recovery will be achieved. This in turn will restore consumer confidence and the get economy rolling again. However, this is a seriously flawed theory. Fundamentally, it ignores common human psychology. Bailing out the banks to increase credit flow has no guarantee whatsoever for restoring Americans’ confidence in the current financial system. In fact, Americans’ anger against Wall Street should be a clear indicator of the growing lack of trust people have in our economic leaders…….

DoctoRxMarch 26th, 2009 at 10:08 am

Good for you, Wolf.Professor is perhaps showing his ideological bias.Jeffrey Sachs and Paul Krugman prove the Geithner plan provides grossly inflated prices for these securities.To answer NR’s challenge: have an auction of the toxic debt, with the pieces chosen by impartial regulators (NOT GEITHNER) – and auction them at FAIR MARKET PRICES, not subsidized prices. Then we’ll see who is swimming naked.Professor Roubini: Your challenge to design a better solution is easily met, per Wolf and my response.Even your buddy Nassim Taleb believes that too-big-to-fail banks should be torn down.My blog econblogreview.blogspot.com comments on these matters regularly.

Octavio RichettaMarch 26th, 2009 at 10:13 am

“Govt takes over toxic assets in exchange for common equity”At what price? Price discovery is the key feature of the GT plan that was missing in previous plans. From what I read, despite the shortcomings I don’t know of a better alternative for price discovery. Check out NC, according to her, the banks are already buying toxic stuff to “game” the system. The good side of it is that the plan hasn’t even started and the toxic stuff is already trading!:-)

economicminorMarch 26th, 2009 at 11:57 am

Except you ignore where the money is actually going. Who is it that actually owns the income from these failed secularized assets?Sure the big banks are taking their cut.. And we all have a right to be angry at those who put the country into this mess (you may be surprised to know it was the same people who are the beneficiaries of the bail outs, the pension funds and the retirees and the insurance companies who ignored the risks and went along like up really was down as they needed extra ordinary returns to make ends meet and took the risks to gain them). Who is at the end of the line that will be really trashed if the bail outs were stopped?I’ve been reading about this for years and it isn’t just the big banks that are going to be hurt. This country has been living way beyond its means for decades and this mess is the consequence. And it won’t be solved byYou have to also look at politics. Who is hurt and which group is the largest voting block? The same people. Who is going to pay? Those with the least power. This is the problem with democracy and why our founding fathers tried to establish a Republic where this kind of process was hindered by States Rights.

Octavio RichettaMarch 25th, 2009 at 10:21 pm

This may be a worthwhile post from the precious thread:How do you see the result of the stress test affecting XLF?Hide replies Reply to this comment By Guest on 2009-03-25 18:33:29Some talking heads are already saying sell the banks, they have run too far. Let’s see under which conditions this would hoold.Economies cannot function without banks. SO in healthy economies/times banks are worth some pretty good money. Back in January before the further drop in financial stocks, I wrote that US financials in the SP500 index with a total market cap of about 600 billion looked cheap.Looking at this 3 mo chart, and given the improvement in expectations for the economic downturn (deflation/depression risks down) I assert that financials Still look cheap!http://finance.yahoo.com/echarts?s=XLF#chart1:symbol=xlf;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedOf course, new information on the economy may change my assessment. There is nothing 100% sure in life; things can take a turn for the worse in no time.e.g., we may suddenly move to an environment in which US T rates start drifting higher despite Benny’s Intergalactic battleship money dropping vessels; and then my friend all bets would be off!By Octavio Richetta on 2009-03-25 18:51:04

GuestMarch 26th, 2009 at 10:32 am

Follow up to my question. “Of course, new information on the economy may change my assessment. There is nothing 100% sure in life; things can take a turn for the worse in no time.” As you say, we need banks, so a turn for the worse =???hlowe

Leo70March 26th, 2009 at 9:12 pm

Nonsense. There are literally thousands of banks that are in fine shape, and they would be plenty enough to take care of the economy’s needs. It is the usual suspect that should go under, nobody is saying that all banks should be wiped out. It’s always easy to trash the straw man when you get to pick it (a bit like funds beating their chosen benchmark).

g AntonMarch 25th, 2009 at 10:36 pm

“For the economy to be viable, the financial system must be healthy, and for this to occur, the financial system needs to be cleansed of its poorly performing loans and so-called toxic securities backed by loans, such as mortgage backed securities.”First of all. “cleansing” of the financial system may be a necessary condition for “viability”, but it certainly is not a sufficient condition. For example, if a patient has amoebic dysentery, and the amoebas have destroyed his liver, killing all the amoebas may be a necessary condition for restoring his health, but our poor patient still is badly in need of a liver transplant!Secondly, there are cleansings and cleansings. “Cash for trash’ (when “cash” is taxpayer’s money) is not the way to go.Thirdly, Tim is an egocentric a****** and wants complete control without oversight, transparency, or outside review of his program (“trust me”). This might be marginally acceptable if he were to have a history of great achievments, but he doesn’t. He may well be an adapt politicain, but give me a list of his very impressive past technical accomplishments.Forthly, Tim has a myopic view of the vastness, complexity, and interactive nature of the financial system. He sees the system as does an accountant, and believes that if he could just restore all accounts to their pre-crisis status, everything would be just hunky-dory. But it wouldn’t be. As an example of this complexity, why would a CEO take the risk of using government money to give large bonuses to his staff? It was probably because he realized that he organization was in a shambles, and he was trying to buy back the loyalty of his subordinates.

ex VRWCMarch 25th, 2009 at 10:41 pm

Oh OR, ORI ask you again, what does this plan accomplish except shift the downside to the government? The plan is not new or different. You buy the myth that this plan will bring private capital rushing in ‘from the sidelines’. To invest in what? Yesterdays debts?Every time the government makes an artifical market, they drag out the eventual recovery. Remember that as you cheer the fire sale of Americas real estate and the rush to invest in yesterdays debts. The money will come from tomorrows home market and from future growth. Capital is waiting to invest in growth, not toxic waste from yesterdays binge.

GuestMarch 25th, 2009 at 10:50 pm

any company receiving gov or TARP money should work for free until the company is viable. this is outrageous that these auto workers is leeching taxpayer money. Where is Andrew Coumo?

GuestMarch 26th, 2009 at 9:20 am

Auto workers are poor relative to bankers of course, the average auto worker now makes less than 20$ per hr, to allow the auto companies to fail would cost U.S. tax payers potentially trillions vs. a few billion now to help them through, it’s not the same as bailing out financial oligarchs as in bailouts for the banks. To lump them all into the same category is pure idealistic ignorance.

GuestMarch 25th, 2009 at 11:39 pm

I can’t believe I just read what I’ve read from Roubini and Shill”er”. Prime examples of the dangers of prevailing orthodoxies by two eggheads. I mean the both of them have lost my respect. They have become confidence men and apologists. I love how the Professor throws in all these caveats to cover his prognosticating butt yet he wants us to “buy” into this grand larceny.CAVEAT EMPTOR professor! You and and the financial oligopoly are trying to sell us a bill of goods. Frankly I’m disgusted by this blatant act of perception management….

GuestMarch 25th, 2009 at 11:47 pm

Prevailing Orthodoxies- “At any given moment there is an orthodoxy, a body of ideas which it is assumed that all right-thinking people will accept without question. Anyone who challenges the prevailing orthodoxy finds himself silenced with surprising effectiveness. A genuinly unfashionable opinion is almost never given a fair hearing, either in the popular press or in the high brow periodicals.”George Orwell…..

g AntonMarch 27th, 2009 at 11:29 am

George Orwell wrote “Animal Farm”, which is an Utopia for domestic animals. Not only is this Utopia governed by Pigs, but it has many other illuminating similarities to our present national government and presidency.

屌不死March 25th, 2009 at 11:47 pm

引述《華爾街日報》,美國財長蓋特納將於今晚公布大不幅改變監管條例,涉及收緊對沖基金及互惠基金的監控,大型企業的金融管理受影響。報道指,措施旨在恢復對美國金融市場的信心,有可能要求金融機構增加資本,以緩衝潛在損失,而風險管理標準亦要提高,預期銀行控股公司、保險集團及某類型對沖基金將被納入監管。(wr/a)

GuestMarch 26th, 2009 at 12:39 am

Quotes Wall Stree Journal, American Treasury Secretary Gaertner in the tonight announcement change supervision rule, will not involve greatly tightens to flushes the fund and the reciprocal benefit fund monitoring, Major industry’s financial management is affected. Reports Dow Jones Index, the measure is for the purpose of restoring to the US money market confidence, has the possibility to request the financial organ to increase the capital, by cushion latent loss, but the risk management standard must enhance, the anticipated bank Holding company, the insurance pool and some type to will flush the fund to integrate the supervision..屌 does not die

GSMMarch 26th, 2009 at 12:21 am

It’s quite possible, that many commentators, NR and Schiller amongst them, have been given an ominous insight – courtesy of the US Govt- as to where this catastrophe is all headed. And it’s no doubt rather scugly (scary/ugly).So perhaps they have been sold on the idea that it’s better to buy into this nasty medicine now (distasteful as it is), rather than endure the illness later on.So, just how bad is this illness again?

Leo70March 26th, 2009 at 9:17 pm

The illness is certainly very bad, and they are working hard to transfer it from one patient to another one. Obviously none of these chums took the Hippocratic oath

GuestMarch 26th, 2009 at 12:25 am

i suspect there is a class of toxic asset that isbeing dissolved in the garden variety toxic asset ,mbs. but this first class is truely fictitious andwhat is happening is the banks are searching for a wayto dump these on the treasury, dilution being the solutionto this pollution..as a taxpayer and member of society i have no problemdoing my part to help support what is fundamental tothe proper functioning, systemic, infrastructure ofthe community.i resent being lied to and paying for the perksand fraudulent securities manufactured by internationalcriminals. that is not public private investment. itis not a basis for globalization.it is more like parasitic fascism. itis outright piracy and actually murder and if there isany justice left in the universe it will be exposed in the light of day and people with eyes and minds will know what it is and bring it to its end.”no lie can live forever”. mlkperhaps this time around the world needs to help savethe u.s.a. from fascism.why not open up the books, investigate, and put thesecrazy suspicions to rest. then the world can go backto doing what a planet filled with sentient creatures is wont to do. creating.

