NYC Letter: Obamanomics 106

Day 65 of CHOPE

From the moment I take office, my top priority will be to do everything I can to make sure your tax dollars are protected. I'll demand a full review of this financial rescue plan to make sure that it is working for you. If you, the American taxpayer are not getting your money back, then we will change how this program is being managed.

Then-candidate Obama,
on the record
LA CROSSE, Wisconsin October 1, 2008 (CNN)

Obamanomics, a scam passed into law is de jure legitimate.

Forget about Treasury's overpayment for junk. Forget about phony Washington outrage (and its fizzle) over AIG bonuses, bonuses championed by the Treasury and authorized by Congress. Monday Treasury Secretary and tax-cheat, Tim Geithner, detailed an Obamanomic toxic asset plan (the Public-Private Investment Program) with, well, some details.

The market responded positively. Why isn't liberal eminence Paul Krugman happy?

The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to "fair" levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use "the expertise of the market" to set the value of toxic assets.

Pure genius. The market expertise that overvalued these assests in the first place, creating the current crisis, and again the same chastened market expertise that now recognizes the toxic assets for the junk it is, this very same market expertise will now lift this same junk to profitable "fair value". [Pause.] Either Messrs. Obama and Geithner do not understand the basics of valorization -- or they think the American public is just this stupid.

But 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. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

... [T]he real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

So why is the market happy? Because, gentle reader, the market is happy -- and anxious -- to unload its trash assets on you. The Market Ticker explains the scam:

Let's say that I am a bank ("financial institution") with $100 billion in "toxic assets". I have them on my balance sheet at 80 cents on the dollar. The market has them marked at 30 cents. We do not know what the held-to-maturity performance will be, since that requires knowing the future, although for the moment let's assume that they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them at 30 cents I take a monstrous loss - perhaps enough to force me under Tier Capital limits and thus render me subject to an FDIC enforcement action. I therefore will not sell for 30 cents so long as I have any [hope] whatsoever that the cash flow - or any government subsidy - will exceed that value.

If I, as a "financial institution" can participate as a bidder in these auctions I can foist off my loss onto the taxpayer. Here is how I can rig the game so as to avoid an otherwise-inevitable [bankruptcy]:

• I become a "bidder" and "bid" on my own assets at 75 cents.

• I am providing 5 or 10% of the money. The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.

• The loan, ex my contribution, is non-recourse. That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.

Now the "assets" (a passel of CDOs?) turn out to be worthless. I lose 5% of $75 billion, or $3.75 billion that I put up, plus the other nickel on the original mark, but that's all.

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these assets are allowed to bid either directly or indirectly as it provides a means for banks to intentionally dump bad assets at a certain loss that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or more in losses onto the taxpayer, not through the operation of "bad luck" but rather through what amounts to a bid rigging operation.

[Hat tip: Duncan]

We put it to Mr. Obama, how are American taxpayers to get our money back from this scam?

Now we ask you, are you just this stupid?

CHOPE.

Vigilance. Protection. 30¢ on the taxpayer dollar.