Who Could Have Predicted This?

Kevin Drum quotes the Financial Times:

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.

....Wall Street executives argue that banks' asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets.  But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

Wow, no one could have predicted this.  Except for anyone who spent 5 minutes with the numbers:

There is an interesting incentive to collude [in the Geithner plan] between banks and investors.  The best outcome for both is for investors to pay a high price to banks and then have the bank kick back some portion to the investor.

I will confess that I did not take the next logical step and consider that the ultimate collusion would be for banks themselves to be the investors, but the incentives for doing so were dead clear (part 1, part 2).

I will stick by my original conclusion -- Taxpayers are hosed at any price.

By the way, can anyone tell me what the evidence has been for the contention Barack Obama is "really smart," because I sure don't see it.  Yeah, he went to an Ivy League School, but so did I and there were plenty of people there I wouldn't trust to run a lemonade stand.  Sure, he gives a nice prepared speech and seems to have invested in that vocabulary building course Rush Limbaugh used to peddle on his show, but what else?  All I see is a typical Ivy League denizen of some NGO who thinks he/she can change the world if only someone will listen to them, who just comes off as puerile if you really spend any time with them.  I will go back to what I wrote on inauguration day:

Folks are excited about Obama because, in essence, they don't know what he stands for, and thus can read into him anything they want.  Not since the breathless coverage of Geraldo Rivera opening Al Capone's vault has there been so much attention to something where we had no idea of what was inside.  My bet is that the result with Obama will be the same as with the vault.

  • Mesa Econoguy

    Of course, the banks were going to be principal players here. The most basic original form of this plan was for them to simply wait it out, and /or negotiate with the government, and wait for a ridiculously high stabilizing bid, which is basically what happened here.

    The dirty little secret is that much of these assets are performing loans, though certain disintermediation has yet to occur, but that likely won’t happen if cramdowns become widespread, which will fundamentally alter the value of the underlying asset.

    Now, the “toxicity” of the assets, namely bad- and nonperforming loans, were basically the result of government-mandated destruction of lending standards. Many of these loans made it into the securitization process, were AAA-rated (hey, they’re backed by Fannie & Freddie, therefore the gov’t. so they’re golden, right?), became highly leveraged in asset comp and balance sheets of the big investment banks, and here we are.

    Much of the problem with banks holding this stuff arose from 1) lack of liquidity, due to “toxicity”, and 2) mark-to-market accounting rules (relaxed on Thurs.), which provided disincentive to dump these assets at any cost, which also contributed to liquidity dearth.

    There are many participants waiting in the weeds out there to buy this stuff, and there will be significant value capture, but as you correctly state Coyote, the taxpayer gets the shaft.

    Obama is a complete moron, idiot, and fool, everyone who works for him is childishly stupid, especially the Ivy Leaguers, and these people have effectively destroyed the financial industry, and continue to do so.

  • GU

    By the way, can anyone tell me what the evidence has been for the contention Barack Obama is “really smart,” because I sure don’t see it. Yeah, he went to an Ivy League School, but so did I and there were plenty of people there I wouldn’t trust to run a lemonade stand. Sure, he gives a nice prepared speech and seems to have invested in that vocabulary building course Rush Limbaugh used to peddle on his show, but what else? All I see is a typical Ivy League denizen of some NGO who thinks he/she can change the world if only someone will listen to them, who just comes off as puerile if you really spend any time with them.

    That's one way to look at it. A more insidious inference is that Obama knows exactly what he is doing. He knows that this unprecedented spending and government meddling will lead to a much larger role for the federal government in the future. He is intentionally changing the baseline for reasonable levels of the size of government. Obama wants power in the hands of the political class, the NGO worldchangers, not people interested in making an honest living and minding their own business. This expansion of government power is a step towards assuring his type of people have lots of power for a long time to come. James Buchanan's leviathan model of government predicts this type of behavior, and its my preferred explanation.

