Will the Geithner plan work?
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David Gergen | Bio
AC360° Contributor
CNN Senior Political Analyst
In a famous exchange in Shakespeare’s play, Henry IV, Part 1, two characters by the name of Glendower and Hotspur are jesting over how to persuade others to follow them. Glendower says, “I can call spirits from the vasty deep,” to which Hotspur responds, “why yes, so can I and so can any man, but when you call them, will they come?”
Treasury Secretary Tim Geithner today summoned spirits from the vasty deep with his ambitious plan to persuade private investors to buy up the toxic assets of troubled banks. All of us have an interest in the plan succeeding – we need our banks to be healthy and able to lend again to consumers and small businesses; the stock market rallied sharply in the opening hours. But the real test will come over time: will the private investors actually come up and buy enough of the toxic assets? We may have to wait a number of weeks to know for sure.
What we do know is that the Obama administration is offering extremely favorable terms to the potential investors. The government, as The New York Times reported this morning, would lend private investors nearly 95 percent of the money for an investment. (Here’s an irony: at the very moment we are trying to deleverage the economy, the government is now using the principle of leverage to revive it). Moreover, if the investment goes bad, the private investor is only on the hook for the small portion it put in originally – not for the full amount of the purchase. Yes, the government will share in profits, but if the toxic assets go up sharply in value – as the government hopes – the private investor could make piles and piles of money.
Two questions immediately arise. The first is that raised by Paul Krugman, the Nobel-prize winning economist who has been slamming this plan unmercifully because he believes that Geithner has way too rosy a view of the underlying value of the assets. He thinks that investors, realizing that these assets aren’t really worth very much, won’t want to invest at the prices that the banks will insist on and the whole plan will ultimately fail. Instead, argues Krugman, the nation will waste incredibly valuable time on a flawed plan, allowing the economy to deteriorate still further, while instead we should be moving swiftly toward a government takeover of the banks, which he believes would stabilize the economy. We shall see who is right – Geithner or Krugman.
But there is a second question lurking that really only the President and Congress can answer: that is, whether private investors can have confidence that if they do invest, the lynch mob mentality we saw last week in Washington won’t come and plague them in the future. As the managing director of a major hedge fund told me recently, if this plan is good enough, our firm stands to make money. But then why should we invest if Washington is then going to get mad, take 90% of our profits from us retroactively and if I may be hauled up before Congress and vilified? Good question.
What this means is that the President and the Congress this week need to restore calm to the Capitol over the AIG bonuses, work out a solution that does not leave a threatening cloud over the financial industry, and provide more concrete assurances that the Geithner plan will work as advertised. Until they do that, it may be extremely hard for the Secretary – try as he might – to summon spirits from the vasty deep. Again, we all have a stake in his success.,
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Filed under: 360° Radar • David Gergen • Economy • Finance • Treasury Secretary |
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Slight correction to my earlier comment: "As for me, I favor intellect over blind faith and not the unrelenting criticism of people that are trying like the devil to make things better."
Whew!
The problem here is that it is a "heads, investor wins, tails, taxpayer loses."
If nationalization is needed, then do it. We take the risk, WE get the reward.
Otherwise, it is just another give away of our tax dollars to others who didn't earn it.
Why are Obama and Pelosi SO opposed to slashing taxes across the board?
More money in OUR pockets, we pay BILLS, we pay down DEBT, we save and we SPEND. Our "own" stimulus in our own areas.
Our LOCAL TAX COFFERS benefit. More money in banks via deposits mean they are MORE LIQUID.
More money in our hands gives banks more confidence in ABILITY TO PAY.
It's so simple. All it takes is the democrats giving us OUR money back that WE ALREADY EARNED.
But Pelosi won't even forgo the Congress' automatic 4900 raise of OUR money that THEY took.
Aren't they like Aig? Rewarding themselves for failure?
Thank you, David. Professionalism at its best.
