this is either the second or third trial leak for this plan
the packaging gets changed but the basics have always remained the same

Ezra,
its worse than even that because it has opened up a corrupt agent problem. think about the "investors" who put up x dollars and are levered up by the govt to buy these assets-- do they make more money looking for assets they can buy below value or do they make more money doing a side investment in C, GS, or BAC and then paying way to much to those banks for their toxic waste-- thus pumping up their side investments?
--its sad and destined to be outright corrupt.
--micromeme

If it goes bad -- and it really might go bad, and the details might prove galling in much the way that AIG's bonuses did -- the byzantine approach could well leave voters feeling tricked.

Basically Geithner's repeated attempts at doing this, when taken into account with his original AIG bailout amount to: protect the Fed, protect the banks to protect the Fed, protect 'financial innovation', don't run up the official deficit. Why? Because financial innovation is good, and the Fed is good and the bankers are good-hearted guys who are just a bit down on their luck. The non-bankers, of course, are dumb idiot Americans who made bad decisions because they're greedy and stupid. Caveat Emptor, suckers! And also, the left doesn't know what it's doing.

There's a reason this guy was in New York having lunch with Robert Rubin and Pete Peterson. We're going to replay 1992-1994, where we pretended employment was ok, and everything was fine and confidence would be restored, and nobody bought it (because it wasn't true), and went out and voted out the Democrats. Here's the hard part for the connected to swallow: they were right to vote out the Democrats; unfortunately, the only available alternative was Newt Gingrich, and Rush Limbaugh. If, on the most important issue of the day, Obama is going to be Bush II (which is what this is), then the D's will be voted out again, and the public will be right to do so.

Unfortunately, the alternative is, once again, Newt Gingrich and Rush Limbaugh. So that will not end well.

Absent a change, we're coming up on the part where the United States of America ends.

max
['And Obama will be Hoover, and Larry Summers will have made his reputation. As one of the single worst economists in history.']

P.S. When I mentioned to my 60-year-old mother at the beginning of this week that I was sorry that I had been distracted because of this stuff, she said something to the effect of, 'Oh!... Can we have a revolution now?'

max
['Things are lookin' ugly on the nationwide domestic tranquility front.']

The article actually seems to indicate that the losses will be shared between the government and the private investors, so while there is still some incentive to overprice assets, not as much as you indicate. Also, on a more fundamental level, one of the points of the whole plan is to manufacture a drop in the market's "risk premium": having low cost partial insurance seems like a reasonable way to avoid a race-to-the-bottom in asset pricing. If you simply wait for banks to get desperate and unload assets at firesale prices, we all lose anyway to the speculators.

Ezra, this why there will be no health care reform, nor cap and trade, nor anything else. The Obama administration is intent on destroying itself to prove that Wall Street is fundamentally sound, when it is in fact insolvent.
This plan won't work because it can't, but there is NO WAY Congress votes the money needed. It might take back the remaining $300 billion. I would.

When and how did Obama get so completely co-opted by all Street? I sure as hell wouldn't have supported him in the nomination contest if I'd seen THIS coming.

The way Obama appears to be letting Summers & Geithner proceed with their rigid dedication to deadly schemes to reward the ultra-rich via public subsidy while not saving the financial system is really, really, really starting to frighten me.

It's almost like Obama just doesn't give a sh*t. There are people in office that he put in, whom he trusts, about whom other influential people said good things, so, you know, f*** it, let 'em do what they want, I'm sure it'll be fine.

But it's not. And it won't be.

best $1M dollar investment in history

powered by hope owned by Wall Street

It's worse than Ezra suggests - this plan has been floated repeatedly, for months, with some tinkering on the margins each time... but the basic premise is the problem: not because of the "reward the rich/bankers" aspect, but because the logical flaw is deeper - all of this assumes that housing stock will rebound in value, making the underlying mortgages not as worthless as they now seem. That's just not reality in terms of where the housing market is or where it will go; thus we're subsidizing the purchase of these bad asses at inflated prices... and we'll be left with major losses for the government when the bill comes due. That may salvage the banking industry (and it probably won't), but it's no answer for government. Until Geithner and his team can admit that the bonds are not worth anywhere near their original value, we're getting nowhere. And once we do admit here... we're in a lot of trouble. It's a bad choice... but I wish we'd just take the pain now and be done with it, rather than keep dragging this out.

