Total Hypocrisy on Christine O'Donnell

Remember these quotes...

tax cheat Tim Geithner

...

turbo tax Tim Geithner

Those are two common things that Sean Hannity says about the Treasury Secretary, Tim Geithner. Remember, Geithner didn't pay the social security tax on his income at the IMF. The same Sean Hannity is now a chief defender and cheerleader for Christine O'Donnell. Isn't this the same Christine O'Donnell that is behind on her taxes?

In March, the IRS initiated an audit and placed a lien against her for $11,744.59 in taxes and penalties from the 2005 tax year.

When Karl Rove famously attempted to bring this up, Sean Hannity fiercely defended O'Donnell and said she explained all her tax troubles to him (Hannity) and her answers were fine. Of course, Geithner also explained his own tax problems. That hasn't stopped Hannity from attacking him mercilessly on the issue.

Meanwhile, the same liberals that fiercely dismissed the tax issues of Geithner, Rangel and other Obama associates are now saying things like this,

how can someone who can't handle their own finances be able to handle the nation's finances?

That sounds an awful lot like a conservative argument.

The reality is that everyone is an opportunist on this issue. If you are O'Donnell's opponent, her personal financial problems are a serious issue even though similar issues are dismissed when done by political allies. If you are like Sean Hannity, the same problems that mean you attack Tim Geithner mercilessly mean you dismiss them with Christine O'Donnell.

Geithner Still in the Hot Seat

With the Massachusetts election, Haiti, and health care reform all taking up oxygen in the news cycle, there is a very important story that is getting little reportage. That's the events surrounding AIG's lack of disclosure that they would use bailout money to pay Goldman Sachs 100 cents on the dollar on some of their counter agreements. Knee deep in this are both Tim Geithner, then head of the New Yok Fed and current Fed Chairman Ben Bernanke. Bernanke spoke about it today.

Federal Reserve Chairman Ben S. Bernanke invited congressional auditors to conduct a “full review” of the central bank’s aid to American International Group Inc. after lawmakers accused the Fed of trying to conceal information about the bailout.

“The Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG,” Bernanke said today in a letter to Gene Dodaro, acting head of the Government Accountability Office, that was released by the Fed.

Some of this little known scandal is wrapped in boring financial paperwork and filings. Others are very easy to understand. AIG was required by law to file a series of disclosures effectively about what it was going to do with tax payer money. It never disclosed the fact that some of the money wouldn't merely go to paying back debts owed based on positions it took against Goldman Sachs but that it would pay Goldman Sachs 100 cents on the dollar. Effectively, we would be giving AIG a bailout then so that Goldman Sachs could be paid back for risky positions that it took.

The reason that AIG didn't make this filing is because it was encouraged not to by then New York Fed Chairman Tim Geithner. It may or may not be illegal but it absolutely looks awful. So far, Geithner has remained relatively quiet about the story. So far, the story has been relatively quiet. Once the news cycle clears, watch for this story to take a front seat. Then, both Bernanke and Geithner will have a lot to answer for.

Geithner in the Crosshairs

Bloomberg has broken a story that puts Secretary Geithner in the crosshairs.

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

This story is technical but here's a summary. Prior to the initial time that AIG borrowed money from the taxpayers, they worked closely with the Federal Reserve Bank in New York. As you might imagine, there's all sorts of paperwork that must be filed before such a transaction can be finished. One of those pieces of paperwork, according to Bloomberg, was going to disclose that AIG would use its government funds to pay back Goldman Sachs 100 cents on the dollar for everything Goldman Sachs was owed in credit default swaps transactions. That, of course, wasn't the only thing but that was one thing.

Everyone can imagine how toxic such a disclosure would be. So, again according to Bloomberg (in emails they received), Geithner's people advised AIG to remove that disclosure.

Now, legally, there's a very important distinction. If Geithner made the Treasury aware, he's all right legally. If this was hidden from Treasury, he faces criminal problems. From a publicity level, it merely comes down to how much this story is covered. This looks horrible and if there's enough publicity, Geithner is through.

Tim Geithner on the Brink

One thing is for sure, Tim Geithner would win the award for most embattled Presidential aide or cabinet member after ten months. Even before he was confirmed, Geithner faced controversy when it was revealed that he didn't pay his taxes. Since then, a series of embarrassing public appearances and vague explanations have caused Geithner to lose the confidence of many.

Tim Geithner rolled out the PPIP plan. That's if you want to call it a rollout. Instead, it was more of a sketch. The rollout was so embarrassing that the markets were spooked and dropped about 300 points that day. Geithner also once suggested that the dollar didn't need to remain the world's currency and that caused the dollar to tank following that announcement. (the Treasury Secretary is on our currency and so it's important, to say the least, for that same individual to contribute to its strength not weakness) He later rolled out the same PPIP in much greater detail and that lead to a rise in the market on that day. (of course the same PPIP program was later scaled back significantly)

The heat was taken off Geithner for a while, though he's become the butt of ridicule for conservatives since the revelation that he didn't pay his taxes. Meanwhile, many liberals are non too happy with Geithner either. He's seen as far too close with Wall Street by liberals and they were hoping for much more populist policies.

This week a lot of these tensions bubbled back to the surface. The bubbled up following revelations of Treasury IG Neal Barofsky that Geithner failed to negotiate a good deal for the tax payers in the AIG deal while President of the New York Federal Reserve.

Of course, while this was revealed this past week, all of this occurred in 2008. The time to discuss it was during his confirmation. Had this come to light then, along with tax revelations, it's unlikely that he would have made it through. Still, during te course of this week, Democrat Peter Defazio of Oregon and Republicans lead by Kevin Brady of Texas called on Geithner to resign.