GuestMarch 26th, 2009 at 12:25 am

Krugman – “US will have to seize big banks”By Timothy R. Homan and Kathleen HaysMarch 24 (Bloomberg) — Nobel laureate economist Paul Krugman said the U.S. will eventually have to “seize” big banks as the economic and financial crisis deepens.“In the end, we’ll come to it,” Krugman said in an interview with Bloomberg Television today, referring to nationalizing banks. “You guarantee the liabilities of everybody but seize the big ones.”He also said the U.S. economy won’t stabilize until “late in the year.”The economy shrank 6.2 percent last quarter, the most since 1982. Economists surveyed by Bloomberg News this month forecast gross domestic product will contract at a 5.2 percent pace from January through March.U.S. companies cut 651,000 workers from payrolls last month, bringing job losses to 4.4 million since the recession began in December 2007. The unemployment rate in February jumped to 8.1 percent, the highest in more than a quarter-century, according to Labor Department figures.The U.S. Treasury this week announced a public-private partnership plan aimed at financing as much as $1 trillion in purchases of illiquid real-estate assets from banks. The proposal is “a very diffused, ill-defined instrument,” Krugman said.“It’s very unlikely to produce enough gain in the prices of these assets to make the banks viable again,” said Krugman, a professor at Princeton University. “It’s a pretty bad deal for the taxpayer.”To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Kathleen Hays in New York at khays4@bloomberg.nethttp://www.bloomberg.com/apps/news?pid=20601087&sid=ardgK6NSMTUk&refer=home

Lou ThomasMarch 26th, 2009 at 3:45 am

There seems to be a contradiction in the professor’s analysis. He says initially that:”The government’s loan is structured so that the firm will only be responsible for losses on their initial investment. This is a huge sweetener. The hope is that this ‘freebie’ will induce many investors to participate. The competition among them will lead to higher offer prices for the loans and securities, thus encouraging banks to sell them.”However, later on he says:”But what happens if removing toxic assets from the bank’s balance sheet at near market prices shows it is effectively insolvent? This is a real possibility. Then we will have to face the big elephant in the room.” Which, as he says, is the takeover of these insolvent institutions.This latter statement presumes that the toxic assets will be removed at “near market prices,” but the former statement acknowledges that the government’s subsidy (described colloquially by some as the “Geithner Put”) will push prices upward beyond market levels. This subsidy shows that the intent of the Geithner plan is to *avoid* facing “the elephant in the room” by providing a subsidy to banks through non-recourse loans based upon inflated assumptions regarding toxic asset values.So, yes, there are provisions for putting banks under, but the intent of this plan is to avoid doing that by bailing banks out. Thus is the culture of denial perpetuated; just as surely as a stitch in time saves nine, a crisis deferred is a crisis augmented.Professor Roubini clarifies that it is his personal position that the subsidized sale of toxic assets should be applied only to solvent institutions. But if the process of price discovery is polluted by the subsidy as just described, then how will we determine which institutions are solvent or insolvent? Simply put, solvent institutions do not need this subsidy to remain afloat, while insolvent institutions will use it to remain in their present state of artificial animation.What we really need is a regulatory regime that enforces transparency regarding asset values, followed by the forced marking to market of toxic assets, followed by takeovers of institutions that are thus revealed to be insolvent, followed by the disposal of the assets of these insolvent banks at auction. Banks and investors should not be subsidized at public expense, only to have these same insolvent institutions continue to be a drag on the public and on the economy.As for disposing of the toxic assets of solvent institutions, it seems to me that transparency and price discovery is the issue, not the recycling of these assets into other hands. Both transparency and price discovery are prevented, not aided, by the Geithner plan, which is what makes it so unhelpful. If transparency can be enforced through regulation, then the assets of each institution can be categorized, and institutions will then learn which other banks are solvent, and will have no qualms about doing business with them.Perhaps Professor Roubini believes that this plan is the best that can be hoped for, given present political constraints. That may be true, but our democracy cannot operate without accurate information and analysis, and it would be a shame if the clear voice of this economist were to become contaminated with the language of realpolitik.

RcoutmeMarch 26th, 2009 at 8:21 am

I believe you misunderstood NR. The banks WILL NOT SELL their illiquid assets at too low of a price. By having multiple people bidding, you tend to get better prices (just look at the no-bid contracts from the Iraqi war to see the opposite). There ‘may’ be a subsidy portion in this arrangement (there probably is). That is the sour medicine that seems to be necessary to prevent complete financial melt-down.

HayesMarch 26th, 2009 at 8:35 am

There ‘may’ be a subsidy portion in this arrangementyes there is a subsidy it even has it’s own acronym – it’s called the CAP or the Capital Assistance Plan. It is really quite brilliant or should I say perverse in that the prices bid for the toxic assets can be increased (subsidized) beyond what the market is willing to pay. The idea is to protect the weak banks, which would otherwise fall into insolvency if no assistance was offered.Add that to the non-recourse loans made available to the “investors” (hedge funds etc) and what you have is a gift to Wall Street banks and a gift to Wall Street hedgies. And guess who will pay

Lou ThomasMarch 26th, 2009 at 4:21 pm

Once you accept that insolvent institutions need to be nationalized, then you do not have to worry about what these insolvent entities will or will not sell voluntarily, because that decision will be out of their hands. As for having multiple people bidding, under the Geithner plan, they will not be bidding for these assets, but rather for the assets along with the provided government subsidy. And the lower the value of the assets, the greater the subsidy will be – that is the nature of a non-recourse loan. Which means that the prices paid will have very little to do with the underlying values of the respective assets, which in turn means that there will be no valid price discovery. To understand how this works, I suggest the following page:https://self-evident.org/?p=502I would also suggest that you view Paul Krugman’s blog at http://krugman.blogs.nytimes.com/. In that blog, Krugman writes:”[The Administration’s] line now goes like this: first, the Geithner put is just “one component of the plan” — although the other components are invisible to the rest of us, now that the stress test seems to have been downgraded to irrelevance. Second, rather than defending the large subsidy the plan creates for anyone who buys troubled assets, administration officials tout the virtues of markets in general, and say, hey, this creates a market, so it must be good.”I’m sorry to say that there are elements of that line in what Professor Roubini has written in this article.Krugman has been very consistent in his analysis, as has Professor Roubini, until, it seems to me, this latest article. You can tell that Roubini is conflicted about what he is saying by his apologetic tone – especially in the section that begins “To clarify my viewpoint.” Unless Roubini has received some secret information regarding the Administration’s actual plans, his statement that the Geithner plan “should” only be applied to solvent institutions amounts to wishful thinking. The plan as presented by Geithner has no provisions for being selectively applied only to solvent entities.

PeterJBMarch 26th, 2009 at 4:55 am

“Competing investors will help solve this by promoting price discovery”?How? when there is no transparency and nobody knows the details of the toxic assets? How is due diligence carried out?”Competing” – how? Over what?Sounds to me like a Zombie Jamboree – where the outcome is already agreed upon, er, perhaps, so better keep the Judas Principle in Mind.Is this a “plan” or a Sham?Ho hum

The AlarmistMarch 26th, 2009 at 4:59 am

You know, I was not paying attention when the PPIF plan was announced. So as I kept reading the acronym PPIF, I wondered if that was a clever acronym like TPTB, and that must surely mean”PostPone Imminent Failure”

Brett in ManhattanMarch 26th, 2009 at 7:11 am

I get the feeling all these machinations are simply a way for the big money uninsured depositors to get their money out and into t-bills before the big banks are taken over.

TheEdgeMarch 26th, 2009 at 7:12 am

You know what a recession / depression is for people with good jobs? A BIG “Sale”. Everything is on sale. Guess who runs the country? Answer: People with good jobs; government, wall street, big business. Beware of cheap talk folks… It’s easy to say you sympathize with all those americans struggling (everyone can act sympathatic), but a wholly different thing to forgo your personal opportunity to exploit the situation for your own financial gain, irrespective of how transparant your exploitation is. There was a gentleman by the name of Jesus that spoke to this dynamic. The power “elites” challenge is to not over exploit to the point of civil unrest. And, of course, distract themselves from taking too much interest in the non-elite struggles which would pose a problem for their conscience.

MandarinMarch 26th, 2009 at 7:42 am

Jeffrey Sachs does the math on Geithner’s plan, explains exactly why it is a ripoff, and by how much: http://www.ft.com/cms/s/0/b3e99880-1991-11de-9d34-0000779fd2ac.html“the government…will finance 90 per cent of the investor’s purchase and, moreover, do so as a non-recourse loan…””The investor uses $71,000 of his/her own money and $643,000 of the government loan. If the asset pays off in full, the investor repays the loan… This happens 20 per cent of the time…The other 80 per cent of the time the investor defaults on the loan, and the government (loses $443,000).”

GuessMarch 26th, 2009 at 10:36 am

Good to see you back, Mandarin!Please don’t be such a stranger,I always appreciate your thoughtful, concise, & spot-on comments.

AnonymousMarch 26th, 2009 at 7:46 am

“The government needs help from private investors so they don’t get hoodwinked by the banks.”Aren’t some of the very people who are buying these assets the ones who created the problem in the first place? And even if they are not, I would think the private investors would be sophisticated investors. It seems to me it is the public/taxpayer who needs to be protected.

HayesMarch 26th, 2009 at 8:24 am

Did anyone notice that the headline on this article changed:The original headline posted last night read:“From Zero to Hero: Geithner Presents a Viable Plan to Dispose of the Toxic Assets”even the Confirmation Keyword changed from “FromZ” to “Geith” – personally I think “Turbo” would have been an appropriate Keyword

MIchael LittleBigMarch 26th, 2009 at 8:29 am

The media states that the American public are afraid of losing their homes,jobs,pensions and standard of living.I believe that as the facts come out, the American public are educated to what really is happening then that fear will turn to anger.What concerns me is when the anger turns to action.It is almost impossible to fight a lie.It is absolutely impossible to hide the truth.Michael LittleBig

HayesMarch 26th, 2009 at 8:42 am

Turbo to propose rules to limit withdrawals from Money Market Funds to facilitate market stability

GuestMarch 26th, 2009 at 8:53 am

I don’t get it where are the big FDR programs to create jobs? 13 trillion to bailout banks and only a few hundred billion for job creation and no political will to create jobs? This theory that the professor subscribes to with bailing out banks saving the system is preposterous in the great depression what pulled the economy up was massive government spending in direct job creation ie. the war. Saving banks when a society is over indebted makes no sense, healthy banks without any jobs is a contradiction. Healthy banks do not create jobs with an over indebted public however a healthy job market can and will save the banks. We might as well have flushed that 13 trillion down the toilet.

HayesMarch 26th, 2009 at 8:55 am

from YvesHas the Gaming of the Public-Private Partnership Begun?”It certainly looks as if Citigroup and Bank of America are using TARP funds, not to lend, which was one of the primary goals of the program, but to scoop up secondary market dreck assets to game the public private investment partnership.And it fleeces the taxpayer a second way: the public has spent enough money on both banks so that in an economic sense, they ought to have been nationalized. Yet for reasons that are largely ideological and cosmetic (the banks’ debt would need to be consolidated were they owned 100% by Uncle Sam), they remain private. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money.This sort of thing was predicted here and elsewhere. Welcome to yet more looting….”http://www.nakedcapitalism.com/2009/03/has-gaming-of-public-private.html

Octavio RichettaMarch 26th, 2009 at 10:16 am

Hey, look at the bright side! The stuff is ALREADY trading and the plan hasn’t even started! Who said it wasn’t gonna move the stuff?

villagerMarch 26th, 2009 at 2:33 pm

It only trades with support of taxpayer money – that is not the kind of market or enterprise you advocate, is it?

Octavio RichettaMarch 26th, 2009 at 5:11 pm

It is ALREADY trading WITHOUT taxpayer support. As I have said many times here the crisis is not 100% about confidence but lack of confidence/fear. IMO, Krugman and Co. are given the confidence side of the equation less weight than it deserves. I’ve said it before PK is no MK, and he will never be.

