Is Geithner Taking Goldman Sachs’ Word That Toxic Assets Are Actually Worth Something?
Is Geithner Taking Goldman Sachs’ Word That Toxic Assets Are Actually Worth Something?
As more details emerge about the Treasury Department’s plan for dealing with the toxic assets currently plaguing our banking system, it’s becoming clear that Treasury Secretary Timothy Geithner is betting the house on a rather large assumption.
He seems to believe that the problem with the assets is not that they are actually relatively worthless, but that they have an “artificially depressed value” that will return as soon as a market for them is created. As Paul Krugman explained:
[S]omehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away
Geithner has posited that the toxic assets have a “basic inherent economic value” that is absent because of “the absence of financing and credit.” Unfortunately, today’s market valuations may reflect actual prices, which would throw a serious wrench into everything about the administration’s plan.
As Financial Times reported, JP Morgan and Wachovia have been picking apart some assets, to see what the underlying loans and mortgages are actually worth, and the outlook is pretty bleak. The recovery rates on some of the junk “have been a mere 5 per cent” and even the best of it is worth 35-40 cents on the dollar.
So where is Geithner getting his theory from? Well, Goldman Sachs — upon hearing the first details of Geithner’s plan — organized a roundtable, and attendees claim they “received the invitation after the speech and decided to attend because of the speech.” Meanwhile, Simon Johnson at the Baseline Scenario wrote that Geithner’s plan is “essentially the same plan that Goldman Sachs has been shopping around for the past month or so.” Was Geithner’s plan crafted along Goldman’s guidelines? (Goldman has since denied that the meeting was organized as a result of Geithner’s speech.)
Any way you cut it, Geithner is counting on the assets being artificially depressed, which exposes taxpayers to a serious loss if he’s wrong; under the plan investors who buy toxic assets would be able “just walk away if prices fell substantially.” Now, maybe Geithner knows something we don’t. But right now, the conventional wisdom is that the assets are pretty much garbage, and Geithner is taking Goldman Sachs’ word in order to avoid talk of nationalizing the banks.
6 Responses to “Is Geithner Taking Goldman Sachs’ Word That Toxic Assets Are Actually Worth Something?”
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He’s not betting “the house”, Tim’s betting our house. The shadow banking system got America into trouble with vaporware financial products. Taxpayer funded programs use the same shadow system to get us out.
It’s hard to see any upside for taxpayers. We provide the levered loans to PEU’s, who get cheap taxpayer debt. If there’s no upside, the taxpayer makes good guarantees.
It sounds remarkably like infrastructure public-private partnerships. Corporafornication lives.
March 6th, 2009 at 3:35 pmFalling for this nonsense is like me believing that what I just crapped out in the toilet bowl has the same monetary value as the prime steak, truffle topped potatoes and 2 glasses of Bordeaux I had for dinner last night.
March 6th, 2009 at 4:17 pmWe have so much more of this to put up with. What can you expect when Obama hires the people who either caused the problem, profited from the problem, didn’t and don’t understand the problem or looked the other way instead of doing their job. What, in the long run, will be the difference between Paulson and Geithner when both seem to trust the Market and pull theories out of their ass to fix the problem.
March 6th, 2009 at 4:49 pmAs far as Obama’s appointments, I would like to hear some suggestions on who he should have appointed. Any takers?
March 7th, 2009 at 10:25 pmAs far as Obama’s appointments, I would like to hear some suggestions on who he should have appointed. Any takers?
Volcker. Stiglitz. Krugman. Baker. Galbraith. Willim K. Black. Michael Patriarca. Richard Newsom.
That should be enough to get us started.
March 27th, 2009 at 2:12 amWHY IS THE STOCK MARKET RALLYING?
Why Does Goldman Sachs Stock Look So Strong?
Wall Street Now Realizes Obama Is Their Protector and
Obama’s Populist Rhetoric Is Meant Only To Fool The Angry Public. OBAMA’S FIRST PRIORITY IS NOW CLEARLY EMERGING:
PROTECT HIS WALL STREET CAMPAIGN CONTRIBUTORS.
WHY HAS HE NOT DEMANDED AN INVESTIGATION OF THE CAUSES
OF THE MARKET’S CRASH OF 2007-2009? ONLY THE 1929-1932 CRASH WAS DEEPER.
HOW CAN OBAMA SAY THERE WERE NO ECONOMIC CRIMES COMMITTED
UNTIL THERE HAS BEEN AN INVESTIGATION?
HOW CAN OBAMA INITIATE REGULATIONS ON WALL STREET AND BANKING
WITHOUT THERE FIRST BEING AN INVESTIGATION?
WHY IS HE HASTILY SETTING OUT HIS PLANS FOR REGULATING WALL STREET?
IS HE TRYING TO PREVENT A DEEPER, MORE THOROUGH OVERHAUL?
WILL HE SEEK A RETURN TO THE GLASS -STEAGALL BANKING LAWS?
WE’LL SOON SEE. DON’T BET ON IT! THAT WOULD MEAN BREAKING UP
THE ZOMBIE BANKS! OBAMA HAS SAID NOTHING ABOUT THIS!
GEITHNER IS TOO CLOSE TO WALL STREET TO DO THIS.
WHAT ELSE CAN WE EXPECT FROM OBAMA, WHEN HE SURROUNDS
HIMSELF WITH THE VERY PEOPLE THAT CAUSED AND PROFITED MOST FROM THE CRASH?
WILL HE EVER APPOINT ANYONE WHO CHALLENGES WALL STREET? NOT LIKELY SOME PEOPLE EXACTLY PREDICTED THE CRASH. WHY DOES OBAMA NOT EMPLOY THOSE WHO PREDICTED IT? ACTUALLY, ROBERT RUBIN DID.
THAT’s WHY HE SOLD SO MUCH OF HIS CITIGROUP STOCK AT THE TOP!?
March 27th, 2009 at 7:04 am