Timothy Geithner refuses to take underwater banks into receivership and resolve them, but has no problem transforming the FDIC into a hedge fund. Go figure? Here's what everyone needs to know: The US government (you) will provide up to 94 percent of the financing (low interest, of course) for dodgy mortgage-backed assets that no one in their right mind would ever buy so that wealthy and politically-connected banksters can scrub up to $1 trillion of red ink from their balance sheets. Ugh!
The so-called "private partners" in this confidence scam, will get non recourse loans, which means that if the plan backfires and they lose their skimpy 6 percent investment they can call it quits and leave the taxpayer holding the bag. ($1 trillion in potential losses!) Here's how Paul Krugman sums it up:
"The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. This isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets."
"Markets"? Who said anything about markets? This is corporate welfare, pure and simple.
Also, the partnerships will be conducted through off-balance sheets operations, (Enron-type structured investment vehicles or SIVs), so the parent company (our new business partners) can avoid liability when they dump all types of ineligible, unmarketable, toxic garbage into the program, which they will since the average banker has moral scruples of Hannibal Lector.
The opportunities for fraud in Geithner's "public-private" Banker's Bonanza are truly breathtaking. All the bank has to do is shovel its mountainous pile of B-grade dog-dung into its newly-minted SIV and then hide behind its government-issue "no risk" loan and claim ignorance when the FDIC tries to get its money back.
"I'm so sorry. How did that 2006 vintage subprime CDO made up of liar's loans from unemployed Pizza Hut workers get mixed up in there? My bad."
In Geithner's defense, we should point out the challenges he's facing. It's not easy pulling the wool over people's eyes, especially when they've been repeatedly fleeced. The Treasury Secretary's main job is "to keep the big banks in private hands" and to remove over a trillion dollars of toxic mortgage-backed assets that are worth only a fraction of their original value. According to economist Dean Baker, these junk assets are worth roughly 30 cents on the dollar, although the banks have them listed on their books at 60 cents on the dollar. If the banks are unable get full price, then many of them will be forced into bankruptcy. Geithner's job is to make sure that doesn't happen, which is why he has created the "partnership" smokescreen to conceal the fact that the government is intentionally overpaying for significantly-downgraded sludge. Here's how economist James Galbraith puts it:
"The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don't want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer."
Galbraith (indirectly) explains why Geithner has avoided "price discovery" at all cost. Think about it for a minute: We are now 19 months into the biggest economic catastrophe since the Great Depression and STILL the public has no fixed idea of what these rotten assets are really worth. Why? The business media, the government and big finance have engineered the biggest cover up in memory in order to protect the interests of privately-owned financial institutions. Is that how a free market is supposed to work?
The question that should be on everyone's mind is this: Why would Geithner create a program that rewards bankers and hedge funds at the expense of the public? Or to be more specific: What manner of man would conjure up a transaction where taxpayers put up 94 percent of the investment but only stand to get 50 percent of the profits?
Who is Geithner working for anyway?
There's no way around the fact that Geithner is a financial industry representative planted in the White House to do Wall Street's bidding. Institutional bias precludes him from doing his job and operating in the public interest. Thus, the first step in any financial rescue plan must be to remove Geithner, Summers and all the other parasitic Rubin-clones that have infected the present administration and bring in a whole new team. That will prepare the ground for nationalizing the banks and providing debt-relief to the people who need it most, the victims of Wall Street's Ponzi-credit bubble.
By Mike Whitney
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
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