TfTMarch 26th, 2009 at 8:59 am

Professor,Respectfully, would you and Mr Richardson put your own money, say 33% of your net worth (, the percentage comes from a rough idea about taxes for middle class per my impression,) as the government sponsored portion to provide incentives to “investors” if Turbo’s plan is so wonderful in all possible approaches by far? If you don’t, then WHY? Thank you.

HayesMarch 26th, 2009 at 9:00 am

via DrudgeRahm Emanuel’s profitable stint at mortgage giantShort Freddie Mac stay made him at least $320,000http://www.chicagotribune.com/news/politics/obama/chi-rahm-emanuel-profit-26-mar26,0,5682373.story

HayesMarch 26th, 2009 at 9:01 am

Roubini via BloombegRoubini Says Stocks Will Drop as Banks Go ‘Belly Up’

March 26 (Bloomberg) — U.S. stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009, said Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.“The stock market is a bit ahead of the real macroeconomic and financial news,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. “We’ll have some major banks going belly up that will need to be taken over.”The global equity rebound in March that sent the Standard & Poor’s 500 Index to its best monthly advance in 17 years is a “bear-market rally” and U.S. Treasury yields will “remain relatively low” as investors flock to the safest assets, Roubini said. Treasury Secretary Timothy Geithner’s new plan to remove toxic debt from financial companies won’t be enough for insolvent banks, he said.Roubini’s outlook contrasts with predictions this week from Templeton Asset Management Ltd.’s Mark Mobius and Traxis Partners LLC’s Barton Biggs, who said that equities are poised to rally as government efforts to revive the economy and banking system begin to work. Investors are “way too optimistic” about the prospects for a recovery in the economy and earnings, Roubini said.Stress TestsThe S&P 500 surged 7.1 percent on March 23 after Geithner unveiled a plan to finance as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The government is conducting stress tests of banks to determine how much more capital each will need.Roubini, who predicts loan and securities losses in the U.S. will reach $3.6 trillion, said the stress tests will reveal that some banks need to be taken over and have their good and bad assets separated before being sold to the private sector. He didn’t name which companies he thought would need to be rescued.Futures on the S&P 500 expiring in June advanced 1.2 percent to 818 as of 8:30 a.m. in New York.Critics of Geithner’s plan including Nobel laureate Paul Krugman, a professor at Princeton University, say the government should take over banks loaded with devalued assets, remove their top management, and dispose of the toxic securities. Sweden adopted the temporary nationalization approach in the 1990s.‘Deflationary Forces’“Some banks are going to have to be nationalized,” said Roubini. “It’s going to be bumpy ahead of us.”Geithner and Federal Reserve Chairman Ben S. Bernanke this week called for new powers to take over and wind down failing financial companies. They said the U.S. also needs stronger regulation to constrain the risks taken by firms that could endanger the financial system.With “deflationary forces” lingering for as long as three years, Roubini said U.S. government bond yields will remain low and American house prices will fall as much as 20 percent in the next 18 months. While the dollar will initially benefit as investors seek a safe haven in the U.S., the currency will ultimately drop as the nation’s trade deficit shrinks, he said.Roubini dismissed China’s call for the creation of a new international reserve currency as a “pie in the sky idea” that’s unlikely to gain traction any time soon.Mobius, BiggsChina’s central bank Governor Zhou Xiaochuan this week urged the International Monetary Fund to expand the use of so- called Special Drawing Rights and move toward a “super- sovereign reserve currency.” Geithner sent the dollar tumbling yesterday by saying he would consider China’s idea, only to drive it back up by affirming that the greenback should remain the world’s reserve currency.“This was a political call and in a nut shell – it ain’t going to happen any time soon,” Roubini said.Mobius, who helps oversee about $20 billion of emerging- market assets as executive chairman at San Mateo, California- based Templeton, said March 23 the next “bull-market” rally has begun. Biggs, the former chief global strategist for Morgan Stanley who now runs New York-based hedge fund Traxis Partners, predicted the same day the S&P 500 may jump between 30 percent and 50 percent.The benchmark index for U.S. equities has surged 11 percent in March, poised for its biggest monthly gain since 1991. The MSCI Emerging Markets Index of equities in 23 developing nations is headed for the steepest monthly advance on record after rising 20 percent in March.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCvWs8KIIsUo&refer=worldwide

GuestMarch 26th, 2009 at 9:22 am

hayes:Please…..this is redundant. do not just copy and paste from another site to here. Thank you.

HayesMarch 26th, 2009 at 9:52 am

Guest, are you the site monitor?here is the video linkhttp://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Says%20Geithner%20Plan%20Won%27t%20Stop%20Nationalizations&clipSRC=mms://media2.bloomberg.com/cache/v1pgho8sGPuU.asf

AnonymousMarch 26th, 2009 at 1:38 pm

Ignore the request to put the article into layman’s terms.It is easily understandable.The request was for a different post.

TfTMarch 26th, 2009 at 9:03 am

If I am not mistaken, was the title of this post something with “Zero” and “Hero”? What happened to the “Ro-es”? Just curious. Thanks.

Kent R. RieskeMarch 26th, 2009 at 9:06 am

Timothy Geithner’s Toxic Asset PlanIs it a bank rescue plan or a bank liquidation-nationalization plan?Investors seem to think Geithner’s plan is a bank rescue plan and have doubled share prices of some troubled banks. They must think this is a bank rescue plan.Geithner steps on small insolvent banks and credit unions wiping them out like a bug. This is understandable for they were highly insolvent. He correctly realized that big insolvent banks were another problem. They would fight back in court claiming their toxic assets were worth much more the Treasury Department assumed.So, Gaithner developed his plan such that the market would place a value on the toxic asset in an open bidding auction. The bank can even bid on the toxic assets, but that would likely not help them because a 100% bid could still leave them insolvent. He could then pay the bank for those toxic assets and remove them. However, this does not make the bank solvent, nor rescued. This process allows the Treasury Department to measurement of the degree of insolvency.Gaithner’s next step is to liquidate-nationalize these large insolvent banks. Where does that leave shareholders of banks like Citi? Well, the common shares go to zip, zero. So why have investors bid up the market in a mania? Either they do not understand Gaithner’s Toxic Asset Plan, or I don’t.Kent R. RieskeBoulder, COUSA

PeteCAMarch 26th, 2009 at 10:00 am

Topsy Turvy Currency ???First, a piece of news …———————————NEW YORK, March 25 — Treasury Secretary Timothy F. Geithner said Wednesday that the United States would do whatever it takes to make sure the dollar would remain the world’s dominant reserve currency, clarifying comments he had made earlier in the day that had caused the greenback to fall against major currencies.”I think the dollar remains the world’s dominant reserve currency,” Geithner said during a question-and-answer session at the Council on Foreign Relations here. “I think that’s likely to continue for a long period of time. And as a country, we will do what’s necessary to make sure we’re sustaining confidence in our financial markets, and in the productive capacity of this economy and in our long-term fundamentals.”———————————–I’ll skip my own remarks here. Instead, let’s go straight to a piece of economic analysis at the link below:Matt Millar Paper on Reserve CurrenciesThe document is in pdf format, and it is well written. The basic conclusions are understandable to the layman, even though part of the paper involves a mathematical analysis.No isolated economics study can ever cope with all the complications in the real world. This paper ignores certain important factors in the global economy too. But still – I think it’s a very helpful contribution, extending Triffin’s work to the current situation with the US dollar as a failing reserve currency.And the point … if the USA does not grasp reality here – and get on the right path – then that puts us on pathway for a descent into certain bankruptcy. The answer is not a lot different than what other commentators have suggested here for quite some time – but Mr Millar lays out the logic a little better.PeteCA

PeteCAMarch 26th, 2009 at 11:18 am

Ohhh .. and I should add. The comments in the news article I quoted in my piece here are NOT putting the USA on the right pathway. However, unlike Matt Millar, I’m not entirely convinced there is a possible winning endgame for the USA at this stage.PeteCA