Wow, so many amateur economists seem to know so much. Especially Ezra. I mean, within hours of the plan being leaked, Ezra writes like he's an expert at this stuff.

The truth is, it's all a lot more complicated than anyone posting on this blog understands - certainly more than poor little Ezra can compute in that big brain of his - so why don't you all give the plan a chance to work. Because acting like you know what will happen when you clearly don't just makes everybody panic.

Yes, Paul Krugman is a smart guy. But there are many ways to skin a cat. If you thought Paul's was the only way, you should have had him run for office.

Pathetic back seat drivers.

cross-posted from FDL:

“A neurotic is a man who builds a castle in the air. A psychotic is the man who lives in it. A psychiatrist is the man who collects the rent.”

Tim Geithner will apparently subsidize the whole purchase.

I don't know nearly as much about this issue as Ezra, leaving me a bit confused when trying to follow his argument. I get that these assets aren't worth what the banks are telling us, but isn't the whole point of this crisis that we have to pay them the imaginary price anyway? I mean, otherwise the banks are insolvent and the financial system collapses. So why isn't it a good idea (or, at least, a better idea than TARP was) to set up a system under which private investors assume as big a percentage of the cost as possible? I mean, isn't it legitimate to say that that's saving taxpayers money versus the alternative that we've so far been using?

Now, I understand that the point here is that this plan is inferior to nationalization, because taxpayers are still assuming huge risk without any prospect of reward. But am I missing something else in the logic?

It behooves them to make it so complicated as its easy to play smoke and mirrors in this way. Quite like the bankers obfuscation about how their expertise and hence excessive compensation is warranted due to the complexity of these financial shenanigans. (if you didn't already note it, the times had a great op-ed about these specious claims). I doubt the media will even try to break it down to the absolute disgrace it is, being that it is to protect corporate america and the free market system at whatever costs to the public.

As Calculated Risk says, "With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks."

I'm going to cross-post my comment on this from Yglesias:

We don't have a full set of entrails to examine for a prediction of the future, but the liver is lousy.

The 'auction' is the kind of misdirection that magicians do (watch this hand, not that one). The incentive is for the bidders to bid higher than true market value because any loses are the taxpayers burden.

The complexity of the several pieces (4 plans!) is calculated to confuse everyone, especially the angered taxpayers.

Krugman has it right: this whole plan starts with the premise that the assets are worth more than the market values them - and presumes saving banks from insolvency by paying their bad debts and managing with proven losers is better than receivership/reorganization. Bad assumptions will make a bad plan every time.

I think it is not conclusively demonstrated that Geithner has an ideology (and some buddies?) to protect rather than being pragmatic (what will work).

He must be forced out to save not only the economy, but the Obama administration's other plans for healthcare, energy, and education. The Congress will not tolerate other investments if the first plan (even if approved) has a high risk of failure and the condemnation of both the left and right.

A fuller quote is as follows;

"The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks...To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders."

I'm sure I'm oversimplifying it, but if the deal is we, the taxpayers, are buying the troubled assets, how does it "protect" us, the taxpayers, to give away a trillion of our taxpayer dollars to the investors who fucked us over for the express purpose of driving up the price of the shit we're buying off them?

Isn't that like saying, "I'm going to sell you this bridge and not only that I'm going to do you a big favor and protect you by jacking up the price?"

Of course, the assets ARE worth more than the market says they are today.

The assets are still backed by real estate, which while not worth 100% of their original value, are certainly worth more than the 5% you could probably get for them on the market now.

And of course, eventually real estate prices will rise again, foreclosed house will be bought and regain some value. This is why the "mark to market" rules make it very difficult for holders of these mortgage securities to operate. I'm not saying overturn that rule, but clearly what the market says these securities are worth now (nothing) isn't what they're really worth, and will be worth in a few years.

Anyway, Ezra doesn't know crap about this stuff and yet pretends he does. Really, Ezra knows more about food than he does about the economy, and Ezra doesn't know much about food either.

The more bloggers pretend they know everything, the more you know they are full of crap.

If the foulness makes personal investments like the public investments he urges, I have a deal for him. Just one thousand dollars will buy you an asset that depreciates at 80 percent, but may, very well may, go up in price in ten years time! It is an excellent deal. After you lose your first 800 dollars, you have the chace to put in another thousand.

I get the 80 percent figure from Jamie Galbraith's story on Firedoglaks. He gets it from Indymac:

"The central Treasury assumption, at least for public consumption, seems to be that the underlying mortgage loans will largely pay off, so that if the PPIP buys and holds, at an above-present-market price governed by auction, the government's loan to finance the purchase will not go bad.

