Toxic Assets Plan Announced
Bloomberg provides the overview: “Treasury Secretary Timothy Geithner, who will unveil the Public Private Investment Program today, has crafted an approach using up to $100 billion of bailout money to spur investment funds to purchase — and banks to unload — the illiquid securities and loans that have caused credit to dry up. The Treasury, Federal Reserve and the Federal Deposit Insurance Corp. will all play a role alongside private investors in aiming to buy between $500 billion and $1 trillion of troubled assets. ‘By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets,’ Geithner said in an op-ed piece published in today’s Wall Street Journal. “The ability to sell assets to this fund will make it easier for banks to raise private capital.’”
Paul Krugman expresses “despair”: “Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.”
Brad DeLong explains his disagreement with Paul Krugman: “I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it’s chances become.”
The Big Picture’s Barry Ritholtz is nonplussed: “It is now nearly 18 months since the crisis erupted, and we are several trillion dollars into this, with little to show except a halting of sheer panic. The thought process seems to be, what’s another trillion dollars?”
James Galbraith on FDL proposes how to value the assets: “The NYT article points out that pools of [residential mortgage-backed securities] can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents — either because they really think the loans will experience only a 40 percent loss rate, or because they fear that acknowledging market value will put them into insolvency. Which it might very well. The way to find out who is right is to EXAMINE THE LOAN TAPES … If I’m right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory.”
MyDD’s Charlie Lemos on prices: “If getting the prices of toxic assets ‘right’ isn’t enough to rescue the banks, that doesn’t mean that we’re doomed; it means that we actually have to, you know, rescue the banks, Swedish style, rather than rely on fancy financial engineering to make the problem go away.”
Calculated Risk on prices: “Mark Zandi supports the plan, although I’m not sure what he means by ‘fair price’ since the price will be above market prices (because of the low interest rate, non-recourse loans)”
Atrios: “Banksters, just pull the cash out of my back pocket during our group hug.”
Mother Jones’ Kevin Drum is more supportive: “maybe with some nudging (along with plenty of leverage from Uncle Sam), Geithner’s plan will motivate private investors to spend more time really trying to figure out what this stuff is worth and making fair bids for it. It’s true that there are tricky aspects to running the auctions that Geithner may or may not be able to solve, but if his plan works it will help clean up bank balance sheets and keep taxpayers from getting fleeced. And if it doesn’t work? There’s always nationalization.”
Dean Baker sees big banks being favored over small: “There are junk mortgages all around. If the Treasury/Fed subsidize the purchase of the junk (or mortgage backed securities based on the junk) at Citigroup and other banks, then these assets become more attractive than the junk mortgages at smaller less politically connected banks, which don’t come with government subsidies. So, this means that there will be less money for the potentially bad assets at these smaller banks. In other words, by helping the big banks, the Geithner plan will likely to be sending more smaller banks into insolvency.”
Angry Bear’s Ken Houghton: “I would have thought by now that economists would know what happens when you create bubbles in a market. That doesn’t change when just because you use the U.S. Treasury as a Fluffer.”
Stop The Press: “Why Geithner’s plan won’t work. Short version: It’s too late.”
Washington Monthly’s Hilzoy on the gamble: “it’s a huge gamble on the proposition that the assets in question are undervalued, and will regain their value as soon as the economy returns to normal. If that’s true, then we will probably get our money back, though we won’t do as well as we would have done had we paid market prices. But if it’s not, then we will be left holding the bag. And it’s a very, very big bag.”
Washington Note’s Steve Clemons rejects Obama aide Romer’s contention for banks to lend “like crazy”: “‘Lending like crazy’ is exactly what helped trigger the global financial crisis — and reflating those trends would be a major mistake if that is what the Obama administration is pushing.”
Conrad and Bernstein Gently Square Off On Budget
OurFuture.org’s Bernie Horn reviews the state of play in the budget battle:
Progressives want to include language in the Budget Resolution that make President Obama’s health care and energy “cap-and-trade” initiatives subject to the reconciliation process—allowing them to be approved in the Senate by a simple majority vote. In other words, progressives would like the chance to adopt these crucial policies through majority rule—instead of letting a minority of only 41 Senators block them from enactment.
Seems reasonable. But Blue Dogs in the Senate are screaming foul. According to news reports, they have already killed the possibility of making “cap-and-trade” part of the reconciliation process, and they’re not sure about health care. At present, it appears that the House Budget Resolution will include a reconciliation provision on health care but not “cap-and-trade,” and the Senate Resolution will probably include neither. If that happens, the issue of reconciliation will be put off while Congress recesses for two weeks (April 4 to 19) and the matter will be raised again in the House-Senate conference committee. If the final Budget Resolution includes reconciliation language that instructs the appropriations committees to fund health care reform, that up-or-down vote would probably take place in September.
Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, said on Sunday that he would not support using budget rules that require a simple majority to pass major changes to healthcare and energy policy. “It is not included in the budget I will put to my colleagues,” Conrad said on “This Week” on Sunday. “It just doesn’t work very well.”
The White House is open to using so-called budget reconciliation measures to pass major elements of the president’s budget if the debate becomes bogged down in the Senate. Reconciliation measures cannot be filibustered. “I think it has to stay on the table,” said Jared Bernstein, economic adviser to Vice President Joe Biden.
BERNSTEIN: The president is prepared to negotiate on this budget with folks like those at this table, and certainly Senator Conrad has been a longtime budget negotiator at times like these. And the president’s been very clear about this, as has our budget director. We don’t expect these folks to sign on the dotted line.
What we do expect — what we do expect and what we are going to stand very firm on, because this president, this vice president have made this clear, that there are these priorities that brought them to the dance here: energy reform, health care reform, education, all done in the context of a budget that cuts the deficit in half over our first term.
STEPHANOPOULOS: Yet — yet as the president’s pursuing these priorities, you have former supporters on — on the stimulus, like Senator Collins, saying, no, she can’t go along. You’ve got Democrats, like Senator Conrad, saying your ideas on taxes we can’t accept. You’re not going to get the kind of revenue you’re calling for. So these are really major changes the president has to contemplate.
BERNSTEIN: Not necessarily, George. I mean, we’ve — we’ve been here before. This is opening negotiations of a — of a large and historically unique budget.
Now, we know that this budget ramps up deficit spending in the first couple of years. And the reason we do that is because this economy is facing something we really haven’t talked about yet today, one of the deepest and more far-reaching recessions of any of our lifetimes, backed up by a — a crisis in financial markets that we haven’t seen since the days of the Great Depression.
Let us not lose sight of the people who realty haven’t come into this conversation yet, middle-class folks who are facing an 8 percent unemployment rate, African-Americans, facing a 13 percent unemployment rate, over 20 million people underemployed right now. And so this budget needs to take into account the difficulties that American families are facing in the face of the toughest recession of many of our lifetimes.
More Conrad, from Politico: “Senate Budget Committee Chairman Kent Conrad is pressing to cut up to $28 billion, or almost half, of the increased appropriations sought by President Barack Obama for domestic and foreign aid programs in the coming year. Conrad’s draft budget would leave a 6 percent increase intact. But given the fixed costs facing the government for veterans’ medical care, the International Monetary Fund and the 2010 Census, Obama initiatives could be squeezed — if not crippled — in some cases.”
Booman Tribune: “Wanker of the Day: Kent Conrad … My answer to Conrad is that it is his responsibility to pass Obama’s health care plan and energy policies and if he can get that done without using the budget reconciliation process then good for him.”
DAVID GREGORY: …How do you, as a matter of political will, make this kind of long-term investment when the country just can’t afford it?
MAYOR BLOOMBERG: The political will issue is the president’s greatest single challenge. There is a crisis of confidence in this country, and it’s up to the president. He comes in–he’s been in office two months. He campaigned on change, everybody wants him to succeed and he’s got to now explain exactly that to the public, why it is so important to make the investment and to commit ourselves down the road and our kids down the road to pay back all of the money they’re spending today. It’s–we’re in a situation where we can’t not spend…
MR. GREGORY: Right. But, Governor Rendell, the question of priorities. Can the nation afford, can the government afford to make long-term investments now, even if they’re good programs, with this sort of crisis of confidence and this immediate liquidity problem in the banks and with this deficit picture?
GOV. RENDELL: I agree with Mayor Bloomberg, I don’t think we can afford not to do it. But I think the president is making good in this year–in this budget. The, the, the high-speed rail component of it, the infrastructure bank, $25 billion. He’s making good on that. So you have to under–I think the American people don’t–aren’t against spending, they’re against spending they can’t see. The bailouts, they can’t get their arms around it, they can’t touch it. They can’t say, “Well, that’s what happened for our money in the bailout.” But for infrastructure, if we do it right and we’re committed to seeing that it’s done right.
…where is the ridicule when Senator Judd Gregg, a person who prides himself as somewhat of a budget expert, was reported in the NYT as saying: “The practical implications of this is bankruptcy for the United States. …There’s no other way around it. If we maintain the proposals which are in this budget over the 10-year period the budget covers, this country will go bankrupt. People will not buy our debt; our dollar will become devalued.”
There are probably no economists who would claim that the government will go bankrupt based on the spending path in President Obama’s budget. One would expect a member of Congress to be informed about such issues.
