Geithner "Plan" for the Banking Industry Provokes Sarcasm, Outrage, Despair, & Bitter PostPartisan Laughter

by Damozel | At The Financial Times, Martin Wolf characterizes Geithner's "plan" as  "yet another child of the failed interventions of the past one and a half years: optimistic and indecisive," adding "it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome." (FT; emphasis added)

Atrios says cruelly: "It was expected that even if they came up with a shitty plan, they'd at least look like they knew what they were doing...Aside from the fact  that it's all about bailing out Tim's friends, it's pretty clear that they still have no idea what they're doing...Should've just left Paulson in charge."  He further snarks:  ""They're going to subsidize leveraged bets on leveraged bets. High comedy!""  Which I guess explains why both sides of the aisles responded to the plan by laughing out loud.

Yves Smith says -- wow, this is so mean --:

Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the "oh he has to work on the stimulus bill" is as close to "the dog ate my homework" as I have ever seen in adult life)....

Geithner's belief that government can't manage assets is sheer projection of his own inability to deliver.  (Naked Capitalism)

dday sums it all up for the ignorant layperson, i.e., me:

Most are calling the plan vague and unclear, and the fact sheet doesn't help. There's a lot of use of Federal Reserve money to grease lending. There's this public-private partnership to buy the crap assets, which assumes that anyone would want to purchase them at all, even if seeded by Treasury funny money. And there's this "stress test" applied to banks to test their solvency, without any explanation of what happens if banks fail the test. Thus Geithner achieved the WORST of all possible worlds - a plan that looked close to a bailout of the banks and protection of the shareholders, without being clear enough for anyone to tell definitively. Thus, both public confidence and Wall Street confidence were not restored even a little, and the Dow responded accordingly.

Before presenting a round-up of Geithner-related smackdowns, courtesy of a number of prominent economists including himself, Yves Smith caustically sums up the universal response as follows:

I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling. Paulson demanded $700 billion, nearly $200 billion bigger than the Department of Defense, via a three page draft bill, nothing more that a doodle on a napkin, save that it did bother to put the Treasury secretary above the law. But high-handedness was the hallmark of the Bush Administration; it was only the scale and audacity of the TARP that was the stunner.

And the TARP initially did have some supporters (perhaps most important, among the media, who trumpeted the "Something must be done" case). Fans are much harder to find for the latest iteration of the seemingly neverending "let's throw more money at the banks" saga.

As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street's interests as the Bushies were. The differences increasingly look stylistic, not substantive... (Naked Capitalism; emphasis added)

John Cole inquires:

So why exactly did team Obama rush out to make this announcement when it is pretty clear they are just making shit up as they go along? And is it possible that Tim Geithner could be the man that sinks the Obama presidency?

Speaking as an ignorant layperson, I wouldn't be surprised; I am still not sure I get why a man who didn't pay his own taxes after repeated pleas from the International Monetary Fund would be put in charge of anyone else's money.  (Or is that too cynical?)

dday further comments:

[H]e prevailed over those who had the interests of people, and so the interests of executives on Wall Street will be in the foreground. Taxpayers will take all the downside risk and get none of the upside profits.

I agree that nobody knows what the banks are worth, and a "stress test" to see how they'll perform might be a good idea, but only if followed by wiping out those banks that have no chance of making it. But that's not what's happening. Geithner is keeping his friends whole while the rest of the nation starves...

He won't break the backs of the elites, who still control this area of policy. And it's deliberately sketchy, with no numbers nailed down, so that they can respond to criticism with an answer like "we are still reviewing the options."

But there are no more options. The banks are insolvent and need to be nationalized, and probably will be, once we burn through hundreds of billions more because the Treasury Secretary is afraid of saying the word. When investment analysts are calling for a takeover, it's really not a wild or out-of-the-mainstream policy. The only thing standing in the way are elites.

Terrible, terrible, and at this point, not even the stimulus is going to make up for this massive loss of capital. We'll be back here talking about a new plan in six months.

At The Financial Times, Wolf says despairingly:

Why...is the administration making what appears to be a blunder?...[I]t has set itself the wrong question.

It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it....

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.

By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late. (FT; emphasis added)

Atrios again:

I do miss the days when we'd sanctimoniously lecture Japan and other countries about how horrible they were for propping up their failing financial institutions. We'd never do anything that stupid!

At HuffPost, Robert Borosage in a piece called Can't Get There from Here says "The Obama administration has made its first serious misstep."

No nationalization rules out the way the US normally deals with insolvent banks. The FDIC takes them over, replaces the management; the depositors are reassured, the shareholders take their losses to write off the bad debts. Then the FDIC restructures the bank, merges it or sells it back to private investors. It arranges an orderly and seemly burial. Without doing this with banks that are "too big to fail," the administration is left paying tribute to zombie banks that consume taxpayers' money while doing little if any productive banking.

No losses for bondholders means that taxpayers pick up the bill. With an insolvent bank, shareholders lose their investment. That's how the market works. If that isn't enough to cover the losses, then creditors take what is called "a haircut." A portion of the loan they made to the bank is written off or turned into equity (stock). But with neither the shareholders nor the creditors taking the hit, only taxpayers are left.

No new money from the Congress - surely a political reality with the rising popular fury at bailing out millionaire bankers - means that the plan is immensely complicated, combining guarantees from the Federal Reserve, small capital injections, inducements to lure private investors. But the whole point of the exercise is to restore confidence in the soundness of the banks. A jerry-built complicated package only makes everyone nervous that the whole contraption won't hold up. (emphasis added)

Borosage does note what he considers to be one potentially redeeming feature:

It pledges that any bank requesting federal assistance will have to undergo what it calls "a stress test," a detailed assessment of the value of its holdings and liabilities. This is the first thing the FDIC does when it takes over a bank verging on collapse. An honest assessment allows the government to decide whether the bank is salvageable or not....

The Treasury could use this clause to "discover" that the banks applying for assistance aren't solvent - and then proceed to restructure them (never using the N word). Congress might sensibly instruct the administration to do just that. Otherwise, another trillion or so will be devoted to keeping the zombies alive, while the economy -- and the Obama presidency -- suffer....

But for this to happen, Obama will have to put grit in his policy, not just his rhetoric.  (HuffPost; emphasis added)

At The Swamp, Frank James says:

What was it that Karl Marx said about historic events occurring twice, the first time as tragedy, the second as farce?

If you want slightly less bitterly amused, despairing, or angry commentary, Andrew Sullivan's got a round-up of economists here.

I don't care what they say.  I am just going to stick my fingers in my ears and assume that it's all going to work out for the LA LA LA LA LA LA LA LA CAN'T HEEEAR YOU best in this best of all brave new post-partisan worlds

Memeorandum has more.

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See also:

Geithner is Likely New Treasury Secretary, Media Questionably Ecstatic