    I generally don't like assigning bad intentions to people, and I could be wrong about Obama. It might be that he thinks an extra large federal government is a good thing for everyone. Does this make him stupid? I would say unwise; lots of high IQ people believe silly things.

  • mishu

    GU, I'd prefer to ascribe to Hanlon's razor myself.

  • GU

    Mishu,

    Even if you think Obama is insufferably dull, do you really think all his advisers are that dim? The stupidity explanation does not seem like the best explanation, given the hordes of very smart people that have Obama's ear. Unwise? Yes. Mistaken? Yes. Dumb? No.

    I still think Obama is really effective; that he is doing exactly what he wanted to do, bring on an expansion of government power that will be with us for a long time.

  • Mesa Econoguy

    GU, you’re absolutely right about Obama intentionally changing the baseline for reasonable levels of the size of government, and introducing massive socialist command and control policies. But that’s precisely what makes him stupid: those policies have failed everywhere they have been tried, and continue to stifle economic growth and development.

    Yes, that makes him (and everyone around him) criminally stupid, and worse.

  • Mesa Econoguy

    GU, you’re absolutely right about Obama intentionally changing the baseline for reasonable levels of the size of government, and introducing massive socialist command and control policies. But that’s precisely what makes him stupid: those policies have failed everywhere they have been tried, and continue to stifle economic growth and development.

    Yes, that makes him (and everyone around him) criminally stupid, and worse.

  • Mesa Econoguy

    Plus, given past performance, we know that this massive government expansion will fail and have all sorts of negative unintended consequences, which makes Obama & friends even dumber.

    If you were to pin them down and make them answer questions, none of them would acknowledge the pitfalls of their plans, nor the past failures. None. They truly believe that if we just elected the right people (i.e. them), then they’ll do everything right, know how to organize society, etc.

    That makes them stupid, ignorant, and dangerously arrogant, too.

  • Mesa Econoguy

    This didn’t post right – should be before that last comment, sorry.

    GU, you’re absolutely right about Obama intentionally changing the baseline for reasonable levels of the size of government, and introducing massive socialist command and control policies. But that’s precisely what makes him stupid: those policies have failed everywhere they have been tried, and continue to stifle economic growth and development.

    Yes, that makes him (and everyone around him) criminally stupid, and worse.

  • Mesa Econoguy

    There was supposed to be another post before that.

    GU, you’re completely right about the intentional government expansion, but that’s exactly what makes him stupid – socialist command & control policies are continual failures. The history of the 20th century is a history of socialist and collectivist failure.

    Yes, that makes him (and everyone around him) criminally stupid, and worse.

  • Mesa Econoguy

    I’ve been talking with various bright people (some Ivy League educated), and we’re convinced that attending those schools can actually make you dumber.

    They’ve certainly destroyed the curricula, and Obama obviously has never set foot inside a private business, corporate boardroom, or economics class, so I’d put his actual IQ somewhere around 98, and his functional knowledge of how things work at high school level, if that.

  • Douglas Foss

    Mishu:

    Do not forget Clarke’s Law - which extrapolates (?) from Hanlon's Razor. It holds that sufficiently advanced incompetence is indistinguishable from malice. It matters little the motivation for the proposed changes when the result looks like malicious destruction of a social/cultural/economic norm of long standing in favor of something new and untried. And, if someone argues that the Administration targets a system similar to Europe's and that the European system is not new and untried, I ask whether the commenter could imagine the current Administration announcing that the model we want to follow is the European model and that the first step for Americans would be to force national unemployment upward by another 2-3% so that we can reach the systemic unemployment levels associated with the European predicates. In fact, the three states most akin to that model are New York (which just increased its budget by9% in the face of what happened to Wall Street and its tax base), California (with unemployment having reached the systemic European level already), and Michigan. The Administration should explain that these represent the future for the rest of the country and that we all will be better off for the Change We Can Believe In.

  • Dr. T

    "...can anyone tell me what the evidence has been for the contention Barack Obama is “really smart,” because I sure don’t see it."