MM CAMarch 26th, 2009 at 10:01 am

A Letter From Inside AIG: “The Entire US System Is Committing Suicide”Below is a letter purporting to be from en employee at AIG’s Financial Products business. It was titled “A View From Inside Banque AIG.” We haven’t been able to independently confirm that it is genuine but there is nothing in the letter to make us feel otherwise. It’s a great look at what it feels like to be inside the embattled financial cripple.Dear Family, Friends and Colleagues,As most of you know I work at AIG, specifically in the division knownas Financial Products which is often cited as the “root of theproblem” at AIG. It seems to me that given the media circus, politicalhypocrisy and witch-hunting going on in the US right now, I should tryto set a few facts out and make a few points that, while they areappearing in the press, are being drowned out in the populist frenzy.First of all, what happened at AIG? AIG has been destroyed by asystemic failure of management that started when Hank Greenberg wasbooted out. I have facts that prove that had Greenberg not beenremoved, AIG would be in fine form today, but he does need to acceptthe blame for the weak overall structure of the place. Now what I meanby systemic failure is this: while it is true that AIG FP lost afantastical amount of money, something like 45 billion dollars, otherunits at AIG, namely AIGGIC in its securities lending activity haslost even more. It is misleading and an intentional distortion of thefacts by AIG and the treasury to pin this solely on FP, much as FPdoes richly deserve blame. The real issue is that AIG management wasabsent from FP, they left it to be run as the personal royal estate ofJoe Cassano, entrusting him with risk management, deal making, and allcompensation decisions with no recourse by the employees to AIGmanagement nor any oversight by AIG management. By the way, the headof Risk Control for the whole of AIG, Bob Lewis, is still working inthat role today.Even worse than this is that the failure of AIG is part of a systemicfailure of the anglo-saxon financial world. If AIG alone had failed,then the lessons to be learned would be at AIG alone. However, asclearly as AIG itself is a case study in corporate governance failuresthat I hope will be taught to the future class of sheep/managers atHarvard Business School, the real failures in the US and UK bankingsystems stem from an extremist belief in the free market. How else toexplain the simultaneous failures of virtually every large US and UKbank? And the blame for this lies squarely in the corrupt circles ofUS politico-business classes. Joe Cassano used to extort contributionsfrom his employees for Chris Dodd, the very man now leading the chargeagainst the employees of FP. Basically at the heart of the USdemocratic system is the fundamental issue that those with money caninfluence those with power and that usually their interests arenarrow, short term and take no account of the country at large.Personally I hate this system, I fear for the future of America andthe world and I and many of my colleagues strongly supportedcandidates of change like Obama because we could see something wasamiss. I will tell you though, what was amiss was not that a bunch ofhard working, highly motivated and intelligent individuals working infinance got paid a lot, what was amiss was that the wider culture ledby people like W Bush and Dick Fuld and Jimmy Cayne set and reinforcedthe example that money was the ultimate arbiter of goodness andrightness and that people who stuck to their traditional values andactually cared about the institutions they worked in and refused to docrappy business that would blow up their banks were sidelined andunderpaid and made to feel like fools for “not getting it”. My teamcontained a Slovak physicist who in act of great courage and wisdom,defected from the eastern block during the cold war. A French civilengineer who would like to build bridges but couldn’t resist the lucreof finance. A Russian-Jewish immigrant who has worked his way up frombusboy in a brooklyn diner to key member of the the commoditiesbusiness and an indian graduate of IIT who fixes his own brokenelectronics gear on his desk at work.. These people are not corrupt.They have earned their success. Their stories are even testament tothe simple fact that anyone could come get a job in finance andsucceed. If anything, the tragedy is that so many talented peopleworked in finance when they and society would have been better offwith their efforts focussed else where.I and most of colleagues at FP are in that group. Last year, amidstthe greatest financial crisis in a long time and the crumbling of AIG,the businesses I ran made tens of millions of profit eve afterdeducting losses taken when we had to pay others to take over ourbooks of business after AIG failed. In my career I have probably madesomething like a billion dollars for the banks I worked for (BearStearns and AIG) and doing this required all my intelligence, energyand hours. I have spent over 15 years waking up at 5am and coming homelate at night , playing by the rules, making thought-through, ethicaland conscientious decisions in the framework of an industry that hasexisted for thousands of years and currently employs hundreds ofthousands of people in the major financial centers. None of What I didwas illegal, none of what I did was unethical, none of what I didkeeps me up at night. I will happily stand in front of congress andjustify every deal, every mark, every decision I made. And most of theemployees at FP, many of whom I count as friends and honorable people,will happily do the same. I can also tell you that for my profits Ihave earned less than Joe Cassano earns in interest every year on whathe was paid for producing world record losses. Joe Cassano has notbeen asked to return a penny of his 280 million dollars.What is happening in the US political system today is a travesty offairness, basic rights and transparency. Where was this congressionaloutrage and mob-baiting over abu-ghraib, guantanomo, the failingeducational system, the failing health care system, the incredibleinequality of opportunity and outcome in the US, the illegal war iniraq and I’m sure this list can go on? This outrage is manufactured bythe very politicians, Barney Frank, Chris Dodd, Andrew Cuomo andothers who supervised the system, who took it’s fruits as campaigncontributions, to hide their own far greater culpability in thecreation of the mess we are in. The crisis is systemic and the leadersof the system are trying to blame it on 10 guys in connecticut.Please, you should feel insulted to your core that the US politicalestablishment tries to lie to you again.I am not shocked. I am an observer of US foreign policy. I see how theUS corrupts, betrays, its principles lies, mis-names its deeds andturns on its allies all over the world all day every day. That thisrot and corruption are now being evidenced domestically in the form ofa McCarthy like witch-hunt of “bankers” is much less shocking thanthat they would kill a million Iraqi’s and then declare victory fordemocracy. I am not shocked that in a country where only 30% of thepopulation can name the three branches of government (but 70% can namean America Idol judge) that it does not seem important that congressis trying to pass ex-post-facto taxes or secure bills of attainder.It flows naturally that the vitiation of contract law doesn’t seemworthy of remark. THE ENTIRE US SYSTEM IS COMMITTING SUICIDE. And why?Because congressman only really care about the next election and carenothing about the long term. The same crappy incentive scheme that hasdestroyed finance is destroying the US government. The real leadersare being mocked for their stands on principle. Today it is not godbless america, it is god help america.Now on the specific case of the AIG bonuses, let me spread a littlefact:1) On October 22nd 2008 (one month after bailout) Andrew Cuomoreaffirmed our right to payments under the retention plan.2) On October 9th Bill Dooley, the head of financial services at AIG,restated that the treasury and AIG were committed to payments underthe ERP.3) AIG reduced the value of our deferred compensation to zero,effectively cutting the value of the contracts under the ERP by about30-50% depending on the amount due to each employee.4) AIG wiped out the value of our previously earned deferredcompensation, costing me, for example, about half my saving and manyothers in the company the same.5) At no time did AIG ask to renegotiate the contracts or pleadextenuating circumstances. Many of us would have worked for much lessor for nothing just to clean things up.6) AIG prepaid 30% of the ERP amount in December with their heartythanks for a job well done. The treasury knew of and had to approvethis.Is it really fair of them to try to renegotiate after we haveperformed on our half of the contract? It would have been fair inseptember during the bailout, or in october. Those were extraordinarycircumstances. But is it fair of them to come to us after the end ofthe contract and then ask for the money back after many of us havemade personal and professional sacrifices based on these contracts? I,along with many of my colleagues, have expressed a willingness to givethe money to charity. But under no circumstances will we accept thatwe did not earn the money. Is it fair or criminal that Cuomo wouldthreaten us with the release of our names if we don’t return themoney? That is blackmail. It is a crime of the most despical nature.Hopefully Cuomo will meet the destiny of the last New York AttorneyGeneral to mess with AIG, Spitzer.Lastly, let me say one thing on the matter of the practicality ofrunning AIG FP with out us. AIG FP is the nexus of thousands ofcontracts of incredible complexity. These are managed in purpose builtsystems using carefully crafted procedures. If all of us leave, whowill maintain the systems for which there are no manuals? Who willknow how to operate the technological machinery that is totallypurpose built in house? Who will have the relationship with therelevant client with whom we have to negotiate as we unwind theircontracts? True one or two or ten of us could be replaced (althoughafter the current furor they would would want to paid a lot and inadvance and with a letter from the president and the treasury and thesupreme court that they can keep their pay) but if we all leave? Evena hijacker has enough sense not to shoot the pilot unless he can fly.Mr Frank, Mr Dodd and Mr Cuomo, can any of you run AIG FP?I didn’t think so.

SNSMarch 26th, 2009 at 11:05 am

shall we pick this nonsense apart from yet another deluded banker that deems his services as irreplaceable as they are vital for the healthy functioning of the economy at large? let’s try:RE: “It seems to me that given the media circus, politicalhypocrisy and witch-hunting going on in the US right now, I should tryto set a few facts out and make a few points that, while they areappearing in the press, are being drowned out in the populist frenzy.”There would not be any circus’s and frenzies if AIG was a responsible and healthy operation sans the gross hypocrisy on AIG’s part re:accepting govt $ while paying out bonuses — you are reaping what you have sown.RE: “AIG has been destroyed by a systemic failure of management that started when Hank Greenberg wasbooted out.” Isn’t management hired by and the responsibility of AIG? Are you attempting to isolate AIG management as separate and autonomous from AIG?RE: “I have facts that prove that had Greenberg not beenremoved, AIG would be in fine form today, but he does need to acceptthe blame for the weak overall structure of the place.”By stating this you essentially negate your point and further support the above response. That’s like saying if the economy were not in a recession AIG would still be engaged in risky behavior and raking in profits. Moving on:RE: ” The real issue is that AIG management wasabsent from FP, they left it to be run as the personal royal estate ofJoe Cassano, entrusting him with risk management, deal making, and allcompensation decisions with no recourse by the employees to AIGmanagement nor any oversight by AIG management.”Are you a serious person? If AIG management is absent from one of its divisions doesn’t it follow that said AIG management DID NOT PERFORM IT’S INTENDED ROLE? Does it not follow that AIG as a WHOLE dropped the ball? What is your point then? Let’s proceed shall we as there’s nothing more pathetic than a grown man whining irrationally and excusing himself and his institution; e.g. it’s not my fault my hand decided to pull the trigger i swear the hand acted on its own i am innocent — try that argument in court pal.RE: “Even worse than this is that the failure of AIG is part of a systemicfailure of the anglo-saxon financial world. If AIG alone had failed,then the lessons to be learned would be at AIG alone.”Well then i guess it makes it okay since another HANDFUL of inextricably linked (“anglo-saxon”) institutions that had direct dealings w/ AIG as well as indirect derivative based baskets of financial fuckery originating and/or conceived by the likes of AIG also went under or are on the verge of collapse? The letter continues in the same pathetic spirit — wonder why we’re screwed when people like this are incapable of taking the blame? Shall we………..RE: “However, asclearly as AIG itself is a case study in corporate governance failuresthat I hope will be taught to the future class of sheep/managers atHarvard Business School, the real failures in the US and UK bankingsystems stem from an extremist belief in the free market.”Yes of course when profits come in let’s have god ol’ red blooded capitalism but as soon as we’re scrambling and on the verge of collapse we invoke the nanny state and beg for bailouts yet dare not use the dirty S word socialism. Let’s continue since there is now a marked change of tone in this letter writer as self-preservation kicks in:RE: “Personally I hate this system, I fear for the future of America andthe world and I and many of my colleagues strongly supportedcandidates of change like Obama because we could see something wasamiss. I will tell you though, what was amiss was not that a bunch ofhard working, highly motivated and intelligent individuals working infinance got paid a lot, what was amiss was that the wider culture ledby people like W Bush and Dick Fuld and Jimmy Cayne set and reinforcedthe example that money was the ultimate arbiter of goodness andrightness and that people who stuck to their traditional values andactually cared about the institutions they worked in and refused to docrappy business that would blow up their banks were sidelined andunderpaid and made to feel like fools for “not getting it”.”Did you hate this system when you were getting paid by AIG during the boom times? You don’t have to answer that. Next:RE: “My teamcontained a Slovak physicist who in act of great courage and wisdom,defected from the eastern block during the cold war. A French civilengineer who would like to build bridges but couldn’t resist the lucreof finance. A Russian-Jewish immigrant who has worked his way up frombusboy in a brooklyn diner to key member of the the commoditiesbusiness and an indian graduate of IIT who fixes his own brokenelectronics gear on his desk at work.. These people are not corrupt.They have earned their success. Their stories are even testament tothe simple fact that anyone could come get a job in finance andsucceed. If anything, the tragedy is that so many talented peopleworked in finance when they and society would have been better offwith their efforts focussed else where.”This is akin to the politicians special interest story a la Joe the Plumber. Okay so i guess AIG didn’t hire enough salt of the earth pull yourself up by the bootstraps immigrants? Perhaps a few more Russian Jews and Indians would have saved us? I’m sure immigrants in finance are inherently more honest then the anglo-saxon managers and CEO’s?RE: ” I have spent over 15 years waking up at 5am and coming homelate at night , playing by the rules, making thought-through, ethicaland conscientious decisions in the framework of an industry that hasexisted for thousands of years and currently employs hundreds ofthousands of people in the major financial centers. None of What I didwas illegal, none of what I did was unethical, none of what I didkeeps me up at night. I will happily stand in front of congress andjustify every deal, every mark, every decision I made. And most of theemployees at FP, many of whom I count as friends and honorable people,will happily do the same. I can also tell you that for my profits Ihave earned less than Joe Cassano earns in interest every year on whathe was paid for producing world record losses.”Live by the sword die by the sword. Perhaps your ethical financial work precluded you from being promoted to management position? What has your 15hrs of work per day yielded precisely? What have you built or created? Did your deals create real jobs? So your industry has been around for thousands of years has it now? Perhaps you just might be fudging that number as well as the fudged books of AIG? No of course not it’s a typo a simple accounting error. Pre-Jurassic derivatives!RE: it does not seem important that congressis trying to pass ex-post-facto taxes or secure bills of attainder.It flows naturally that the vitiation of contract law doesn’t seemworthy of remark. THE ENTIRE US SYSTEM IS COMMITTING SUICIDE. And why?Because congressman only really care about the next election and carenothing about the long term. The same crappy incentive scheme that hasdestroyed finance is destroying the US government. The real leadersare being mocked for their stands on principle. Today it is not godbless america, it is god help america.” Maybe tomorrow it is God save America from righteous bankers? In NATURE SUICIDE EXISTS AS AN AUTO DESTRUCT FOR ANIMALS THAT ARE NOT FIT TO PASS ON THEIR GENETIC MATERIAL. Perhaps your zombie insolvent institutions are not fit to continue in the natural or nature perverted scheme of financial dealings? Now here is my favorite contradiction you make: so the govt didn’t monitor you initially (“US politico-business classes”) and now that it is attempting to regulate you in terms of what you call “trying to pass ex-post-facto taxes or secure bills of attainder” you complain! You resist! What is YOUR solution then? Let’s see…..RE “Now on the specific case of the AIG bonuses, let me spread a littlefact:1) On October 22nd 2008 (one month after bailout) Andrew Cuomoreaffirmed our right to payments under the retention plan. -> DOES NOT MAKE IT RIGHT OR LEGIT OR FINANCIALLY VIABLE.2) On October 9th Bill Dooley, the head of financial services at AIG,restated that the treasury and AIG were committed to payments underthe ERP. -> DOES NOT MAKE IT RIGHT OR LEGIT OR FINANCIALLY VIABLE.3) AIG reduced the value of our deferred compensation to zero,effectively cutting the value of the contracts under the ERP by about30-50% depending on the amount due to each employee. -> welcome to reality pal. many people took a beating in the markets and lost their homes and had their mortgages blow up in their faces thanks you AIG and the likes.4) AIG wiped out the value of our previously earned deferredcompensation, costing me, for example, about half my saving and manyothers in the company the same. -> SEE ABOVE.5) At no time did AIG ask to renegotiate the contracts or pleadextenuating circumstances. Many of us would have worked for much lessor for nothing just to clean things up. -> OF COURSE AIG DID NOT WANT TO RENEGOTIATE AS THEY WANTED 100% OF BONUSES.6) AIG prepaid 30% of the ERP amount in December with their heartythanks for a job well done. The treasury knew of and had to approvethis.” -> STILL DOES NOT MAKE THIS FINANCIALLY VIABLE — REMEMBER YOU ARE BAILED OUT BY TAXPAYER $Alright now let’s get on with this as it’s getting pathetic and rather transparent that these “bright” financiers really are dimwits that can’t generate a decent logical argument so is it any wonder we’re in this mess:RE: “Is it really fair of them to try to renegotiate after we haveperformed on our half of the contract?” Perhaps you should renegotiate directly with the taxpayers that are covering your mess. But of course since you’re ethical and work 15 hours a day and it’s really not your fault but managements there should be raises and increased bonuses for the likes of financiers like yourself? Again the hand is guilty. Not the body or the mind. Is it really fair to create convoluted ” nexus of thousands of contracts of incredible complexity” so as to reap more profits and generating this complexity catastrophe for the express purpose of creating unaccounted and illegitimate profits which can neither be justified nor tracked by anyone save for those that created this? You created these “nexus of thousands of contracts of incredible complexity” to circumnavigate any regulations and all business ethics. You created complexity so as to never have anyone but yourselves track your wrongdoing which you thought would never catch up with you.More pathetic whining and the breakdown:RE: “But under no circumstances will we accept thatwe did not earn the money. Is it fair or criminal that Cuomo wouldthreaten us with the release of our names if we don’t return themoney? ” Did you earn the money that you lost to bad deals of in the nexus of thousands of contracts of incredible complexity? Did you earn the taxpayers bailout money? Perhaps hiring a hooker a la Spitzer might help you gain some insight. That would be the least offensive illegal activity that you could ever hope to engage in and one that would do less harm to society. Thankfully you are wrapping this up and so shall I as i have real work to do after this little commentary:RE: “Lastly, let me say one thing on the matter of the practicality ofrunning AIG FP with out us. AIG FP is the nexus of thousands ofcontracts of incredible complexity.” See above. Funny how you now invoke practicality after creating impractical and untenable systems and deals. Pathetic.RE: ” These are managed in purpose builtsystems using carefully crafted procedures. If all of us leave, whowill maintain the systems for which there are no manuals?” Why would there be manuals when you don’t even understand nor can you track all of your baskets of deals to date? Why a manual if you don’t want anyone doing the work other than yourselves in order to justify your bonuses and pay? If your procedures were so carefully crafted why are we in this mess? Wouldn’t carefully crafted procedures extend to MANAGEMENT? Ah but there’s the rub: management is MIA and you are excuses to continue your CRAFTY ways.RE: ” Who will know how to operate the technological machinery that is totallypurpose built in house? Who will have the relationship with therelevant client with whom we have to negotiate as we unwind theircontracts?” See above SUICIDE as natures way to cure the diseased and genetically unfit. The machinery is clearly broken and needs updating. If there’s a machine that only a few mechanics in the world can fix then the machine is a failure in terms of purpose and build. The clients will find ways to unwind the contracts by subpoena or by hook and by crook. There may even be a tour bus of unemployed blue collar workers pulling up to your home shortly.RE:” True one or two or ten of us could be replaced (althoughafter the current furor they would would want to paid a lot and inadvance and with a letter from the president and the treasury and thesupreme court that they can keep their pay) but if we all leave?”You can always consult out of a jail cell if you refuse to cooperate after your firm is nationalized. Don’t worry the TRULY ETHICAL ones will stick around. Maybe you’ll even work those 15 hour days to UNWIND the mess you so tightly wound?RE: “Even a hijacker has enough sense not to shoot the pilot unless he can fly.Mr Frank, Mr Dodd and Mr Cuomo, can any of you run AIG FP?”This is an apt conclusion. You are the financial hijackers. You won’t kill each other off. And you won’t shoot the pilot — who is the pilot? Management? The sacked CEO? Obama? Cuomo? The hijackers are the pilots and the pilots are the hijackers and they are YOU. So are you going to perform suicide because you aren’t getting the bonuses for crashing the plane? You shall help unwind this mess before you are relegated to the dustbin of economic history. You shall aide in unwinding your own mess from the office or from the jail cell before you are cast aside as the natural balance of economics approaches equilibrium once more. I think so. And I know so.