The dollar will almost certainly fall, but that would happen whether or not the government runs a budget deficit. The dollar will fall because the country is running a huge trade deficit, which is the result of the over-valuation of the dollar. The fall in the dollar is needed to bring down the trade deficit, which will be a necessary part of a stable recovery. It is remarkable that Senator Gregg apparently has no understanding of how the economy works.
Krugman on differing deficit projections: “the new, pessimistic CBO budget projections … have no bearing on the case for a large stimulus now — none. Adding, say, another $600 billion to stimulus spending would, on net, add around $400 billion to debt a decade from now (net is less than gross because the stimulus expands GDP , which leads to higher revenues that partly offset the initial outlay.) This would make essentially no difference to the outlook. [OMB Director] Peter Orszag has this exactly right … What the projections suggest is that Obama’s longer-term agenda, or a progressive agenda in general, needs more revenue; that’s probably true, although there’s huge uncertainty about any long-term projection. That revenue might come from environmental policies: I’ve been hearing that realistic projections of the revenue from cap and trade might be much higher than assumed in the budget. In any case, however, it’s really a political question: are we willing, ultimately, to pay the modest costs of a better society.”
Pledge Project Canvass Begins
The Field rounds up stories from the Organizing For America canvass in support of Obama’s budget:
“It Felt so Good to Be Out in the Community Again”
Jack and Jill Politics: “The best part of getting back to the streets is getting away from the often-disconnected echo chamber of the media and listening to what the people are actually saying.”
W. Post reports on plans to beef up staff: “the organization remains skeletal, and the Pledge Project does not nearly cover the 435 congressional districts. The organization aims to develop a structure — including at least one paid staffer in each state — in time for larger fights over health-care, climate change and education legislation.”
Health Care: Debating the Mass. Model
The Treatment features debate between Diane Archer of Institute for America’s Future and Mass. health care adviser Jonathan Gruber about whether Massachusetts’ health care plan, which lacks a public plan option, should be a national model.
Big Retailers Spin Anti-EFCA Bill as “Compromise”
Under the alternative offered by the coalition, two of EFCA’s main provisions would be effectively removed.
The measure that would allow workers to bypass secret ballot elections to form a union if a majority of them sign authorization cards stating their intention to organize — often called “card check” by business lobbyists or “majority sign-up” by union officials — is not in the coalition’s statement of principles.
Instead, there is a guarantee for a secret ballot in a union election but voting would have to happen in a fixed period of time once workers wanted to certify their union.
In addition, the provision for the government to appoint an arbitrator if workers and management cannot negotiate a contract within 120 days is removed.
There are concessions to the labor movement as well in the proposal. Along with quick union elections, labor organizers would be granted equal time along with management to campaign for votes for forming a union. Penalties for violating labor law by management would also be strengthened. There is a similar provision in EFCA as well.
But the lawmakers pushing EFCA feel the alternative would allow employers too much leeway in decertifying unions and would not give workers enough of voice at their workplace.
“It is nothing more than a classic Washington lobbying campaign intended to confuse the issues and disguise the real agenda of maintaining the status quo,” said [Rep. George] Miller and [Sen. Tom] Harkin.
Washington Monthly’s Steve Benen gets House Dem reaction: “I spoke this morning with a committee aide that Democratic leaders on the House Committee on Education and Labor will not accept this compromise, because the arbitration element of EFCA cannot be removed.”
HuffPost’s Art Levine: “Could Anger at AIG and Geithner’s New Bank Plan Help Unions?”
Bonus Tax Momentum Slows
W. Post: “As the Obama administration prepared to unveil major elements of its plan to address the global financial crisis, some of its leading economic officials reacted coolly to congressional actions to recoup bonuses from financial firms through targeted taxes, with one adviser saying the approach may be a ‘dangerous way to go.’”
Obama administration officials worked Sunday to persuade reluctant private investors to buy as much as $1 trillion in troubled mortgages and related assets from banks, with government help. The talks came a day before the Treasury secretary, Timothy F. Geithner, planned to unveil the details of the administration’s long-awaited plan to purchase troubled assets, meant to remove them from the balance sheets of banks and, in turn, spur banks to lend more money to consumers and companies.
The plan relies on private investors to team up with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk. As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.
But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group. Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations.
Salon.com’s Joe Conason says there are bigger tax evasions to worry about:: “The popular urge to claw back the bogus bonuses paid by American International Group is irresistible and fully justified, but should the Treasury someday retrieve every single bonus dollar, that total of $165 million will make no difference to anyone except a few disgruntled traders. From the jaded perspective of the financiers, the uproar over the AIG bonuses may provide a welcome distraction from far more important (and lucrative) abuses in the world’s offshore tax havens.”
NYT seeks to make every potential international disagreement into apocalyptic vision of destructive protectionism.
NYT reports GM bondholders are resisting efforts to shoulder responsibility in the auto rescue plan.
Terrance Heath contributed to the making of this Breakfast.