    I don't believe that Obama has the 125 IQ he claims, but he is not stupid. He just has very different goals than us libertarian free market types. To him, the most important thing is to maximize government control of the economy. (It's hard to tell whether he prefers socialism to fascism. My guess is that he wants a hybrid. Regardless, it was obvious before he ran for president that he hated the US and wants to remake it into something vastly different.) Damaging the private economy is the most important step towards rapid enlargement of the government's control of the economy. Shaky banks, falling stock markets, and rising unemployment are Obama's goals. If our banks look bad, our retirement plans are toast, and we're worried about keeping or getting a job, guarantees (of financial security, welfare, healthcare, and retirement) by the (increasingly socialist/fascist) government look better and better. The banks and our investment firms are heavily regulated and partly controlled by the bank. So is GM. Much of our agricultural business is totally dependent on the government. Elderly living and medical care are mostly in the hands of government. Free market capitalism is hanging by a thread.

    My first prediction is that Obama will push for nationalized health care within three months (when unemployment peaks and people are most worried). I expect a huge advertising campaign with lots of sob stories about people who lost insurance (they'll conveniently omit the COBRA option available to anyone who gets fired or laid off) and incurred gigantic medical bills because little Johnny got osteosarcoma or the mother of four got brain cancer. The push for nationalized health care will be much more effective than Hillary's, and Congress will pass it with the support of most voters.

    My second prediction is that Obama will be reelected in 2012 by convincing the masses that only he can keep the country (meaning the federal government) together.

    Obama already has made successful runs around the constitution, sometimes with the help of Congress. But, the term limit amendment cannot be skirted. Therefore, my third prediction is that in 2013 or 2014 Obama will support (behind the scenes) yet another attempt to reverse the two-term limit for the presidency. It probably will succeed, and we'll have Obama for life. (I hope to be living overseas before then.)

  • Peter

    Obama's plan can be considered a combination of malice and stupidity. The malice is not directed at everyone just those that don't believe as he does. The stupidity is that he believes his big government plans will work and create his democrat utopia.

  • Maximum Fab

    As long as foreign leaders do not know how stupid Obama is, we may be okay. But once they realize that he is unintelligent, unwise, AND inexperienced, we are in trouble. A president needs to know when to deal, when to bluff, and when to cut throats. This man only knows how to make promises and concessions. Not a good long term bet.

  • Mesa Econoguy

    Now this:

    RIGHT NOW, THE US GOVERNMENT IS HOLDING A SOLVENT MAJOR MONEY CENTER BANK HOSTAGE.

    This is not a drill, this is happening NOW.

    THEY ARE COMING AFTER YOUR RETIREMENT ASSETS NEXT. The government will seize most of what you own, directly or indirectly. Wait until they come after your house, your car, etc. These people will stop at nothing.

  • Link

    Meanwhile the New York Post is reporting today that the head of TARP oversight, Harvard Law prof Elizabeth Warren, will go public with a report this week calling for the firing of top executives at TARP recipients. According to the Post, she's also calling for "accurate valuation of the troubled assets currently being held" and for wiping out current shareholders.
    Elizabeth Warren has a hard-on for banks. Her expertise is bankruptcy law -- she thinks banks screw consumers over credit cards. She's probably right ... but go tell that to the Senator from MBNA, Joe Biden.

    She's only one official ... and I can't tell if the Post is exaggerating what she'll say in this upcoming report ... but I'd be surprised if she's taking this position without approval from Obama & Co. Once again, they're intent on creating fear and uncertainty and then exploiting it. This may feed into concerns with upcoming stress tests at the big banks.

    So are toxic assets still undervalued? I thought Timmy's plan, recent market deals done by the banks themselves, and easing mark-to-market were all about validating that toxic assets had probably been written down too much.

    ***
    Separately, I've been questioning for months whether Obama is a sh*thead or a diabolic agent of Alinksy ... or a bit of both. I fear that you can't underestimate how bad this guy is.