SNSMarch 26th, 2009 at 11:12 am

if i had more time i’d remedy typos and edit this and give specific examples but alas i don’t have the time.

SNSMarch 26th, 2009 at 11:19 am

and let me just add something re: witch hunts — that is a gross and perverted misunderstanding of US history. You again twist history and terms just like you twisted your deals and numbers. No one is witch hunting innocent individuals. No one is witch hunting communists. What they are hunting are the perversion of capitalism run amok; they are hunting greed. Notice i didn’t add witch. There is no witch in this case. There is you and your bonuses. And let me add that the bonuses are a mere distraction from the the real issue which also is not the pittance of your salary — the real issue is the total bailout sum. That is no witch hunt. That is a legit hunt. Let’s hope the witches aren’t in charge of the investigations — i do not entertain high hopes.

SNSMarch 26th, 2009 at 11:23 am

and the pathetic offering of giving your bonuses to charity is simply disgusting. you now want to decide the fate of the taxpayer’s monies? is that what your solution before you attempt to blackmail us by unwinding your complexity catastrophe schemes?

SNSMarch 26th, 2009 at 11:37 am

how do you reconcile this: ” Many of us would have worked for much lessor for nothing just to clean things up.” with this: “True one or two or ten of us could be replaced (althoughafter the current furor they would would want to paid a lot and inadvance and with a letter from the president and the treasury and thesupreme court that they can keep their pay) but if we all leave?” ????¿????No wonder we’re in this mess.

PeteCAMarch 26th, 2009 at 10:11 am

Mike Shedlock has some very interesting comments on the Japanese economy today: See this linkJapanese Economy Data from Mike Shedlock, March 25, 2008“Japan Caught In Deflationary Spiral; Exports Plunge, Prices To Follow … Recessions have taken their toll on Asia exporters. Inquiring minds are reading Japan Exports Drop Record 49% as Global Slump Deepens …Japan’s exports plunged a record 49.4 percent in February as deepening recessions in the U.S. and Europe sapped demand for the country’s cars and electronics.——————-We’re still on a trajectory for a collapse in the economies of Japan, USA, UK, Ireland, and Spain. Naturally, the Balkans and E. Europe will follow as well.PeteCA

thimappa nayakaMarch 26th, 2009 at 10:34 am

Lot of wailing here from $ hoarders. Deflation and depression with high unemployment is BAD – VERY VERY BAD. To avoid that this is better. The only way to force $ from the hands of the hoarders is to threaten inflation and if that does not work then print new $ and cause inflation. $ sitting unproductively does not create wealth. This is basic capitalism. Capitalism has stopped now and it needs to be restarted. Tim and Ben are doing their best.The next thing is the rate at which new $ have to be printed. The printing of new $ will be gradual. A 5T$ hole which is hoarded cannot be replaced by new 5T$ immediately. Then the $ will collapse. It will be a long drawn out printing and rightly so. I think it will happen over 5-10 years. The treasury providing 90% of the asset price as a non-recourse loan will help in drawing out this printing over 5-10 years. Who know if things improve ($ holders put it back into circulation) by then amount that needs printed can be lesser.

tutterfrutMarch 26th, 2009 at 11:21 am

All those hoarded $ on savings accounts are normally the counterparty of credit and so investment. I thought the US had a negative savings rate, at least until recently. That’s part of the reason why we’re in this global mess. Sodon’t point your finger to those with common sense. Or are you part of those who want us to change to’hocus pocuconomics’.

thimappa nayakaMarch 26th, 2009 at 11:42 am

If the counterparty is a going concern with productive assets then your $ are being used to create wealth. If they are under the mattress then they are not really being productive. If they are in T-bills it is slightly better. Of course govt is chanelling money from the T-Bills to banks (and hopefully to companies from there on) but people are wailing about that being a bailout.

JLCMarch 26th, 2009 at 11:22 am

Sitting on my $ is preserving my wealth so that I can “create wealth” when the time is right.You want to take that away through inflation? Why don’t I come over to your house and start taking your things in the name of “restarting capitalism”.Theft has many names. Inflation is one of them. Bailout is another.Deflation and depression with high unemployment are great if you have money and an income.When I determine that my $ can be productively put to use in an enterprise from which I can expect a reasonable return, I will no longer hoard my dollars. I will happily start buying again, and I look forward to that moment. We are not quite there yet, but we are getting closer. I don’t like sitting on cash, but in my estimation capital preservation is paramount for the short term.

thimappa nayakaMarch 26th, 2009 at 11:47 am

Please don’t construe by observations about $ hoarders as being critical of them. If some people do it, then they will be smart and better off. If everybody does it then you will have a depression and things will SUCK for most people. Govt. and Ben and Tim are worried about the massive unemployment that will cause lot of grief to lot of people and that is their duty. It is your duty to maximize your well being. Yes, you are smart and are in cash now, but push it too far and Tim and Ben will rightly inflate away and you will be poorer.

GuestMarch 26th, 2009 at 12:13 pm

dont fight FED and Treasury. or they will surprise you with another $1.2Trillion printed dollar. they will smoke you out one or another.

PeteCAMarch 26th, 2009 at 1:50 pm

There will be more Fed monetization. So what? They are losing the game at this stage. US debt is spiraling higher. Risk of downgrade on US credit rating is rising.PeteCA

GuestMarch 26th, 2009 at 1:54 pm

China’s and Czech’s comment didn’t put a dent on dollar. looking at UUP, dollar can handle couple more $1.2Trillion printed dollar

GuestMarch 26th, 2009 at 1:58 pm

and China’s lack of backbone of diversifying out of dollar shows China is paper tiger. China is held as hostage by USA. nothing will weaken or replace USD, not even couple more $1.2Trillion printed money.