Recovery rates on sub-prime residential mortgage-backed securities (RMBS) so far appear to belie this assumption. IndyMac lost $10.8 bn on a $15bn portfolio (and if you count the wipeout of equity, the total loss is about $12bn). That's an 80 percent loss. It's possible that recovery rates at other banks will be better, but how can we know? No one is examining the loan tapes."

This plan should be called the Madoff plan - except that here, the events are reversed. Madoff first admits the fraud, then asks you to invest in the fund. Luckily for Geithner, it is captive money, from the U.S. treasury.

The Foulness: "The assets are still backed by real estate, which while not worth 100% of their original value, are certainly worth more than the 5% you could probably get for them on the market now."

This is a common misconception. Many of the "assets" in question are NOT "backed by real estate" in anything but the loosest sense of the term. Many mortgage-backed securities are bundled together from junior tranches, which only get paid off if ALL the senior tranches have been paid off first. In other words, if the property loses 20% of its value, the junior tranches don't just lose 20% - they are completely worthless, since the senior tranches got paid first and there's nothing left over.

Many of these securities were rated AAA on the basis that, even if some borrowers might default, they wouldn't all default at once. But that assumption was flawed - it assumed first of all that borrowers circa 2006-7 were similar to borrowers from previous years (they weren't) and secondly that housing prices would never go down (they did). If these assumptions fall apart, the securities are worthless.

And that's without even getting into the trillions in "credit default swaps," which have absolutely nothing at all backing them up.

The Foulness: "And of course, eventually real estate prices will rise again, foreclosed house will be bought and regain some value."

Why would you think that? Housing is still way overpriced in some parts of the country, and we have a massive glut. It's not going back up for decades, and probably not until most of the people who remember this bust are senile or dead.

Housing is still way overpriced in some parts of the country, and we have a massive glut. It's not going back up for decades

Well, since the national real estate market peaked nearly four years ago, the country's population has increased by almost ten million. At some point pent up demand is going to catch up to supply, especially as construction of new units has fallen pretty dramatically, and also because many vacant homes will face the wrecking ball. We've got a while to go yet, but I'd say "decades" is stretching it a bit.

Larry Summers is toxic. I wish Obama would get rid of him.

An analysis by Burns shows that the last time Los Angeles home prices dropped below their historical average relative to incomes, in 1992, they kept falling until 1997 and didn't return to their 1992 level relative to incomes until 2002.
Southern California home prices fall LATimes 2/20/09

I have some analysis in a post on my blog here:
http://noemptywallets.blogspot.com/2009/03/uh-oh-initial-details-of-treasurys.html

Historical norms show that, in order for housing payments to be affordable, the property should cost no more than 3 times the annual income of the person or family purchasing it.

Currently the median American family income is something around $45,000/yr. That means that the median house price should be around $135,000. But it is substantially higher than that, which means that housing is still overpriced.

The only way housing prices can rise sustainably is if the median income of American families rises to keep up with it. We could have spent government money working towards this goal, but Tim Geithner and Larry Summers would rather shovel trillions into the pockets of the wealthy.

but Tim Geithner and Larry Summers Barack Obama would rather shovel trillions into the pockets of the wealthy.

"The key protection for taxpayers",.....should be that the Democrats in Congress will actually let some adults READ the bill before voting on it and Obama will actually READ the bill before signing it and claiming victory.

And Ezra thinks these federal idiots should run health care?

EZRAS NEAR FUTURE:
Today it was discovered that Chris Dodd put in an amendment to the 37th continuing resolution bill that allows fat cat constributors to have organ transplants over the age of 55 unlike normal Americans who are barred from such transplants under the Obama rule that we only pay for people who are worth it, not the old and the retarded.

Dodd immediately lied about being behind the amendment, then admitted that he did it only because he received 225,000 in contributions from rich fat cats needing heart transplants.

The Presidents teleprompter was furious when it learned the news and demanded a bill be passed confiscating the transplanted hearts and other organs back from the recipients.

What we need to do is unwind and what this plan seems to do is prevent that and, in fact, wind the bad stuff up tighter but with no risk to the private parties. It's not just lemon socialism, it's really stupid lemon socialism.

I can't believe that something this foolish is going to derail Obama's presidency. It's even dumber than having an affair with an intern.