Comments on: No Tonic For Toxic Assets

By: Grant Baier

Grant Baier — Wed, 31 Mar 2010 08:26:23 +0000

The Government bailed out the big corporations, but who bails out the average guy on the street? No one. Banks are dragging their feet with loan modifications. Why? Because if real estate values go up, they wont have to show as big a loss. In the meantime, thousands of fine folks are losing their houses. We now reveal Insider tips to avoid foreclosures. Its a free report you can get at Save My House Tips.

By: Warren F. Muhammad

Warren F. Muhammad — Thu, 02 Apr 2009 13:46:31 +0000

The answer lies in the fundamentals of Islam. More later. On my way to court.

By: Evan Rogers

Evan Rogers — Wed, 25 Mar 2009 20:27:52 +0000

Thanks for taking the time to enlighten us cousin. I agree that throwing good money after bad is not good public policy. The concern for me is the alternative. The notion of ‘too big to fail’ is real and problematic but I don’t think that this particular plan was conceived to address that. I take it for what it is. A plan that tries to a) prevent bank runs or systemic failure and b) lure private money back into the system while mitigating the risk to taxpayers as much as feasible. The potential losses are still TREMENDOUS but I look at this risk similar to alcohol poisoning (think 120lbs woman vs 300lbs man in a drinking contest). The more pressing concern that I have is the endemic wealth transfer that Marc mentions above. But again, I go back to the alternative. Politically, I think it would be much more difficult for the Administration to secure receivership powers (which I think they ultimately will in a limited capacity) over non-bank institutions without first trying the Geithner plan. For the ’shadow banking industry’ as described by Nouriel Roubini and others, there is no government instrument that could orderly liquidate the assets of non-bank institutions which pose a systemic to the larger economy. This stands in stark contrast to the FDIC which has such powers for banks in certain instances. Part of this plan calls for an entity similar to RTC during the S&L scandal but resolution authorities have historically done a poor job of valuation. If the auction model works and there is sufficient incentive and/or willingness on the part of the banks and the hedge funds and others to participate, then I am at least optimistic that the Geithner plan represents one of the best of a few VERY BAD options. Securitization has driven our economy over the last few decades. I question whether the political and economic climate is actually shifting to the point where greater regulation will be imposed upon the financial sector and thereby shrink its size and influence. Obama’s gamble is that big bets on education, health care, and energy will pay off over the long term through bottom up prosperity that “could” be created. Solving the ‘too big to fail’ problem won’t happen overnight and both Geithner and Obama have hinted that a new regulatory framework is under works. But even if they do change the relationship between capital and the government (to strike a better balance between efficiency and stability), I doubt that it will result in any drastic structural changes to our system. Even if securitization was the problem (which I do not think it is), the political will won’t be there until there is a viable replacement. That’s why I have resisted looking at the toxic asset plan independent of his recovery plan and long-term agenda. But what do I know? I’m just a young twenty-something.

By: Marc

Marc — Wed, 25 Mar 2009 17:10:41 +0000

As always my brother, you made this complex mess very plain for our community. If I could add the following:

1. The major flaw in the plan Presidnet Obama is allowing to Geithner to use, is that is based on a false set of assumptions about what the real financial crisis and the recession in the real economy are all about. Like you said, you can’t make sugar from *#$&@ and at best this is the right plan, for the wrong problems.

2. Some analysts note that regardless of the success or failure of the Geithner plan to make a significant impact on the real economy, (at best it might create a temporary boost) if the shadow banking system companies use it up to 1 trillion dollars, the details on how the deals will be structured could result in an additional net $500 billion transfer of capital from taxpayers to the banks selling the toxic assets. of course not only does $500 billion still fail to cover the holes in their balance sheets, it becomes even more pathetic when you know that the banks have some bigger holes coming later this year as some of their commercial real estate, credit cards, car loans, and even prime mortgage assets (like you said loans) get transformed into TOXIC assets.

3. And of course for playing this role, the shadow banking system collects fees and gets help re-starting their securitization business model. They need both to compensate for their own losses and because the first federal reserve backed $200 billion securitization re-starting program launched a few months ago has only produced 5 billion in new securitization.

4. In the end, the biggest problem I see is that President Obama thus far has not accepted the fact that saving the banks as a prerequisite for saving the real economy, represents a false logic and world view. The only thing that logic will produce after the crisis, is a return to the status quo of the financial industry being both seperate from the real economy, but also having power over the real economy, which is actually THE problem. It is unsustainable as an economy which can support the society and fosters repeated systemic risks. The logic Obama may have to come to is one where the solution is not to save the banks, but to transform the role and position that banks are supposed to play in a society. The finance industry is not supposed to dominate the real economy like a parasite, it is supposed to “support” the real economy.

By: Bro. Rich

Bro. Rich — Tue, 24 Mar 2009 21:15:31 +0000

Great Article! Thanks for taking the time to put this topic in a more digestible form; it reviled some missing elements for me. Perfect closing! LOL.

By: em2wice

em2wice — Tue, 24 Mar 2009 18:00:26 +0000

This is brilliant.

By: Bro. Troy- Mosque #4

Bro. Troy- Mosque #4 — Tue, 24 Mar 2009 16:15:34 +0000

Greetings,

I’ve found your articles always clear, timely and informative.

As-salaam Alaikum