FEDupMarch 26th, 2009 at 11:00 am

Bankruptcy for the Banks? When a business’s liabilities exceeds it’s assets and there is no mechanism to repay those debts, then bankruptcy is filed. If the 4 major banks and AIG meet this criteria, then they must file bankruptcy. The FDIC would protect depositors and all others would lose most of their investments. This happens millions of times a year and the laws were written for exactly this purpose. Why are we devising countless bailout measures and inequitable wealth transfers under the guise of TBTF? Were the 2.3 million homeowners who lost their home to foreclosure last year alone deemed TBTF? To apply rules and laws differently to different socioeconomic groups is unfair, discriminatory and illegal! Does this country really stand for a free democratic capitalistic system with liberty and justice for all?

PhilTMarch 26th, 2009 at 11:12 am

Right ON !The groupthink fog is blinding the narrow leadership from seeing your viable suggestion as well as many other straightforward solutions for the short and long term that are clear and present in this blog and around the ether.

Plongka10March 26th, 2009 at 12:59 pm

Anyone would think that the Government want to sort out this mess(!) Others would say it is all going to plan. You decide.

GuestMarch 26th, 2009 at 11:15 am

President just said legalizing pot will not grow economy. Does this mean keeping people in prison is a better alternative? Does this mean he thinks pot will eventually disappear? Lack of common sence on this issue!hlowe

upinsmokeMarch 26th, 2009 at 11:29 am

Fantastic idea: actually, legalizing pot would bring in more money to the govt than alcohol and tobacco combined! More importantly, none of these clandestine, clever and complex financial derivatives would have been able to have been devised, nevermind, correctly executed by spaced out financial potheads!

Detlef GuertlerMarch 26th, 2009 at 11:31 am

Anyone here who can explain why NRs remarks on Jeffrey Sachs have disappeared from this blog? I could read it today in the (European) morning right here – now it’s removed or moved to a place on the website where I have no access.What I remember of that post: MR defended the Geithner plan against Jeff Sachs’ critics. It was a bit like: You’re right, Jeff, they want to steal the taxpayer’s money – but it’s okay, because they will only steal much less money than you say.

PhilTMarch 26th, 2009 at 6:13 pm

@Detlef GuertierJust curious to know what you think of NR’s remarks on Sachs’s’analysis …

GuestMarch 26th, 2009 at 11:35 am

GS COO Cohn recently stated that their total exposure to AIG was $2.5 bil. Can someone please explain to me then why GS was funneled over $12 bil through AIG?

Octavio RichettaMarch 26th, 2009 at 2:57 pm

historical GDP is a lagging indicator:http://www.nobletrading.com/blogs/2008/04/lagging-coincident-and-leading.htmllet's wait for the wli tomorrow. IMO, it will show an uptick but not enough to say economy has turned. There are some flickering signs the US economy is starting to turn. The ECRI guys take no chances so they will take a while longer than some bolder guys like Kasriel to cry land. It is all very tentative. It is like a drunkard walking on the edge of a 100 ft. high wall; bery dangerous game. It is looking as if he is sobering up and will jump into the safe, water side. But wait! don’t rush so much. He still likes drinking and he carries a bottle of his favorite buzz in his back pocket. He may still end up falling on the side full of sharp knives pointed up.Keep your eyes open and stop whining!

subgeniusMarch 26th, 2009 at 12:44 pm

Excellent summary of where we find ourselves by J M Greer:Arnold Toynbee, whose monumental work on the rise and fall of civilizations has been discussed in these essays several times, offered a useful way of thinking about this dysfunction. He argued that civilizations rise under the leadership of a creative minority, who are able to offer a vision of human destiny and possibility strong enough to overcome the inertia of tradition and launch a new phase of social integration. As long as the creative minority continues to come up with successful responses to the challenges and curve balls the world throws at every human society, the society they lead continues to expand. Sooner or later, though, the creative minority becomes so deeply committed to some particular set of solutions that it keeps on trying to apply those solutions, whether or not they actually fit the challenges. At that point the creative minority degenerates into a dominant minority, ruling its society by increasingly blatant coercion rather than inspiring it with the force of its ideas. Unsolved problems pile up as failed responses are repeated on an ever more lavish scale, and the death spiral of decline and fall begins.It’s a pity that Toynbee didn’t live long enough to see the current economic debacle, as there has rarely been a better example of the phenomenon he outlined. Consider the way that nobody in American political life has anything to offer in the face of economic crisis but more attempts to reinflate a bubble like the ones that popped in 1987, 2002, and 2008. All sides are declaiming about economic growth, at a time when further economic growth in the current sense of that phrase is the last thing America needs. A sane strategy would seek economic contraction instead – a massive downsizing of the banking and finance sector until our annual production of debt has some relationship to our annual production of goods and nonfinancial services; a steady decrease in energy use across the board until US energy use per capita equals that of Europe, about a third of the present US level; the systematic rebuilding of American manufacturing and agriculture protected by trade barriers, which would require Americans to pay prices reflecting American wages for their consumer goods; and so forth.Conventional wisdom insists that any such program would be rejected by the American people. I’m not at all sure that that’s true; many people in the working class, I suspect, would be quite willing to accept higher prices for consumer goods in exchange for a return of manufacturing jobs and a sustained drop in housing costs. Still, nothing of the kind will be proposed at any level where the necessary decisions could be made, because such a program flies in the face of the set of economic solutions that Americans from the middle class on up want to apply – even though those “solutions,” which amount to flooding imaginary wealth into a broken system, have themselves become a major cause of the crises shaking our economy to its core.

economicminorMarch 26th, 2009 at 1:46 pm

Thanks for the piece. It is very much on the lines of my thinking.We can’t actually change the financial system any more than we can fix health care or education or our transportation systems. We are on the verge of massive total systematic failure because little of how we are organized today makes sense. The dominoes are lined up and all it will take is one more event to start a series of cascading failures.There are to many entrenched interests who may say sure to a small inconvenience but will not tollerate a big one. Just look at the USPS and their $3 billion deficit. Do you think they can make it cheap enough for mail to be a practical sales tool again? No, their idea is to raise the rates to support a system that is out of balance with the real world. Education is the same. Always more money but never enough to actually implement change so for many young Americans education is irrelevant and drop out rates are very high in many poorer communities. Even when many graduate with a degree, they do not know enough to be functional in the field they have been educated in.Health care is totally messed up. Insurance Companies and Attorneys lobby to keep meaningful changes from happening to keep their profits while the users of the health care system have the highest costs in the world and if you are one of the many with mediocre or no coverage, you get health care on the level of witch doctor or put on a list. Those at the top of the economic ladder do not see this because they get the best but those of us near the bottom sure do. It is appalling. And we all get to pay for the inefficiencies with losses of time and money and loved ones.Generalized pay inequity is another imbalance. Why should a postal worker or a GM worker get paid more than an educated nurse or teacher? And why should those who have the power to mess things up with only self interests get the most?We will need a miracle to get out of this mess with out a meltdown and ensuing chaos. Money can’t buy you love and imaginary money dropped from the sky can not make a dysfunctional system work.

ex VRWCMarch 26th, 2009 at 3:21 pm

I will try. He is saying that the CDS insurance market is being used by traders to cause bank stocks to go down. This is because they can manipulate the prices (or spreads) for this insurance with comparitively little money, which, in turn, forces the banks to write down the value of the underlying assets. Since there is no market for these assets, their CDS spreads become a proxy for the assets’ value. Therefore, when the spreads go up, the banks balance sheet takes a hit, and their stock goes down because they are perceived to be insolvent.Underlying this is the fact that short selling becomes one of the only ways for an investor (trader) to make money in a market where most asset classes are falling. The ‘bear raiders’ he describes are traders attempting to make money when they cannot do so in any other way.The author goes on to recommend that, rather than the government essentially insuring the toxic asset downside via the PPIF, instead the government should directly counter the traders by pouring in money to drive the cost of the CDS downward. Then the underlying asset value will improve, and a market will develop by itself. The author reasons that if this happens, the short sellers will go on to target other assets other than banks.My opinion on this is that since the underlying assets are actually very poor, what would actually happen is that the spreads will be proven to be not actually that good of a proxy for the value of the underlying assets. In other words, the asset market would not really develop as the author envisions. Therefore the proposed activity would cause the Fed to be on the hook for the CDS, but without curing the underlying problem.Does that help?

GuestMarch 26th, 2009 at 2:27 pm

dont fight the FED. look at China, largest creditor of USA, dare not to fight FED too. the best China could do was whine a little, but quickly rebuffed by Geithner’s strong dollar. FED will continue QE, and no one will fight FED. trust me, if even China dare not fight FED, then who else? dont be a fool. FED will smoke everyone out with more QE coming online.

PeteCAMarch 26th, 2009 at 2:33 pm

They may smoke you out.But this is not the same game as before.If the US dollar does not decline … you tell me what happens to US exports?Right now they are in a major tailspin.Since the US private sector is being rapidly deprived of capital, exactly how does our industrial base become productive again?How high do we really expect our markets to bounce, if foreign creditors are bailing out of US equities as fast as they can run?PeteCA

GuestMarch 26th, 2009 at 2:50 pm

well, looking at $usd and uup, i dont see weak dollar. as far as the market’s concern, FED can continue his QE and do couple more $1.2Trillion printed dollar. until signal of weak dollar is given out by $usd and uup, then dollar is not weak. dont fight the FED.

GuestMarch 26th, 2009 at 2:56 pm

US export didn’t matter past 8 years. looking at Obama and Geithner, there doesn’t seen any plan for US export. well, US doesn’t need to export, US just need to print more money or keep China on hook by borrowing from them. it seems unless world can diversify out of USD, USD will not be weak. may be Europe depend less on USD cuz whole continent uses EUR, but entire Canada, Mexico, Latin America, and whole Asia still uses USD. USD will not be weak, regardless of how many times of $1.2Trillion are printed out of thin air. regardless of US export and trade deficit gap.

GuestMarch 26th, 2009 at 2:53 pm

u moron, what else do u expect in a casino? sad faces? don’t u no that only happy faces go to casino? join the casino while the game is good and enjoy, u won’t regret.

GuestMarch 26th, 2009 at 2:57 pm

Casinos are meant for wealthy people, who have the luxury of making and losing money. Unemployeds are supposed to stay at home and keep counting their nickels and dimes, and not care for where the Dow or Nasdaq are going!

GuestMarch 26th, 2009 at 2:57 pm

What do you think will happen with the market? We have Roubini still saying it’s a bear market rally and most of the other economists disagree. Given that they are going to keep the printing presses going and make the taxpayers pay for Wall Street excess what concrete actions do we the little people do in this market to prepare ourselves for the future? What is the HOPE? Is it time to jump back in the market now?

