Rolling US Economy Into The Shitbin Thread

delong's point #2 there is what i used to think the obama strategy was -- wear down resistance to the idea of nationalization by exhausting other avenues first. but i'm not sure of that anymore. but hell i'm not sure of anything.

or, take office 30 years into voodoo economics plutocratic nightmare, gradually (takes longer than two months) tilt county back to normalcy over four year term

tim speaks
http://online.wsj.com/article/SB123776536222709061.html

http://www.nytimes.com/2009/03/23/business/economy/23toxic.html?hp

As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

The horror!

But - I don't understand how those those last two grafs connect with the first one. Compensation limits, disclosure, governance rules, etc are potential conditions of taxpayers owning a preponderance of shares in a company, i.e. owning it.

Government subsidies with which private funds can buy up troubled mortgages have nothing to do with that.

Does "90% tax" ring any bells, Tracer?

Yes, for companies that are almost entirely owned by the taxpayer there are compensation limits being sought, i.e. a 90% tax on bonuses. Just think of it as union-busting Don.

But with what justification would the govt demand these things of companies that simply take advantage of cheap govt loans to buy up bad mortgages? I don't get it.

Sigh.

The problem--one that I hinted at twice upstream--is that you have to give incentives for private money to get involved i.e. you have to mitigate the risk somehow. In this case, we are talking about massive public subsidization to do that. And so yes, our public ownership entitles us to make the rules.

What PE/HF firms do not want to happen is have the rules get changed downstream i.e. when management fees and bonuses are made public. Retroactive punitive legislative behavior is what alarms anyone managing an i-bank.

Is it starting to make sense yet? Private banking doesn't want to do business with the fed if the rules are going to get changed willy nilly because that raises risk.

I understand your point. But as I said before, the case of the "megafirm that collapsed due to greed/recklessness/fraud and now needs a public bailout and arrogantly refuses to even attempt to curb its outrageous bonus structures" is distinguishable from the case of the "private company that is working hand-in-hand with gov't to try and rejuvinate the economy by solving the bank's toxic asset crisis." In the former case, compensation limits make sense. In the latter case, they likely don't (unless there's abuse by the private entities in the process that also brings the economy to the brink of collapse). So I don't see a reasonable fear by private investors.

It's a reasonable fear--retroactive interference or governance--by private investors because their business models rely on current regulations, not ones that get dreamed up whenever pitchforks appear on The Mall.

The compensation limits are one thing, but things like disclosure rules frighten i-banks/HFs/PE firms to their core.

I really don't see why, if you're running a PE firm, you can't say to the government, "We'll help you out as long as you don't change the investment contract if you're unhappy with it."

What's the point of entering a contractual agreement if one party has the right to change the contract at will?

Or, more succinctly, where's the incentive to enter an agreement like that?

Don I completely agree and I'm still trying to work out where anyone in the govt has suggested that this is even a possibility with investors who participate in this "let's all buy the bad stuff together" plan.

The investors mentioned in the article think it's a possibility because they think they just saw it happen with the "90% tax". THAT'S MY POINT.

To wit, Treasury can get the whole thing set up as an agency and have rules in place, but how does an investor know whether or not Congress won't come in behind Treasury and change laws? That's the point those guys in the article were making.

The opposite situation -- a highly deregulated environment where private interests do as they please to maximize value -- produced the current situation, so there's risk on both ends. As between the two, I want a robust regulatory environment, notwitstanding the risk that the private sector may not partner with the gov't in Treasury's plan as a result. But, by the way, I think it's unlikely that this "fear" by the private sector is completely genuine.

And the ability to change contracts has always been the gov't right. It infects all types of business relationships, (n.1) but it doesn't scare off private-sector ventures.

(xp to Don)

_______________________________
(n.1) To give just one example, in an effort to crack down on Medicare fraud, the gov't moved to an auction system for durable-medical equipment providers who sought reimbursement from CMS. The auction was run last year, and it was shoddy: Private entities who were qualified were erroneously disqualified; Non-viable entities who should have been disqualified were not. Nevertheless, the gov't went forward, and awarded contracts to winning bidders. Just as those contract went effective -- and after the winning bidders spent money and allocated resources to fulfill those contracts -- Congress, recognizing the problems with the auction, scuttled the contracts and began reviewing the system (with a slate of concessions from the DME industry). The gov't was legally entitled to break those agreements, and I guarantee you, when the next auction is held, all the entities who grumbled about the way the first one was run will submit bids and hope feverishly that they're among the "winning bidders."

Don your point doesn't make sense. What incentive, or rationale, would the govt have for punishing investors who it has just coaxed into buying up trash assets?

