Follow this link to the resignation letter of Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.
As Paul Harvey used to say, “And now for the rest of the story.” Of course I cannot attest to the validity of this story any more than I could have attested to the validity of any of Paul Harvey’s stories. It is, however, food for thought.
Follow this link to find out how to submit your questions about the economy to President Obama.
If you have any doubts about the Presiden’t plans, now is the time to ask your questions.
The online town hall will be at 11:30 AM Eastern, the voting will close at 9:30 AM.
On 23 March 2009, Treasury Secretary Geithner introduced his Public-Private Investment Program (PPIP) for helping to cleanse ‘toxic assets’ from banks’ balance sheets. A bank (with FDIC approval) may auction off troubled mortgages to ‘Public-Private Investment Funds’ (PPIF). The PPIF’s are financed as follows: 85% through non-recourse debt from FDIC, 7.5% through equity from US Treasury, and 7.5% through equity from private investors. Under this structure, the most that private investors can lose is all of their equity investment but if there is net gain on the ultimate disposition of the troubled mortgages, the private investors share the net gain equally with Treasury.
Two decades ago, a famous former professor of mine (with one foot in academe and the other on Wall Street) said, ‘There is no regulation of financial markets that a smart investor cannot get around.’
I was reminded of this professor when I read Karl Denninger’s Open letter To The FDIC Ombudsman on the ‘Market Ticker’ blog. He poses a case of a bank which is carrying a mortgage at 80% of face value but could only sell it in the open market for 30% of face value. If the bank sold the mortgage at 30% of face value, it would have to recognize the loss in book value and would weaken its equity for regulatory purposes. Suppose, says Denninger, that the bank offers this mortgage for auction under PPIP and then bids to buy its own mortgage for 75% of face value (clearly winning the auction). The hit to regulatory equity is minimal. In the event that the mortgage subsequently becomes worthless, all the bank then loses is 7.5% of the bid price on the mortgage (i.e., its equity investment in the PPIF); FDIC and Treasury absorb the remaining loss of 92.5% of the bid price.
I think we can safely assume that the FDIC will disallow such a transaction, especially after Denninger’s warning letter.
However, what if banks implicitly collude to buy each other’s troubled assets under PPIP? I can see my old professor smiling.
On March 23, Charlie Rose had a show discussing the pros and cons of the Obama bank rescue plan.
Follow this link to the video of the first half of the show.
Follow this link to the video of the second half of the show.
The first half of the show was with Andrew Ross Sorkin, Paul Krugman and Joe Nocera. Sorkin and Nocera are mainly journalists. Krugman is a Nobel Prize winning economist Professor at Princeton University and also a columnist for the New York Times.
The second half of the show was with Thomas F. Steyer – a San Francisco based founder of Faralon Capital Management whose clients are foundations and college endowment funds, and Daniel Alpert – Managing Director of Westwood Capital an investment bank in New York.
I happened to see the second half of the show live before I was able to view the video here of the first half.
Half way through watching the presentation by Krugman in the first half, I began to think that he really was ignoring a lot of the details of the Obama plan. A lot of what Krugman said was refuted in the second half of the show by representatives of the types of investors that Obama’s plan hopes to entice into working this issue out.
The second half of the show explained why the Resolution Trust model for rescuing the Savings and Loans won’t quite work in this situation. Most of the S & L banks were fairly small and the problem was small enough to be manageable. The current crisis involves some of the largest financial institutions around.
Contrary to Krugman’s assertions, the Obama plan is not to pretend that all banks can be made solvent again. As explained in the second half, the idea is to make as many of the banks solvent again as is
possible. Then whatever banks are left that must be put into receivership represent a small enough bundle that they can be handled like the S & L problem.
Even Andrew Sorkin fails to see the substantial difference between the Krugman plan and the Obama plan. To use some leverage to accomplish with your money more than you could with 100% usage of cash is not a trivial difference and it is not smoke and mirrors.
Krugman does not seem to understand how the investment business operates. He talks about having investors pay more for the assets than they are worth as if knowing what an asset is worth is a trivially
obvious thing to know. As explained in the second half of the show, the worth of an asset to an investor crucially depends on the financing arrangements to buy the assets. If the asset can be financed at a low interest rate, then you can afford to spend more for the asset and still make a profit. Anybody who has been able to buy a more expensive house because of lower fixed rates on the mortgage interest knows that this is true.
Follow this link to a video of the complete news conference that President Obama held on March 24, 2009.
The final point that the President made is critical to keep in mind.
Like a giant ocean liner, turning a country around is not easy. When the captain of the ocean liner wants to reverse course by having the helmsman turn the wheel, he doesn’t get discouraged if the ship has not turned around in a few minutes. He knows that it takes a long time to turn around. He keeps an eye on the change in course. As long as the course is changing in the desired manner, he keeps at it.
After the captain has made the initial steering correction, the ship stays pretty close to the original course for a very long time. However, the change in course is detectable to the officers in charge by reading the GPS instruments even if the passengers are unable to tell that there has been a change.
Do not look for the end results to appear tomorrow on the economy. Do look for signs that the economy’s course is changing. Try to establish some reasonable thresholds that you will use to tell if reasonable progress is not being made.
I bet that long before your thresholds are violated, the President will already have taken steps to make needed corrections. If he hasn’t done so, then he will deserve all the criticism that you can heap upon him. Even so, it would be better to suggest what he should do than to simply chastise him for what he hasn’t done.