GuestMarch 26th, 2009 at 5:01 pm

Let’s be real. The other economists have been disagreeing with Roubini for some time. They were wrong then and are probably wrong now. Do you really think the problems in the economy are that quickly solved by the bank plan, which has not even been put into effect yet?

ex VRWCMarch 26th, 2009 at 2:58 pm

The markets are goosed by bailouts. Automaker bailout – markets climb. Toxic asset bailout, markets climb.CNBC cheerleads on ‘better’ economic news, such as the increase in housing sales (an accelerating fire sale), or a ‘jump’ in durable goods orders after a prior downward revision or that the GDP contraction is ‘only’ 6.3%.These are the worst excuses for optimism or a market rally I have ever seen. I cannot fathom how ‘investors’ will continue to fuel this for any length of time absent some real, fundamental economic improvements.Full Disclosure:, I am not short, and I have no sour grapes about this. I basically am a non-participant and an observer in the Wall Street casino we call ‘The Market’.

GuestMarch 26th, 2009 at 3:09 pm

You are right, only partially. Markets went up, up and up during 2005, 2006, and part of 2007 — ONLY ON SUCH NEWS, that the news is better than feared, that the news could have been worse, that the worst is behind us, that the coming news will be better, and so on. The market tanked in 2008, but only after going up, up and up for some three years ON BAD NEWS. Our corrupt political-economic system has the wherewithal to continue playing up such games. It has been doing so since some Aug. 2007, when that bearded helicoper started reducing rates from 5.25 to 0.25, and after that the corrupt O machine, the corrupt Frank-Dodd-Rangel, etc. machine, + the disoriented Fed — they are all hand-in-hand corrupts. Well, the game can go on for an indefinite time. Come G-20; the game will last for another one month ………

ex VRWCMarch 26th, 2009 at 3:38 pm

Yes but there was no export collapse, there was at least some part of the world that could fuel growth. Now we don’t even have that.You are betting the G-20 will cause a change in the rules relative to the dollar reserve. My bet is they will be afraid to do anything but stay the course they are on and urge collective stimulus and bailouts.Basically, the future Japan completes what they started in WWII. The world will become Japan, but circa 1990, not 1942. Japan is is and we are Japan. Until it gets so bad that things slowly fall apart at the seams.

ORMarch 26th, 2009 at 2:58 pm

As posted above:historical GDP is a lagging indicator:http://www.nobletrading.com/blogs/2008/04/lagging-coincident-and-leading.htmllet's wait for the wli tomorrow. IMO, it will show an uptick but not enough to say economy has turned. There are some flickering signs the US economy is starting to turn. The ECRI guys take no chances so they will take a while longer than some bolder guys like Kasriel to cry land. It is all very tentative. It is like a drunkard walking on the edge of a 100 ft. high wall; bery dangerous game. It is looking as if he is sobering up and will jump into the safe, water side. But wait! don’t rush so much. He still likes drinking and he carries a bottle of his favorite buzz in his back pocket. He may still end up falling on the side full of sharp knives pointed up.Keep your eyes open and stop whining!Reply to this comment By Octavio Richetta on 2009-03-26 14:57:26

GuestMarch 26th, 2009 at 3:14 pm

Can you, pleeeze, pass on that bottle from your back pocket to me? I promise I’ll fall on the waterside.

Plongka10March 26th, 2009 at 4:13 pm

Can I ask what you mean by the economy OR? Do you mean the money markets? Wall street? Manufacturing? I thought consumer spend made up 70% of the US economy. Are Joe and Jane out racking up spend on their credit cards? What?

Octavio RichettaMarch 26th, 2009 at 5:31 pm

Financial markets are part of the economy. Watz going on now IS NOT that somehow everything is gonna go back to Hummer party time in South Beach. But that it now appears spiraling down recession/depression has been avoided; which is what the sheep were preparing for when they took the SP500 down to 666. The crowd is not always wrong but it often is. Diz was one of those times.So what you are seeing in the markets now is not some kind of irrational recovery. SP500 666 wasn’t totally irrational either, but new information came in; Benny showed he has the cojones of using the choppers and they got a toxic asset plan that has great practical appeal. i.e., it is very likely to work without disrupting the way markets currently operate.So the markets had gone down so much they bounced back like one of those Jack in the box toys. And with Dow under 8000 and SP under 850, this rally may still have room to run.BTW, Mauldin type valuation exercises such as SP500 2009 earnings will be at most 40 bucks so that even at 15 times earnings the SP500 should be at 600 are pure rubbish. Markets discount more than an year and everyone knows 2009 depressed earnings are not a good proxy for SP500 earnings in the next 5 years.

ex VRWCMarch 26th, 2009 at 6:19 pm

OR, I am saving this. I will repost it for posterity on the day the S&P breaks 600 on the way down.

Octavio RichettaMarch 26th, 2009 at 7:40 pm

I am not saying the index may not go down to 600 but not current assessment of valuation. It may down there on fear, new information. Right now and today SP500 fair value at 600, IMO, is wrong!BTW, I also hope you save my post today where I say SP May 750 puts are looking tasty and I may load up on them.

ex VRWCMarch 26th, 2009 at 8:14 pm

OR I am pulling your chain! Optimism is fine, I just want some real, fundamental improvements and I am not seeing them. I do believe we will see 600, tho.

GuestMarch 26th, 2009 at 2:59 pm

WhOOOOPS A SLIP UP by the BIG GUYGeithner gaffe roils marketsTreasury Secretary Timothy Geithner pauses between answering questions at the Council on Foreign Relations on Wednesday in New York. Associated PressAn unguarded comment by Treasury Secretary Timothy F. Geithner on Wednesday set off a sudden drop in the dollar and contributed to a chain of market-rocking events that included a setback in the stock market and a sharp uptick in interest rates.http://www.washingtontimes.com/news/2009/mar/26/geithner-gaffe-on-dollar-roils-stock-bond-markets/Mr. Geithner appeared to lend his support to a proposal by China’s central bank governor to replace the dollar as the world’s reserve currency with a basket of currencies that would be managed by the International Monetary Fund. In an appearance before the Council on Foreign Relations in New York on Wednesday morning, Mr. Geithner raised eyebrows by saying that “we’re actually quite open to that,” only a day after both he and President Obama had vehemently rejected the idea and affirmed their strong support for the U.S. currency.The dollar plummeted

HayestMarch 26th, 2009 at 3:11 pm

from Turbo’s testimony”Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.”http://www.ustreas.gov/press/releases/tg71.htm

GuestMarch 26th, 2009 at 5:54 pm

That’s “instead” not “intead.” I was so disturbed by your use of Turbo I could not spell.

HayesMarch 26th, 2009 at 3:14 pm

Soros Predicts U.S. Commercial Real Estate Values Will Fall 30%March 26 (Bloomberg) — Billionaire investor George Soros said U.S. commercial real estate will probably drop at least 30 percent in value, causing further strains on banks.“Commercial real estate has not yet fallen in value,” Soros, 78, speaking at a forum in Washington, said. “It is inevitable, it is written, everybody knows it, there are already some transactions which reflect and anticipate it, so we know, they will drop at least 30 percent.”Soros said the risk of further declines in property prices is reason for the administration of President Barack Obama to move quickly to recapitalize banks. Soros said Obama acted too slowly on a banking overhaul and should have moved immediately upon taking office. …http://www.bloomberg.com/apps/news?pid=20601087&sid=a2pBt4Vo5uHk&refer=home

GuestMarch 26th, 2009 at 5:57 pm

I would not want to be on the other side of the bet from Soros. The operative phrase is “at least.” I don’t think it would be surprising to see a decline significantly greater than that.

Octavio RichettaMarch 26th, 2009 at 3:28 pm

Speaking of the devil (AIG CDSs bought by GS and others). Diz is what I was talking about yesterday. I could spend my time and energy being upset about these crooks or I can focus my energy on keeping my eyes wide open, pulse steady, and try to guess right where the dumb Goldilocks think the ship is headed next. SP500 May 750 puts are starting to look tasty. If things keep this rosy, I may buy a boat load of those instead of selling the less liquid call leaps; a hedge that may prove to be worthwhile if Mr Market catches pneumonia once again.http://www.bloomberg.com/apps/news?pid=20601087&sid=a4DSJP7CX91Y&refer=homeAIG Payments to Banks Should Be Probed, Lawmakers Say (Update3)Share | Email | Print | A A ABy Hugh SonMarch 26 (Bloomberg) — Lawmakers called for a federal probe into whether banks including Goldman Sachs Group Inc. received more funds than necessary from the bailout of American International Group Inc.“We would like to know if the AIG counterparty payments, as made, were in the best interests of the taxpayers,” said 27 members of Congress led by Elijah Cummings, a Democrat from Maryland, in a letter dated yesterday to Neil Barofsky, inspector general for the Troubled Asset Relief Program. Banks got about $50 billion in payments tied to credit-default swaps.The demand reflects widening frustration among lawmakers with the rising cost of AIG’s bailout, now valued at $182.5 billion. The U.S. has propped up New York-based AIG four times since September after a cash shortage left the insurer unable to back up protection sold to banks on their fixed-income holdings. The lawmakers asked why banks weren’t asked to take some losses to help stabilize AIG and the financial system.“Was any attempt made to renegotiate and close out these contracts with ‘haircuts?’ ” the letter asked. “If not, why not?”The query from the lawmakers concerns payments made to unwind some of AIG’s credit-default swaps, contracts similar to insurance that pay investors if bonds don’t pay as promised. AIG sold swaps to more than 20 U.S. and foreign banks.Imposing ‘Haircuts’After AIG was rescued by the U.S. from collapse last year, banks that bought credit-default swaps got $22.4 billion in collateral and $27.1 billion in payments to retire the contracts, the insurer said earlier this month. Goldman Sachs, Deutsche Bank AG and Societe Generale SA were among the largest recipients. The letter asked whether holders received 100 cents on the dollar for their securities, a sum they wouldn’t be entitled to get unless their bonds actually defaulted.Kristine Belisle, a spokeswoman for Barofsky, didn’t immediately return a call for comment. Societe Generale spokeswoman Stephanie Carson-Parker declined comment.Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke told Congress on March 24 the U.S. needs new authority to take over and wind down failing financial companies after the government’s rescue of AIG.Imposing HaircutsIf a federal agency had such powers in September, when AIG agreed to turn over an 80 percent stake in exchange for an emergency loan, “they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders and impose haircuts to creditors and counterparties, as appropriate,” Bernanke told a congressional panel that day.Banks were able to avoid losses when the Federal Reserve created a vehicle, known as Maiden Lane III, to purchase assets they’d insured with AIG. The members of Congress asked in the letter whether the U.S. negotiated to acquire the holdings at less than face value and if there was any assessment of the financial strength of the banks, including Goldman Sachs.Cummings, 58, a member of the House Oversight and Government Reform Committee, was among the first lawmakers last year to question AIG’s plans to pay $1 billion in retention bonuses. A firestorm of criticism this month about the payments prompted President Barack Obama to demand that the bonuses be blocked or recovered.Goldman Sachs Chief Financial Officer David Viniar said March 20 that because the New York-based bank had collateral on swaps and hedges against AIG, the company wasn’t willing to accept anything less than full payment from the insurer.Bankruptcy OptionMaurice “Hank” Greenberg, 83, AIG’s former chief executive officer, said at a Hong Kong luncheon that bankruptcy would have produced better results because the contracts could be redone.“The counterparties all become general creditors, and they get in line with everybody else,” Greenberg said, adding it’s “puzzling” the government didn’t try to get new contracts. “You renegotiate things all the time. In fact, if you had declared Chapter 11, I guarantee you that the judge in bankruptcy would be renegotiating terms on almost everything.”Bernanke also addressed questions from lawmakers this week about why banks outside the U.S. benefited from the AIG rescue.“I would point out that the Europeans have also saved a number of major financial institutions,” Bernanke said. “And the issue of whether those institutions owed American companies money has not come up. So I think that there is a sense that we all have the obligation to address the problems of companies in our own jurisdictions.”To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.netLast Updated: March 26, 2009 15:19 EDT

Octavio RichettaMarch 26th, 2009 at 3:31 pm

What a neat way of money laundering taxpayers’ money. GS gets our tax dollars via AIG no strings attached and then brag about returning the TARP money so that we have no control over them!