With a place like AIG, which is now taxpayer-owned, it makes sense to open up the books and curb the excesses of these people. It's owned by the people, who are the only thing standing between AIG and total bankruptcy. This new plan doesn't involve the govt taking equity in anyone; so why would the govt be in any position to dictate these companies' governance and compensation?

I mean, that's a genuine question, I honestly don't get it. The linked NY Times article quotes exactly one "senior exec" who has these fears but doesn't explain why s/he has them, since his/her situation would be completely different from a bailed-out zombie firm. In fact the rest of the article contains quotes from ahnother exec and from two people on Obama's team who say - on the record - that firms who participate in the plan are obviously in a different category.

What incentive, or rationale, would the govt have for punishing investors who it has just coaxed into buying up trash assets?

It's not the short term that worries anyone. It's the long term, I assume. For example, let's say the toxic buyback is a roaring success, and management fees end up higher than anyone expected. You think Goldman wants to see a decrease in fees two years from now, simply because pols in DC thinks that Goldman is making too much money off of the program?

And yes--the government is entitled to legally break contracts (just as you are if you don't pay your mortgage.) But when the government breaks a contract or changes the rules retroactively, it reminds the private investor of the risk of doing business with the government. The government isn't taking equity in anyone--it's private money at risk, but the government essentially can retroactively control the profit margin.

I'd say right now that it looks like a really good deal for private investors--too good, in my opinion--and maybe it looks so good that at least one guy at an i-bank is wondering what the catch is.

Let me see if I have this right. 1) This asset-buying plan will be a roaring success; 2) the trash assets will come back up in value; 3) The currently on-life-support ibanks will reap big rewards; 4) So will the taxpayer; 5) The govt will then seize a portion of the ibanks' fees.

in that scenario, I'd amend #5 to read "the govt reserves the right at any time to retroactively change compensation either by contract or through punitive taxation"

i rly wish i didn't have to wait for planet money to break this down for me

I think the past few months have shown the govt's extreme reluctance to do anything of the kind, even with institutions that it now effectively owns, and even when the public is baying for it.

Oh really?

http://www.ritholtz.com/blog/2009/03/ben-was-so-right/

“Politicians acting in haste rarely act wisely, least of all when guided by rage” commented the Financial Times over the weekend. The paper calmly, but effectively, editorialized that to use “the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact with retroactive force…is Constitutionally dubious…and an abdication of responsibility.” Those FT guys really know how to use the King’s English, don’t they?

Sunday’s NY Times was not going to be outdone by their brethren across the pond. The headline in the paper was that the Obama Administration is going to call for increased oversight of executive pay at “all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation.” The other thing likely to be announced this week (and may already have been by the time you read this) is a three pronged approach to rid the financial system of toxic assets. It would encompass a: 1) an entity backed by the FDIC to buy and warehouse loans; 2) an expansion of the TALF to buy older asset backed paper and not just newly issued stuff; and 3) the long awaited private/public partnership to buy mortgage backed paper and other troubled assets on banks’ balance sheets.

Beyond the problem of how to price this stuff that we have been wrestling with since the idea was first formed, the other, and bigger issue, is who will step up from the private sector to play with the bully that changes the rules after the fact?

Don EVEN IF the govt imposes this tax on "retention bonuses" at AIG - which so far it has not - in part because "President Obama might be concerned about 'using the tax code to surgically punish a small group of people'" - we're talking apples and oranges. AIG is a company that the taxpayers own.

Ask someone at Goldman--a publicly-held company that is subject to the tax for participating in TARP-- how they feel about the 90% tax.

Personally, I don't think the 90% is going to get signed into law but that's not the point.

this discussion is going to rage all day long, I'm sure

http://www.ritholtz.com/blog/2009/03/tarp-part-ii/

In practice will be the question of to what extent will the private sector want to be a part of this because god forbid they make money what will the repercussions be and will the rules change, whether banks will want to sell to these new SIV’s and at WHAT PRICE and is this just an act of Houdini where we’re just shifting assets to the taxpayer who will have a 50% ownership rather than seeing an extinguishment or payoff of the debt which would happen without this program over time.

Hmm I didn't realize Goldman Sachs would also be getting their bonuses taken away.

I feel for them though. Really I do.

I mean it's not as if they've been as incompetent as national broadcast journalists.

Krugman tearing the Savior a new one today...

