Paul Krugman has a hard hitting opinion piece in which he goes after “Senior Administration Officials” on the TARP II
Question: what happens if you lose vast amounts of other people’s money? Answer: you get a big gift from the federal government – but the president says some very harsh things about you before forking over the cash. …
There are a number of things that are happening, and a number of things that are not happening (but which should be happenin) that give me pause.
First, let us consider the broad outlines of Pres. Obama’s plan.
(a) pump in a large amount of government spending as a stimulus. This is the only portion of his plan that has widespread public support. It will “save or create” 2 million (or 3 million) jobs.
(b) Tax cuts. Presumably, this was thrown in for bipartisan support.. the wisdom of this move looks increasingly suspect, given that the Republicans are all set to vote against the package anyways. This portion has marginal support in the public.
(c) TARP or TARP II or Hanky Pankie II (as Paul Krugman called it) This is the portion of the plan that the public does not support, and which is as daft as TARP I.
As Paul Krugman says:
When I read recent remarks … by top Obama administration officials, I feel as if I’ve entered a time warp – as if it’s still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.
“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” says Timothy Geithner … as he prepares to put taxpayers on the hook for that system’s immense losses.
Meanwhile,… Mr. Geithner and Lawrence Summers … “think governments make poor bank managers” – as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
So let us consider the situation here: The banks have still not come clean on what their assets are really worth.
“To date, the banks have stuck their heads in the sand and demanded that they be paid the price of good apples for bad apples.”
Lynn E. Turner, a former SEC chief accountant
Yesterday’s NYTimes had an interesting article that cited an unnamed bank with an unnamed bond.
The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.
…
The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.
All these shenanigans makes me wonder whether the guys that have nominally been put in charge (Summers and Geithner) have an institutional loyalty to their friends in the banking industry, and that they are putting that loyalty above the fealty they must now show to their new boss (i.e., we, the people)
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