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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: ChinuSFO who wrote (52801)	3/30/2009 10:42:39 PM
From: stockman_scott	Respond to of 149317

Things Not to Worry About (Geithner Plan Edition) newyorker.com by James Surowiecki The Financial Times’s Martin Wolf (via Matt Yglesias) says that the Geithner Plan — or, as Wolf tellingly calls it, “this scheme”—is going to make the banking crisis worse, by making government involvement in the financial system more unpopular with voters. Why? If this scheme works, a number of the fund managers are going to make vast returns. I fear this is going to convince ordinary Americans that their government is a racket run for the benefit of Wall Street. Now imagine what happens if, after “stress tests” of the country’s biggest banks are completed, the government concludes - surprise, surprise! - that it needs to provide more capital. How will it persuade Congress to pay up? Of all the myriad objections to the Geithner plan, this one (which I’ve seen floated in a couple of other places as well) strikes me as by far the least convincing. In the first place, it’s highly unlikely that any fund manager is going to make “vast returns” in the short run by buying toxic assets. The whole point of these assets is that there is effectively no secondary market on which to trade them—the way you’re going to make money investing in them is by buying them at a discount to their true value and holding them over time, so that you can reap the cash flows they generate. I wouldn’t be surprised if people did get rich buying these assets, because I think investors’ risk aversion has likely driven many of them below their true value. But it’ll likely be years before any fortunes are made from these assets—long after Congress will have had to decide whether or not to put more money into the banking system. There is, to be fair, one way that fortunes could be made in the short run on these assets, which is if the Geithner plan works exactly as it’s supposed to, with the initial purchases of toxic assets encouraging other investors to take a risk on buying them, sparking in turn the emergence of a genuinely liquid secondary market where these assets could be bought and sold. I have to say that doesn’t seem likely (I’d settle for people buying the assets and holding them to maturity), but if it happens, it’s plausible that someone who bought a pool of assets at 45 might be able to sell it at 60 six months later, which would be a hefty profit at 6 to 1 leverage. But if that happens, no one’s going to be complaining, because it’ll mean that, to a large extent, the toxic-asset problem will have been mitigated and the banking system will be considerably healthier than it is today. It’s also true that if private investors in these partnerships make “vast fortunes,” then the Treasury Department is going to do very well in these partnerships too, since it’s splitting the returns with the private investors 50-50. Now, one can imagine a scenario in which a few of these partnerships do very well while most of them lose money, leaving the Treasury with losses on the whole. Nonetheless, any hedge-fund manager who makes a ton of money investing in these assets will also make the Treasury a ton of money, which will mute any backlash. There are a lot of things about the Geithner Plan that are worth thinking hard about. This just isn’t one of them.