Infamous principle of leverage – Indeed, ironic.
Why the recent uproar over the AIG bonus scam when their enethical and deceptive practices have been know for quite some time?
-looking forward to a sunny forcast in the financial sector as it's been raining for far too long.
Oh David, would it be that this is so simple as you say!
It is not! the problem is not a socialist style bank nationalisation or selling toxic assets to the government or a combination of government or private investors. The problem is the same whatever you do except that when the government pumps money in that allows the banks to lend to stimulate good parts of the Economy.
The problem is a whole bunch of people like it or not are going to suffer because of a property market asset bubble, huge speculation in currencies, commodities, stocks and bonds that had no economic fundamentals behind those transactions and the property bubble and speculation elsewhere exacerbated by Leveraged borrowing by hedge funds which is almost now a bad debt to the banks created a geometric effect on Insurance companys who failed to see the real level of risk.
The reality if 10,000 was an index in 2007 end somewhere in future 7,000 is the best that can be hoped for i.e a 30% loss to banks hedge funds and main street. whether that is real cash or debt exposure depends on each indivu=idual but we will all apparently be 30% worse off unlees we create the same problem over again = put appropriate regulations in place!!
Regards,
Hodgson.
I agree with Jennifer H. completely.
I'd add that even well-regarded economists like Simon Johnson know that Obama needs to break the power of the oligarchs NOW. That's not what he is doing. Instead, he is helping them gain even more power. Very bad move.
Sounds a lot like gambling to me, but if I make a bad bet, nobody has a bailout for me.
Geihtner, Summers, Dodd and Obama are all owned by the by the financial services industry. The taxpayers are going to pony up 95% of the cash for the trash and the "private investors "(i.e the same people who created this mess) will put up 5%. So once again the ordinary Americans will be forced to assume most of the costs and the risks of fixing the mess that the over class has created. This is the change we are supposed to believe in?
Yes I'll take some of that, provided those that did already have not choked on it, otherwise count me out. Its like a mine field, the private can walk 200 meters ahead of me, where he steps and did not get blown away, I will follow.
Isn't there one other thing to consider? The O Administration recently floated the idea that judges will be able to make decisions about how much certain home owners will have to pay back – in other words, some people may get the principle lowered on their mortgages.
My questions is: Who would be interested in investing in these toxic funds if some judge may come up in the future and lower people's mortgage principles – thereby lowering the value of any investment?
Am I understanding this correctly?
Try to remember it's the worst economic crisis since the depression. It's not like there's any great options. While Republicans and Democrats enjoy plentiful ammo hit each other with, remember this; it's either let the banks fail (which would cause all sorts of terrible problems people haven't even thought about) or create huge debt by putting the economy on life support and hoping it revives itself.
The best solution likely lies somewhere in between.
Ok...let me get this straight. What got us to this point was the way things worked before: Banks held homes and let private investors come in and put a small percentage down on the house in the hopes that the value would rise and both could make a profit. Housing prices then get overblown and housing market comes tumbling down allowing the world to enter a long-lasting global recession. Hurray??
The Obama-Geithner plan: GOVERNMENT (meaning our tax dollars) hold homes and let private investors come in and put a small percentage down on the house in the hopes that the value would rise and both could make a profit. Sounds familiar right? Can you guess what's going to happen next???
(Just so you know all I did was copy and paste what the banks and private investors were doing before the collapse of the market and replaced only one word......Bank for Government (us!))
For the unfailing Obama supporters I say this: he knows absolutely NOTHING about economics and has to rely on his old Prof Geithner to think for him. This isn't about getting out of Obama's way, it is about the absurdity of following the lead of someone like Geithner who was part of the original problem in the first place when he was at the Fed. If the gov't (us) is going to take 95% of the risk why not take it all as well as 100% of any profitability? What IS the point of taking the lion's share of the risk and the lamb's share of the profit unless you are wanting to line someone's pockets?