We need a march on Washington BADLY

Personally, I don't think the 90% is going to get signed into law but that's not the point.

yeah. i don't think anyone should underestimate the effect that last week's little rage-fest had on wall street types. i think it freaked them the fuck out. nobody alive has seen anything like that, much less the 30- and 40-somethings in the thick of the action. in the long run, i think (hope) it could have some salutary effects on how they do business -- for a while, a lot of them will have in the back of their minds that they don't want to end up as the next aig. but in the short run, it will also inevitably have the effect of making any of them really cautious about how they deal with any government-subsidized program. it's just a natural reaction.

xpost:

what would be the marching slogans, morbz? "hey hey ho ho timothy geithner's gotta go"? "what do we want? nationalization! when we want it? now!" "no blood for collateralized debt obligations!" not very catchy.

"no blood for collateralized debt obligations!" not very catchy.

bite your tongue!

I think the larger issue, of which the execs' current paranoia is a consequence, is that places like Goldman make decisions largely without input from shareholders. Traditionally they were private firms and they continue to be run like private firms, even though they are not anymore. When outraged taxpayers become the shareholders the disconnect is revealed plainly, but the issue remains even for firms whose shareholders are not the government.

there was a surge of corporate-democracy activism in the wake of enron et al, which i assume is still going on but you don't hear much about it these days. it's been superseded by events, i guess. but it's still a major issue for the long term. shareholder power is potentially important to holding multinationals accountable, but at the moment it's a pretty toothless tiger.

what would be the marching slogans, morbz? "hey hey ho ho timothy geithner's gotta go"? "what do we want? nationalization! when we want it? now!" "no blood for collateralized debt obligations!" not very catchy.

― paper plans (tipsy mothra), Monday, March 23, 2009 10:13 AM (1 hour ago) Bookmark Suggest

How about "No taxation without representation"? If anything the past 6 months have driven the point home that the government is going to spend their money in every wrong way possible, many times over, and with much public outcry. "Of the people, for the people" requires a larger and larger imagination as time goes on.

"their money" = "our money"

the outside chance of a global economic collapse is what's keeping the Obama Admin. from taking the boldest type of action with regard to the banks (e.g., nationalization)

It was said a while back, up there, but I fully agree with this statement and deplore the result. The chance must be taken, if only because no other course of action will cure the illness.

The chances of killing the economy beyond repair are quite vanishingly small. It is the fear of it that looms large. This fear is being taken advantage of by those who would stand to gain most from it, the executives at the banks who made the worst decisions in order to enrich themselves.

I never thought I would march in the streets demanding a government takeover of banks, but life is strange sometimes.

How banks and HFs will scam the TALF
http://www.businessinsider.com/how-banks-and-hedge-funds-will-scam-the-talf-2009-3

Aimless, have you read Brad DeLong's assessment of Treasury's plan? He likes it. I tried to digest it, but I'm just not getting parts of it. He also posted a specific response to Krugman.

like timid inaction doesn't up the chance of a global economic collapse??

that business insider post makes the plan sound like an expensive money-laundering scheme.

I bet you'd all like to read Matt Taibbi in RS?

http://www.rollingstone.com/politics/story/26793903/the_big_takeover

In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers....

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

http://www.federalreserve.gov/oig/

Consistent with the Inspector General Act of 1978 (IG Act), as amended, the Office of Inspector General (OIG) of the Board of Governors of the Federal Reserve System (Board) will
conduct and supervise independent and objective audits, investigations, inspections, evaluations, and other reviews of Board programs and operations;

promote economy, efficiency, and effectiveness within Board programs and operations;

prevent and detect fraud, waste, and mismanagement in the Board's programs and operations;

review existing and proposed legislation relating to the Board's programs and operations and make recommendations regarding possible improvements in such programs and operations; and

keep the Chairman and Congress fully and currently informed of problems.
Congress has also mandated additional responsibilities that have a significant impact on our resources and workloads. For example, the Federal Deposit Insurance Act (as amended) requires the Board's OIG to review Board supervision of failed financial institutions that result in a material loss to the bank insurance funds and produce, within six months of the loss, a report that includes possible suggestions for improvement in the Board's banking supervision practices. In the information technology arena, the Federal Information Security Management Act of 2002 (FISMA) provides a comprehensive framework for ensuring the effectiveness of security controls over information resources that support federal operations and assets. Consistent with FISMA requirements, we perform an annual independent evaluation of the Board's information security program and practices to include evaluating the effectiveness of security controls and techniques for selected information systems.

i just beat Matt Tabbi--do i get to work at RS

hey look the guy that Matt Tabbi quote re: The Federal Reserve being audited works for. . . Ron Paul. Really makes you think

"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting notices every six months or so that they're being renewed. They just sort of quietly announce it."

i didnt realize youve taken on gabbneb & ethan's old work

work is supposed to be hard--that was too easy

i think youve lived in that Company Town too long

did you read what i posted--do you realize the Fed Reserve has an inspector general? please answer in the form of a nickname.

looks like legalese to me, zzzzzzzzzzzzz