The Plan for what, exactly?

From the Treasury Department:

To address the challenge of legacy assets, Treasury – in conjunction with the Federal Deposit Insurance Corporation and the Federal Reserve – is announcing the Public-Private Investment Program as part of its efforts to repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.

The italics are mine.  Let me translate this: Nobody in their right mind will invest in banks with their own money right now because the banks are broke.  But the country needs banks to start lending again if we expect our economy to get better.

With that in mind, here’s the jist of Geithner’s plan: The Government begs private investors to front a minimal amount of capital to bid on toxic mortgage assets by saying, “Hey, we’ll pay you $6 for every $1 you spend on mortgage debt.”  This takes bad debt off bank balance sheets, investors are then willing to place more money in banks again because they’ll be able to start making loans again.


Unfortunately, this plan raises a lot more questions than it answers.

Wall Street loves it, as evidenced by stocks shooting up today.  And why shouldn’t they?  The Obama administration just told them, “Hey guys, great news!  We don’t intend to break apart the huge mega banks that got us into this mess, and we’re going to give you billions — possibly a trillion — in taxpayer dollars!”  This people are all for preserving status quo since it makes them rich, and no matter how hard they fuck us they won’t be reprimanded.

But the plan might not even work.  Currently, it’s slated to purchase $500 billion in toxic assets; possibly rising to $1 trillion.  This is supposed to clear bad debt off banks’ balance sheets, thus allowing investors to place money in banks again since they’ll be solvent, thus allowing banks to make loans, etc.  But as I’ve mentioned here before, just with Fannie Mae and Freddie Mac we see, at most, $5.4 trillion in bad mortgage debt. So does the plan address this debt or just the debt from banks that the government didn’t have to gobble up, like Citibank and Bank of America?  If the plan doesn’t address the Fannie/Freddie debt, what will?  Additionally, discounting the Fannie/Freddie debt, just how much toxic mortgage debt are we looking at with Citibank and Bank of America?

To give you an idea of the scope of that last question, as of December 2008, Bank of America’s total liabilities were over $1.6 trillion; and Citibank’s liabilities are almost $1.8 trillion.  Will $1 trillion from the Fed/FDIC — much less $500 billion — be enough to convince investors to place money in these institutions again?  It would certainly be great to know just how much of that $3.4 trillion in liabilities is bad.

The part of this plan that I really find galling, though, is that the government is willing to fork over hundreds of billions to Wall Street to get them to purchase mortgage debt.  This is our money, and essentially our money is being used to pay off mortgages — but by giving it to investors who can afford to put up a few million to pay for them.  These investors can then turn around and ask home owners to pay up on mortgages that their tax dollars just bought.

If this is the case (and I could be reading the plan wrong, but…), what’s with the middle man?  If the government intends to pay for these mortgages, why not just forgive them?  Why not just give banks 85% of what the mortgages are worth — which they should very well be happy with — and everyone goes on their merry way?

While some will rightly point out that people would get free houses under such a scenario, which they certainly don’t deserve, under this plan the business school rejects who placed the economy in hot water are now being rewarded by having the government give money to banks to pay off these mortgages, and turning around to give these mortgages to the business school rejects with instructions to squeeze as much profit out of it as they can.  In short, the business school rejects have the potential to reap huge profits off home owners since they paid $1 for every $6 the Obama administration would give them to buy their mortgage.

And you know, I don’t think these assholes deserve the money.

The more I think about it, the more unsure I am of exactly what this plan is supposed to accomplish.  Do Obama and Geithner (shamefully) intend to give Wall Street what’s maybe the biggest bonus in history?  But if so, how can this plan deliver such when it may not accurately address all the bad debt that exists?  In the former scenario, normal Americans — you and I — bend over and take it; but in the latter the plan just doesn’t work.

Here’s an idea for a plan that could work: restructure the mortgages so their value reflects the median value of a home based on its value from 2005 to the present; adjust interest rates so they are lower; then spend enough money on job creation (like infrastructure repairs) which give people jobs, kickstarting the economy and giving everyone money to pay down their debt.  But that plan doesn’t give Wall Street a big fat check, now does it?

Makes me wonder what’s really important to the Obama administration right now.

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