Obama-Geithner Financial Frankenstein
In anticipation of the formal public exordium of the Obama-Geithner banking and credit program many are predicting continued skepticism on the President’s gripe on fiscal recovery and whether the Treasury Secretary’s gravitas is enough to hold the consequential billet where he finds himself now. Economic experts from the right, center, and left are harmonious like a chorus in sounding their disapproval.
The top 15 to 20 banks which have assets amounting to more than $100 billion are being “stress tested” to see if they can continue to be in operation. If large banks pass their stress test they will be allowed further injection of capital from the Federal Reserve but must accept certain conditions. There will be restrictions on bank operations, including limits on purchasing healthy institutions, salary caps, and caps on dividends. From most experts points of view this is the most accepted and least controversial part of the Obama-Geithner plan.
The controversy starts with the Obama-Geithner plan to form partnerships between private investment groups like banks and hedge funds with the government to buy “toxic assets”. The government will pay or at least guarantee hedge fund managers for their participation. Up to $700 billion in funds from the FDIC will be used to provide loans for these partnerships to buy up troubled assets from banks. Those assets that the bank wants to put up for sale will be auctioned to the highest bidder. The hedge funds will have to put some small percentage of investment but 80% of their risk will be guaranteed by the Federal government.
This brings up perhaps the quintessential issue of the plan according to David C. John and James L. Gattuso of the Heritage Foundation who recently analyzed the program. How will an appropriate price be paid? David Elliot at the Brookings Institute points out that banks are only going to sell the very worst of the assets which may create very little volume. Analysts were critical in the New York Times perhaps best summarized by the once Obama cheerleader now pundit, Paul Krugman, who calls the plan “a loser” which will create “zombie banks”. Almost every analyst says there is a potential that the government will be over subsidizing the private investors and cost too much money to execute.
Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) program will be increased from $200 billion to $1 trillion. Holders of derivative securities involved with commercial real estate loans,residential lending, student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration will will be lent more more from the fund to allow creating new securities.
Many are asking why is the government seeking to make new derivatives of low value assets when exactly the same process of making derivatives of then over priced assets created the process in the first place? Why is the government guaranteeing the private investors? Paul Krugman has said that President Obama has failed to realize that the problem is not a problem of just needing confidence in the system instead of recognizing the reality of their lost value.
The overwhelming interference in government to prop up the prices of these assets will only cost the taxpayers more money. America must come to realization that you cannot get something for nothing. Spending trillions of dollars to build a fancy store to sell horse manure will not improve the price of the manure. The tried and true method of dealing with business failure that has been a staple instrument in commerce, bankruptcy, has been dismissed for a financial Frankenstein.
Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Revew