  • Mesa Econoguy

    And the WSJ has an op-ed by Stuart Varney citing a Fox Biz story that Obama is refusing repayment of TARP money, retaining effective control over a solvent money-center bank:

    Obama Wants to Control the Banks

    If they begin forcing bankruptcy for solvent institutions, wiping out shareholders, and installing their stooges in management (who will then direct lending practices), get ready for war. First shareholder class-action legal wars, then open armed conflict.

  • An axiom of General Robert E. Wood, Sears, Roebuck Chairman who managed and masterminded that company into the largest retail organization before Walmart ever existed, once said if ever you allow an accountant, lawyer or career politician to run a business that business is doomed to fail. Now today here we are with Elmer Thud (Secretary of Treasury), Wylie Coyote (Secretary of State), and Donald Duckit, (President). Enough said!!

  • morganovich

    mesa-

    as an ivy league grad (brown, which may be the worst of the worst in this respect) i can confirm your theory that it's easy to come out of an ivy dumber than when you arrived.

    the ivory tower groupthink ring-led by a group of arrogant "intellectuals" who have little real world grounding (especially among the liberal arts faculty) actively discourage dissent and debate and push a party line to the exclusion of all other ideas. it was bad when i graduated in 94. from what i have seen, it has gotten much worse since.

    nothing is more dangerous than an ideologue who has mistaken himself for a free thinker and confuses dogma with intellectualism. it produces arrogant thinkers insusceptible to argument and triggers a deep cognitive dissonance which drives extraordinary elitism and extremism. they become identified with their ideas to the point where disagreement with them is taken as a personal attack. it's a bit surreal, and really crosses the line between scholarship and religion.

    a friend of s friend made a movie about this entitled "indoctrinate u".

    it's as interesting as it is chilling. i recommend checking it out.

    http://indoctrinate-u.com/pages/news.html

  • morganovich

    to mesa-

    as an ivy league grad (brown, which may be the worst of the worst in this respect) i can confirm your theory that it's easy to come out of an ivy dumber than when you arrived.

    the ivory tower groupthink ring-led by a group of arrogant "intellectuals" who have little real world grounding (especially among the liberal arts faculty) actively discourage dissent and debate and push a party line to the exclusion of all other ideas. it was bad when i graduated in 94. from what i have seen, it has gotten much worse since.

    nothing is more dangerous than an ideologue who has mistaken himself for a free thinker and confuses dogma with intellectualism. it produces arrogant thinkers insusceptible to argument and triggers a deep cognitive dissonance which drives extraordinary elitism and extremism. they become identified with their ideas to the point where disagreement with them is taken as a personal attack. it's a bit surreal, and really crosses the line between scholarship and religion.

    a friend of s friend made a movie about this entitled "indoctrinate u".

    it's as interesting as it is chilling. i recommend checking it out.

    http://indoctrinate-u.com/pages/news.html

  • joshv

    Way back when, a younger Obama was on a local PBS show called 'Check Please' here in Chicago. This weekly show gets three people to recommend their favorite restaurant, and then sends all three out to review each other's restaurants. Then the participants all sit around a small table and sip wine while they are interviewed by the host of the show.

    They never aired the episode with Obama. He basically ruined it by monopolizing the conversation. With two other participants, he had about 75% of the air time. I know this because it was recently aired as a novelty by WTTW.

    He seemed to be under the impression that every word out of his month was fascinating and compelling. He was truly in love with the sound of his own voice. He spent a great deal of time repeating himself in a very profound and professorial manor - but in truth he came off as rather boorish - the sort of person you struggle to get away from at a party.

  • Scott Wiggins

    Neither Obama nor Gheitner have any power to fire executives...CEOs and Boards of Directors need to stand firm against these two thugs or it will get a lot worse for American business...Bullies are afraid of only one thing...That is someone calling their bluff and standing up to them. Moreover, Obama's war on business needs to be stopped or we will rapidly hasten China's rise to the pre-eminate economic power in the world...Power, money, investment, and brain power gravitate to the No. 1 economy. We will lose our place in the world along with our standard of living as China takes our place.