Mar 26, 2009

There is no doubt the government is taking a risk. The question is how best to do it.
Treasury Secretary Timothy Geithner¹

Recipe for disaster: Induce Joe Hedgefund to buy a package of mortgages for more than they are worth by loaning him over 90 percent of the purchase price, and require no security on the loan except for the real estate behind those mortgages. If Joe subsequently concludes his heavily leveraged purchases aren’t increasing in worth fast enough to justify the scheduled payback, he will default on the loan, we get the white elephant real estate, and he walks away scot free. Sound familiar? It is more or less what has happened—and is happening— to millions of hapless homeowners over the past decade with one crucial difference—the latter are being foreclosed upon and rendered homeless.

The banks that do agree to sell their toxic paper at a 50 percent discount will enjoy a huge infusion of cash which, paradoxically, will leave them even poorer, having to write off the other 50 percent. This will require them to increase their cash reserves (with the sale money), reinforcing their reluctance to start lending again, which was the putative reason for adopting this meshugener scheme in the first place. If we are misreading the Times story referenced below, please write and tell us how.

Because if we are not, you are about to witness the greatest plundering of the public coffers in the history of the world. The trillion plus the government is ready to hand out to a handful of rogue banks will represent a redistribution of wealth that will make the cash sucked to the top during the last thirty years look like chump change.

And the money is coming from everywhere, including the TALF² program, initially designed to make loans to real people and real businesses. Yet another trillion may be plundered from there.

Meanwhile, the interest rate on these loans has not been set and the question of how the American people will profit “if the troubled assets rise in value above the prices paid to acquire them” has also not been made clear. Neither interest rate nor rising property values will much matter, however, in a scenario that will probably see all that money disappear into a half a dozen banks, with little or no effect on the credit freeze.

They have fed us their bread and paraded their circuses before us, and we have gone, willing sheep, to the slaughter of our own best interests. Millions have lost their homes. We have all lost a large chunk of our retirement savings. The best and the brightest of our children, burdened by usurious and inescapable student loans, will work their entire lives for the corporatocracy. And our grandchildren’s financial security is now being stolen by these closed-door, weekend decisions that cost us trillions with every new-hatched scheme.

In the matter of the initial bank and A.I.G. bailouts, the Obama administration could credibly plead to no greater crime than accessory after the fact. They have no such defense this time around. Who could have imagined that we would come to such a pass?
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¹ U.S. Expands Plan to Buy Banks' Troubled Assets, by Edmund L. Andrews and Eric Dash, from the New York Times, Mar 23, 2009, accessed Mar 24, 2009.
² Term Asset-Backed Securities Loan Facility, if you really want to know.
tags: Economics | Governance