The New York Times in two opinion pieces seems to have taken a decidedly negative tone towards Treasury secretary Tim Geithner's plan to take toxic assets off the banks' balance sheets.
Economist and Nobel Laureate Paul Krugman referred to it as a cash for trash plan that recycle's ideas from the Bush administration. Mr. Krugman was an outspoken opponent of President Bush and has been a big Obama supporter.
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, he wrote, describing the goal of the plan as being the use of taxpayer funds to drive the prices of bad assets up to (so-called) 'fair' levels.
One of the main problems with the administration's proposals is that they provide 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.
The Times editors see the assumption on the part of the administration that values on the troubled assets will eventually recover as a major flaw of the policy.
There is not much, beyond faith, to believe those assumptions will pan out, the editorial said, adding that even if there were, it is hard to see how the plan is the best way to go.
Because of the fact that the government is putting up the vast bulk of the money to make the purchases and is lending to private investors for the balance, even a modest decline in the value of the purchased assets would endanger repayment of the loans.
The editors see additional problems with the plan even if values do increase:
Successful sales will rid banks of some of their toxic assets, but not necessarily all or even most of them. To restore the banks to health, the sums expended would have to be enough to balance the banks’ assets and liabilities, and provide a reasonable cushion to resume lending and absorb future losses. No one knows with any certainty how much that is, though some estimates put it north of $2 trillion, much more than what the administration is contemplating.
And even if you assume that the sums put up by the government are enough to cleanse the banks entirely, restoring the banks to health by throwing money at them — even with a sheen of private capital — would not be fair. It would be one big transfer of wealth from the government to bank investors. That would be better than an apocalyptic crash, but it is a near complete socialization of losses, with little value flowing to taxpayers.
In other banking crises, both in this country and abroad, resolution of a system wide problem has sooner or later involved separating solvent banks from insolvent banks. In the end, there is no getting around firing the executives at failing banks, acknowledging the losses, wiping out the shareholders and then deciding how the government can best restructure the institutions. The Obama administration has yet to explain why its approach is better than that.
Meanwhile, fund managers and analysts said the Public-Private Investment Program (PPIP) may generate returns as high as 25%, a figure that could drive demand, and prices, higher.
Hedge funds and other asset managers have an advantage because of the government financing and the FDIC backstop. Investors will be able to access non-recourse, low-interest loans for their share of the cost to purchase the bank's assets, estimated in some cases to be as little as 3%.
Specific financing terms, including the haircut, duration of loans and other details have yet to be determined, the Treasury said in its statement. However, recent loans through the Fed's new Troubled Asset-Backed Securities Lending Facility (TALF) have been provided for 2.52% (fixed) or 1.53% (floating).