Want to buy: Any Democrat, anywhere near the White House, with the guts to say "no."
I slept through Tim Geithner's press conference, but that's probably the good news. It meant I could skip the sales pitch and go straight to the paperwork: Anonymous (given in the document properties as Gene Sperling), "Fact Sheet: Financial Stability Plan" (PDF), FinancialStability.gov, 2/10/09. I hate it. It's the Bush (the Younger) administration plan, almost line for line. It spends roughly another trillion dollars. It's got far too many moving parts, because instead of picking one or two of the proposed solutions to the problem, it includes very nearly all of them. And it doesn't solve the problem, because none of the solutions that made it into the plan include the only one that would actually work.
Here, let me lay it out for you. You may first want to review, if you haven't seen it already, my previous essay, "The Stimulus Bill is a Crock, Again," 2/8/09, which reviews how we got into this problem and the status of the negotiations over the solution as of when Tim Geithner took over negotiating for the government. Now, here is the Geithner plan, as it was laid out on a Treasury Department-run website this morning:
Step One: Do Nothing about the Biggest Banks for at Least the Next Year or Two. Think I'm being unfair? Let's look at what the plan actually says. For banks that (allegedly) have over $100 billion in assets on the book, the government isn't going to buy the "troubled" assets, it's not going to issue loan-guarantees, it's not going to infuse capital into the bank right away based on the difference between the current market valuation of those assets (which is, I remind you, zero), and what the banks would need them to be to be technically solvent. No, first we're going to assemble a whole new government department nearly the size of, and at least as complex as, the Department of Homeland Security, combining all of the auditors from just about every government regulatory agency into one temporary (?) super-agency. Then, once that's done, their job is to go through the balance sheets of every major bank in America and compile a list of all the shares in mortgage-based collateralized debt obligations (CDOs) they own. Then they're supposed to go through the records of every single one of those CDOs to figure out which loans were fraudulent, or otherwise unlikely to pay off. That way they can calculate the actual, per-the-formula honest value of those CDOs. Then, and only then, will those banks be eligible for federal funds, via partial or complete nationalization. Let me remind you that this is what Warren Buffett tried to do when Berkshire Hathaway more or less accidentally acquired a ton of these mortgage-based CDOs because they were on the books of another company that they'd bought, Sun Re. After six months of slaving over it, the best accountants in the world told Buffett: can't be done. And that was for one company. No, really: if the big money-center banks have to wait until the CDOs are completely unraveled before getting recapitalized, we will still be working on this when the next election rolls along. If we're still having elections by then, because in all likelihood, the economy will have totally collapsed. No wonder the DJIA dropped 300 points at the end of Geithner's speech; this one provision all by itself guarantees that the Geithner plan can not possibly work, because it commits the government to achieving the physically impossible before we even start on addressing the most important part of the problem.
Step Two: Auction Off the Smaller Banks' CDOs for "Fair Market Value." Which is, zero. No, the plan document doesn't say zero, because it is deeply out of touch with reality. What it says is that it will create a new public-private partnership, an entirely new private corporation backed by government money (oh, yay), to buy any of the mortgage-backed CDOs that are on the smaller banks' balance sheets via "private sector pricing of assets." I don't know how a supposedly bright guy like Tim Geithner missed this, but the private sector price of those assets is zero. Nobody in their right mind would buy them. I don't care how much money you make available to buy them, any individual one of them is worth zero dollars and zero cents until we figure out which ones are completely worthless, which ones are partially worthless, and which ones are honest.
Step Three: Create a Whole 'Nother Trillion Dollars worth of Fraudulent CDOs. No, really. "In order to jump start consumer lending," the government will put up the up-front capital and issue guarantees against loss for a trillion dollars' worth of new lending, packaged into CDOs and resold, with the loan portfolios underlying those CDOs rated by the exact same ratings agencies that told us the previous CDOs were "AAA." And with the reminder that only the ones the ratings companies call "AAA" will be eligible for government funding, and with pressure on the ratings agencies to quickly find and approve a trillion dollars' worth of them. In other words, even more toxic CDOs than the last batch. Much more so, really: a big chunk of it is supposed to be for completely uncollateralized lending, credit card debt.
Step Four: Improved Accounting and Reporting Standards, for Any Big Banks that Survive Step One. Why this got moved all the way down to step four, I have no idea, because it belongs under step one. Any big bank that survives step one and ends up qualified for partial nationalization will be required to stay completely out of acquisitions, to pay no more than 1 cent per share in dividends, agree to government instructions on how to work out any non-performing mortgage loans that they're servicing, report monthly to the government on what they're doing with the money the government invested in them, and, yeah, cap CEO salaries.