Additionally it is INSANITY to be contemplating this huge deficit so that OBAMA can carry out his three-pronged approach to re-engineering our way of life. Wait UNTIL the economy recovers before you spend even more money we don't have.
This problem is so complex that No One Group can device a coorect plan. We need the intellegetual giants like Gietner and O'Bama as as peopel and poeples at the all levels of corporate amercia. We need the titans andme lower level experience and with businesss knowledge to lead us through the CRISIS!!!!
The Plan will go through many startss and starts!
I have read this column by David while sitting in Shanghai, China. I have just written an essay about what is happening in both China and the U.S. and much to my consternation how China is getting ir right and we are getting it wrong. From afar, one of my concerns has been the lynch mob mentality of going after AIG. I fear that we are going to do more long term harm to our country for the precise reason that David mentioned. Like them or not, be jealous of them or not, but we cannot scare away the major players in our capital market by threatening them with retroactive tax penalties for obtaining benefits that are legally theirs. This lynch mob mentality will scare people away from our capital markets and cause some of our best and the brightest in the future to think twice about careers in our capital sector.
David,you should try not to be such a brown noser to the Obama addministration.Do you really think its a good idea to spend trillions and trillions of dollars that we dont have.Obama will spend more money in two months, then Bush spent in eight years.
I don't think Timmy can pull this off. Like it was posted here already .. they call these TOXIC assets. And they are not referred to as that for no reason. Not many buyers will step up and more time will be wasted. I agree with Krugman. Nationalize the Banks. Let those with Toxic Assets go broke. The Bozos on Wall Street were sickening once again to-day in their exuberance. And more innocent suckers were sucked back into the market. I don't see this Rally going much farther. It's just a game for those irresponsible clowns.
Obama is always thinking a few steps ahead. THis plan is simply being put out there to justify a takeover of the banks in a few weeks (which is the correct thing to do). He is doing this so that he can play the 'we tried everything else' card.
Celeste:
– I'm confused, if Obama is for the Geithner plan, and you're for Obama, then how can you also be for Krugman's nationalization plan? Believe they're mutually exclusive.
– so if the Geithner plan will work because of greedy Americans, and Obama is behind the plan, does that make him in favor of greed? And if not, will he give his latest book deal money ( $500,000) to charity even though he's not gonna get a tax deduction for doing so?
– So why are those of us against national health dumb?Have you ever considered that you might be wrong ( and thus the dumb one)?
– What Obama " magic" should we not criticize- free condoms? mag/lev trains from Disneyland to Vegas? how about the largest deficit in the history of the world for the next TEN years? Also, maybe you could list his qualifications and accomplishments that tuened you on in the first place.
– As to criticizing BO, did you not criticize Bush? Bet you did. I remind you that only 53% elected him. The rest of us will continue to exercise our right to free speech until it gets taken away- our apologies.
The government, as The New York Times reported this morning, would lend "private investors" (quotes are mine) nearly 95 percent of the money for an investment.
I am so very middle class.
I have ten grand to invest. I bet other people do.
David,
Should we as citizens become a part of those "private investors"?
Do we leave it to somebody else to "invest" or do we put up?...
Are there enough of us to invest that ten grand... and make the difference?
We all screwed up. We weren't minding the store.
You break it, you buy it. We broke it. Either actively or passively.
Now we pony up to fix it.
And how this plan different from the Nick Leeson's the took down Barrings? Now, if we are lucky and it works, everyone may be happy (unless Frank, Dodd, Pelosi, Reid, Shumer go bananas and tax investors out of their mind retroactively). and what if it does not? Would Geitner go to jail? Frank? Pelosi?
Just imagine that cell .... for all this money could public at least have live streaming?
That's the only condition under which I agree to this Monopoly game.