Octavio RichettaMarch 26th, 2009 at 3:49 pm

My preliminary numbers indicate today I went above water YTD by about 1.5%.During the roller coaster ride from +2.6% YTD on 2/5, all the way down to -14.4% on 3/6, to +1.5% YTD today, all the trading I did was a couple of profitable flyers on GLL and APOL (as posted).It took some big cojones to stay put as Armageddon unfolded. There is no trading system/BS trading guru that will miraculously tell you what to do. Diz thing is more an art than a science. There are no rules, sometimes the right thing to do is to take your profits/cut your losses and run. Other times the thing to do is to stay put. One cannot always figure these things right but if you are right about 70% of the time. You will make money. Otherwise you will be taken to the cleaners.

ex VRWCMarch 26th, 2009 at 4:01 pm

I am in the same place as you YTD, and I sleep like a baby! No large cojones needed, at least for my financial/investment life! I save that for other stuff. Guess I am the anti-OR!

Octavio RichettaMarch 26th, 2009 at 5:37 pm

U R Rite. If I had stayed in cash as I adviced in early Xams, I would be around where I am right now. Cannot say I was happy at the bottom but I wasn’t loosing much sleep either.As I have written many times, knowing your attitude towards risk is the key. When you go beyond your sleep level, overextend yourself, you always end up doing stupid things at the worse possible moment.

PeterJBMarch 26th, 2009 at 3:52 pm

From the previous thread:”I see that the EU is not happy with the American and British approach – perhaps LB is too concerned about his employment to be an unbiased observer at this point – maybe the Professor too.”EU presidency: US economic plans ‘a way to hell’ (link)@ Morbid on 2009-03-25 13:52:31LB’s position, as are the reactions of the EU and elsewhere, is merely an expected emotional reaction to the ‘others’ (national solutions to global economic collapse) that disagree with ‘your’ way – where ‘their’ actions adversely impact on ‘your’ actions. Expect to see much more of this (read: aggressive hostility and civil unrest leading to revolutions – Oh, it is already happening; Oh dear) as every country goes its own way to “political” (read: personal political) survival at any cost.You should note rising unemployment in the USA – impossible to reverse and property prices falling dramatically with more falls driven by commercial property rising vacancies (recent turnovers are reported as banks, etc., dumping repossessed bundles to bottom dredger investors – and most predictable – I mentioned this here a long time ago) – so:1. how does governments’ incompetence inflate property prices to their former highs? and,2. how do incompetence bureaucrats bring about full employment, and3. how does incompetent “leadership” restore “confidence”?April 1 – and happy April Fools’ day to you all…Ho hum

HayesMarch 26th, 2009 at 3:53 pm

watching Turbo today – there appears to have been a change in sentiment towards him – the Senate hearings were civil and filled with praise for his actions – it seems that his handlers are doing a fine job of rehabilitating his reputation — I can’t wait for some hack pollster stats to be issued showing his approval rating has soared. (at least NR removed the offensive headline this article had originally (unless of course it was sarcasm)

Octavio RichettaMarch 26th, 2009 at 5:47 pm

He will recover, just like a cheating husband wife’s breathing down his neck eventually recovers as long as he honestly mends his ways and has a forgiving wife:-)The guy is working smartly and as hard as I have ever seen anyone work.

ghoul esstMarch 26th, 2009 at 4:25 pm

ZOMBIE JAMBOREE(Conrad Eugene Mauge Jr.)The Kingston TrioAlso recorded by :Harry Belafonte; Fannigan’s Isle; Leftover Salmon; Rockapella.SPOKEN: Right now, as a point of information, something we didn’tknow until recently. Every year, in Trinidad, they have what isknow as a “calypsonian carnival” in which the various nativegroups down there vie with one another, uh, musically, in orderto find out who’s the best extemporaneous composer of them all.And in the year 1955, Lord Invader and his Twelve Penetratorstook the title with this next song, based on a theme by Goetheinvolving the dance of the dead. Well, uh, Invader could onlydraw from experience so he called it, of course,”Zombie Jamboree, the Song That Killed Calypso.”Well, nowBack to back, belly to bellyWell I don’t give a damn’cause it doesn’t matter reallyBack to back, belly to bellyAt the Zombie Jamboree……

HayesMarch 26th, 2009 at 4:26 pm

Oil Production Cutbacks Threaten Major Price Spike, Study SaysWSJ MARCH 26, 2009, 5:24 P.M. ETLONDON — The slowdown in investment in oil and gas production could lop off nearly 8 million barrels a day of future oil supply growth, setting the stage for another big crude price spike in the years to come, according to a new study.The global credit crisis and falling oil prices have squeezed oil companies’ finances and forced many of them to cut capital spending and postpone projects. That could have big implications for supply when the global recession ends and demand for energy recovers, the report by Cambridge Energy Research Associates says….http://online.wsj.com/article/SB123808291973348921.html

MorbidMarch 26th, 2009 at 5:09 pm

I expect, when the time comes, that the ObamaNation will regulate the price of oil, food, etc. as a part of their economic recovery. Talk about roiling the markets! At this point or in the very near future all such matters will be on the table. I just don’t see how it is possible to invest in this coming “climate change.” But, perhaps I am too Morbid.BTW, didn’t your mother teach you not to play with knives? Especially “bouncing” ones? 🙂

HayesMarch 26th, 2009 at 6:03 pm

The smart grid that is high on Obi’s priority list in conjunction with the militant faction of the global warming crowd will result in regulation of the amount of energy you will be able to consume – this is not far fetched – at our house up north we have had smart meters installed that will eventually tie into a region wide WiFi network. Energy consumption will be monitored with a variable rate applied based on time and quantity.as for investing in this market – OR seems to have had success – I trade with limited success -The full force of Obama’s incredible machine is being applied to talk these markets up – they are changing the rules and printing money – IMHO it is not sustainable the question is how long this current “rally” will last – I had suggested a week and 60 on the SPX – we are currently up 64 pts since Turbo’s plan was announced and Obi has been on TV every friggin day – – we shall see

GuestMarch 26th, 2009 at 5:05 pm

Wow, maybe something will come of this.March 26 (Bloomberg) — New York Attorney General Andrew Cuomo expanded his probe of American International Group Inc. to see whether its customers including Goldman Sachs Group Inc., Societe Generale SA and Deutsche Bank AG were improperly compensated with taxpayer dollars.“Our investigation into corporate bonuses has led us to an investigation of the credit-default swap contracts at AIG,” Cuomo said in a statement. “CDS contracts were at the heart of AIG’s meltdown. The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayer dollars to capitalize banks all over the world.”

Octavio RichettaMarch 26th, 2009 at 5:43 pm

I wrote about bailouts above. The AIG bailout which started under Hanky, is a good example of a BAD bailout. I think regulators have to watch closer what diz guy Libby is doing. Now that things are a bit more stable, time has come to squeeze these suckers.

Octavio RichettaMarch 26th, 2009 at 5:59 pm

Just a feeling. I hope this AIG CDS ripoff thing gets some legs.I also hope that the damage has not been already done and that the situation is not now irreversible. Believe me, GS lawyers are good at what they do. it may be too late…

GuestMarch 26th, 2009 at 6:14 pm

Andrew Cuomo has big political ambitions and has immense power. I think he is our best hope for really making some hay here. Let’s hope anyway.

Octavio RichettaMarch 26th, 2009 at 6:52 pm

I hope regulators, and by that I mean the COMPLETE Obama administration including himslef, are now keeping their eyes on the ball.The BIG MONEY is not in a couple hundred million in bonuses, but in the hundreds of billions of taxpayer USDs used to murkily settle CDS contracts with a few banks and “smart” hedge funds.Straitening this out, even if not 100%, is not gonna bring the financial system down. Hundreds of billions in CDS were written without collateral. A game that even Buffy got the hang of playing.Now that the markets are more stable and systematic risk excuses are kinda irrelevant, they can take an opportunity to humble down GS and Co. (i.e., the other banks ans “smart” hedge funds such as Paulson’s).CDS written without proper collateral are not supposed to turn into “free money”.

GuestMarch 26th, 2009 at 7:15 pm

Big O may ask for a vote recount of last presidential election results! Humm.Although, for the good of the country and the world we wish him [bogus POTUS] success, it is likely that he inherited a much worse financial mess than he could ever imagine and that his intellect and persistence will not be enough. In fact, after the election we wrote two reports about how President Obama will ask for a recount of the vote when he understands just how bad the mess is.http://www.comstockfunds.com/screenprint.aspx?newsletterid=1449

HayesMarch 26th, 2009 at 7:23 pm

LB posted an interesting comment in prior thread re Beijing/Moscow and G20 – it seems that the game is afootChina Chastises West in Leadership Bid Before G-20 GatheringMarch 27 (Bloomberg) — China is scolding the world before the Group of 20 meeting next week, telling the largest countries to spend more on stimulus and fix their financial supervision.Central bank Governor Zhou Xiaochuan yesterday lambasted governments that failed to emulate China’s “decisive” action to spur economic growth. Earlier this week he suggested creating a new international reserve currency to rival the dollar.http://www.bloomberg.com/apps/news?pid=20601087&sid=a1UC7pF1qNbw&refer=home

Jason BMarch 26th, 2009 at 7:48 pm

I laughed so hard I criedhttp://www.breitbart.tv/?p=305583Econcomic crisis explained south park style

Jeff WinterMarch 26th, 2009 at 8:06 pm

Professor Roubini,Why can’t we simply remove the government funds from ONE of the failed banks while maintaining the bail outs on the others, and let that bank either solve its own problems or go through bankruptcy? With the others still being bailed out how could there be a cascading systemic failure? Then repeat for each failed bank one by one.Would this accomplish the goal of downsizing, restructuring, recapitalizing, and reprivatizing the industry? Is this the goal?

HenrytheprayerMarch 26th, 2009 at 10:41 pm

Well, Mr. Roubini is right about the goal of removing the toxic assets from the banks. However, he’s totally wrong on the approach to do it. Since the government is going to take the loss of the asset anyway, why not just to nationalize the bank, take the toxic asset away and then resell the clean bank to the public. In this way, the government will enjoy all the upside if the value of the toxic asset improves and the downside if that doesn’t. In the new program, the government will incur the full loss and yet, get only a slight fraction of the profits. The government will be exploited by private investor and banks alike. It’s ridiculous to see this is just the capability of a state secretary of treasure of United States.Moreover, the hard question still awaits for answers: the pricing issue.

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