Step Five: Solve the Mortgage Crisis. The only actually palatable part of the plan, and ironically, we were told last night that it wouldn't be in this plan, we were told this was going to be a separate bill. The Federal Reserve will buy another $600 billion worth of brand-new mortgage-backed CDOs from Fannie Mae and Freddy Mac. We're missing important details on how these mortgages will be different, but the plan says some very hopeful sounding things about lowering the interest rates on people who are currently getting screwed by their teaser-rate loans. And, if I'm reading one of the sub-points right, if the original loan was issued based on a completely fraudulent assessment of what the house was worth, the government will commit up to $50 billion to cover the write-downs on the previous loans. (This is one of the vaguest and least detailed sentences in a very vague document, though, so I could be understanding it wrong.) Sounds pretty good. Has almost nothing to do with the banking crisis.
Step Six: Expand the Small Business Administration. Sounds good, but how? They'll tell us "over the next several days," but probably by doubling or tripling the amount of money Congress puts up for it. Are there really two or three times as many qualifying small businesses, with AAA credit ratings, trying to get SBA loans as there is money in the program? If so, good idea. If this is about trying to find or make new small businesses that have no real business plan or credit record and therefore shouldn't be rated AAA and pressuring the ratings agencies to up-rate them, by putting the government on the hook for up to 90% of the loan value if they fail, all it turns into is workfare with no supervisors; not the dumbest idea I've ever heard, but probably not all that helpful. Probably utterly fraudulent, too, since those new "business plans" will probably let the "loan recipients" set their own salaries, too? On the other hand, the reason it's all the way down here at step six is that it's also the single smallest part of the plan, probably only in here because somebody in Congress insisted.
And that's the fundamental problem with this plan: "somebody insisted." This isn't a plan. This is a laundry list of every half-cocked idea that anybody in Congress, anybody in the banking sector, and any think tank came up with to solve the problem, all of them at once, even the ones that contradict each other. It's not a plan, it's a clipping service set to "bank rescue idea." There are ill-informed populists out there who insist that the government not give banks any money without first making sure we don't overpay for even one asset; okay, they get that, even though it's physically impossible. There are Republicans from the Chicago School of economics who think that there is some gigantic market out there of people desperately hungry to buy the toxic CDOs because surely they must be worth money, really, right? They got their way. There are financial firms and right-wing Democrats who insist that the real problem isn't that there are toxic CDOs, the real problem is that we stopped believing in the fairy dust that was propping them up, so what we need is to inflate another artificial bubble in CDOs; this plan does that, too. There are a few older Congressmen who remember previous TARP-like bailouts and want to give them time to work, who think that all it would take to give the voters the confidence it can work is better reporting and accounting standards; they don't get just TARP, but they do get their accounting and reporting standards. There are mortgage industry experts, some of whom I even respect, who insist that the toxic CDO problem would go away altogether if we could find some way to do what was originally intended to be done, namely refinance those teaser-rate loans via new CDOs; this plan attempts that, too. And there are country-club Republicans who still insist that there is no financial industry crisis, that we just need more government loans to businesses, so this plan gives them that, too.
Seriously, Mr. Geithner? GROW A PAIR. Tell somebody no. Frankly, tell most of them no, because big parts of this plan (steps one and four, in particular) flatly contradict each other. Pick a plan, or at most two. Ideally, one that can be implemented in a whole heck of a lot shorter time than your main plan, step one above, since it's the kind of thing that I would expect out of Cheops Second Law, "No job is impossible to the person who doesn't have to do it himself." Except that you are going to have to do it yourself, or your employees will; do you actually think that what you asked here is even possible? Because nobody else does.
I'd like to think that this plan is DOA. And, frankly, based on this performance, I'd like to think that so is Treasury Secretary Geithner's career in government. Yep. I'd like to think both of those things. Because it would beat the alternative, which would be to believe that we're going to go ahead and try to pass legislation based on this mess, or worse, pass legislation based on this mess and actually try to implement it. Because if it comes to that? Welcome to Weimar America.
Addendum: It's Not Just Me. Hot off of the Associated Press wire, via Yahoo News: Tim Paradis, "Stocks tumble after gov't unveils financial plan" and Dirk Lammers, "Oil prices tumble after US rescue plan unveiled." Implication: Broad consensus among both financial analysts and commodities brokers that demand will drop further. In other words, if we go forward with this plan, it's Great Depression 2.0, thanks to Barack Hoover Obama. I wonder if Bill Richardson is starting to regret his endorsement?