As always, David Gergen is spot on. The events of last week (AIG rage and mob reactive punitive legislation) may very well indeed cause potential investors to stay away from buying these "toxic assets". Yes, the taxpayers have every right to be outraged by executive bonuses and the fact that Congress allowed a loophole to be slipped into the stimulus package, but rather than having members of Congress and the Administration jumping on the rage ship, they should be doing everything they can to calm the situation down instead of inflaming it. Especially since we the taxpayers do very much indeed need private investors to make the Administration's policies regarding the economic recovery work.
I think that what a lot of people don't understand is that "toxic assets" is bad debt. Real money has been spent that cannot be repaid. Someone is going to lose money. The banks cannot afford to sit on these assets until there value goes back up. If they have to wait to get their money back, they have no money to lend to other customers and get the credit flowing again. If we the taxpayers sit on these assets, we stand to profit if and only if the value does indeed eventually rise again and we then sell them. However, as another poster noted, this strategy has been tried by other countries and has never worked short term. So it would be in everyone's best interest to get the private investors on board and into this deal so the taxpayers aren't left holding the bag all by ourselves.
There are no exact parallels to the economic problems this administration is facing. Even the much-touted Swedish solution does not accurately mirror situations that prevail in present-day America.
While no one doubts the integrity and brilliance of Paul Krugman, no one can say that he has all the answers. Dr. Krugman may be a very highly regarded academic but he isn't known for his political smarts.
This is a problem too complex to be dissected in a classroom or in a dissertation. There were inputs from voluminous sources, many of which would be inaccessible to scholars like Krugman.
It is clear that America is willing to give the so-called "Geithner" plan a chance. While Geithner is taking center stage on this blueprint to rescue banks from their toxic assets, there have been inputs from minds as brilliant as Krugman. These would include eminent economic advisers such as Christie Romer, Paul Volcker and Larry Summers.
Whats toxic here is Obama,
Yes! I believe the plan will work. The purpose was to stabilize the economy. Besides, nobody else has brought forth a plan to fix it. Tim has done exactly what most folks including McCain has said. Now that he's done it; its consider a fluke, a ponzi scheme.
Therefore, I ask if not this plan what plan?
David, you should also read Summers responce on Krugman which states how wrong Krugman is in his assessment.
David quoting anything regarding this plan from The New York times is fundamentally wrogn since its been relealed that the NY Times articles were all written before thye actually got the plan and subsequently their critizm was unfounded.
The real voters was Wall Street and they voted 498 yes and 0 no. That works for me.
The markets have voted on the plan. The House Republicans have also voted. The latter's vote is predictable. They have decided to oppose every Obama administration initiative and to obstruct in anyway they can. Let America remember these days! I am quite happy at the House Republican position aka I hope Obama fails. Obama and Americas optimists will succeed and the Republicans will be confined to minority status for the next generation.
Geithner's plan is the best thing to do. It minimizes taxpayer risk overall because only the original TARP is at stake and guaranteed loans. 90% of people are paying back the mortgages that back these assets. That's why the banks have not written them off because they know some day they will get much of their value back. This plan is only trying to transfer risky investments that hedge fund managers are comfortable with and banks are not. These funds know how to manage and profit off risk and the government will profit and be paid back. Like you say the only thing that can hurt this program is if investors are frightened off by populist outrage.
You people has been complaining for lack of a plan from the Obama administration to solve the credit problems with the banks. Now, they
came up with a plan to try to solve the problem. Instead of given them chance to work, you people have already started shooting it down. Please give Obama and his administration a break
Eric Cantor prefers to dump the administration's plan and dust off a plan recommended by the Republicans last fall. If not we're going to take our toys and go home, he says. In the national election last November the Republicans lost ground in the Senate, they lost ground in the House, and they lost the Presidency by a margin W only dreamed of. Duh, will someone please tell Mr. Cantor about this startling turn of events!
Everyone is making comments on how little the percentage of bonus money was compared overall to the entire stimulus package. Where was that talk when the auto companies asked for the bailout (loan).