Now, it's important that Geithner hasn't done anything recently to cause anyone to ask for his resignation. That can be viewed two ways. On the one hand, you could call it nitpicking. On the other hand, you could call it a lack of confidence that has been brought to the surface. One thing is for certain. Geithner's public presentation doesn't create a sense of security. That doesn't create a sense of comfort in his stewardship of the economy.

He's fumbled a series of Treasury tasks. More than that, there's a growing sense that the Obama administration doesn't know what it's doing on the economy. Our deficit will be about $1.5 trillion this year. Unemployment may reach 11% and beyond. There doesn't seem to be any end in sight, nor is there a sense that they can fix this.

On top of all this, Geithner, and Obama for that matter, continue to blame Bush. That's what happened in Geithner's exchange with Brady.

There's no worse leadership than blaming others. That's been the M.O. of the Obama administration. Whenever they were challenged on any of their misdeeds: massive deficits, massive unemployment, etc., they blame Bush. The half life on that ended months ago and they would be wise to put an end to it. Geithner wins no points by blaming his problems on the previous administration. The massive deficit is entirely his administration's not Bush's. It was his administration that promised that unemployment wouldn't reach above 8% with the stimulus, not Bush. These are the things that are making people jittery, and Geithner is doing nothing to relieve the jitters by blaming Bush.

Obama's Friday Night Doc Drop

This was announced by the Obama administration last evening.

President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

Obama had until Sept. 17 -- next week -- to accept, reject or modify a U.S. International Trade Commission ruling that a rising tide of Chinese tires into the U.S. hurts American producers. A powerful union, United Steelworkers, blames the increase for the loss of thousands of American jobs.

I immediately had two thoughts. First, I thought about history. In the early 1930's, we had an act called Smoot/Hawley. This was a sweeping bill that provided tariffs and other protectionist policies on all sorts of goods and services. Smoot/Hawley sparked a trade way and it contributed greatly toward turning a recession into a depression.

President Obama's tariffs are much more limited. They are limited strictly to tires. Still, the Chinese are not happy. Trade wars don't have to start with a sweeping piece of legislation. You can expect protectionist retaliation from China. Our companies, in some industry, will see the price of their goods get whacked with tariffs on their product from China. From there, who knows what can happen.

During periods of economic contraction, and frankly always, the last thing you want to do is stunt trade. All companies need access to all markets now more than ever. Now, Chinese tire companies don't have as much access to our markets. That makes the price of tires more expensive. China will now protect those companies with a retaliatory tariff and our companies will have less access to China. That will stunt growth all over the world and create upward inflationary pressure.

This move makes no economic sense. It's strictly political. Unions control the tire makers and they've been complaining that cheap tires from China are causing them jobs. This is yet another nod to the unions from the Obama administration.

More than that, we count on China to finance our massive deficits and debts. Is ticking off our biggest creditor really the wisest geopolitical move? China is already weary of buying up our bonds. Now, the Obama administration has just given them another reason not to buy our bonds. At the same time, Secretary Geithner is assuring the Chinese that our debt is safe, we are telling them our markets are not welcome to them. How exactly does that work?

Some Thoughts On Geithner's Request to Raise the Debt Ceiling

There's a story that has received way too little attention over the last couple days.

Although the US debt ceiling currently stands at $12.1 trillion, the ceiling could be shattered by October as the national debt is rapidly approaching $12 trillion. Should the national debt be allowed to grow without limit?

Tim Iacono from The Mess That Greenspan Made discusses this.In a letter to Congress yesterday, Treasury Secretary Timothy Geithner urged elected officials to raise the $12.1 trillion debt ceiling since, according to current projections, that limit may be reached as soon as mid-October

.



Now, let's break this down. Our current total debt is about $11.5 trillion. There was recently a report that the deficit just for the month of July that was about $180 billion. S, at that pace, we'll run up against the debt ceiling in the next couple months. The limit was last raised in February when the stimulus passed.



Now, what we have is not only incompetence but political nonsense all around. First, we've had this dubious "debt limit" for decades and each and everytime we got near it, it was raised. What's the point of a debt limit, if it's just going to be raised every time we near it.



Second, the administration is coming to Congress with the financial gun in hand. If the debt limit isn't raised, we will literally default on our debts. The Congress has no choice but to raise the debt limit. Meanwhile, the administration has gone on a spending spree for six months and suddenly realized that all this spending is threatening the debt limit. After spending $180 billion more than they took in in July, the administration suddenly realizes that soon they will spend so much that they will reach the debt limit.



Just think about that for a minute. They passed a stimulus, an omnibus spending bill, unveiled their budget, cap and trade, and health care, and now they realize that all of this spending might not be enough.



Furthermore, Geithner claims that raising the debt limit will be

critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations

In a sense that's true. That's because without raising the debt limit, we will simply default. On the other hand, what major creditors, like China, are really afraid of is the out of control spending that has caused us in six months to need to raise the debt limit again. This dance needs to stop. Congress sets a debt limit as if that's supposed to stop the government from out of control spending. The government spending with no control. Then, when there's no choice but to raise it, those in power come to the Congress to ask, but really to demand, that the debt limit be raised yet again.

The PPIP and My Favorite Latin Phrase

Back in April, the Department of Treasury released this statement about the criteria they were looking for in determining companies that would be eligible to compete to be bidders in the private public investment partnership. (PPIP)

The Treasury Department today announced the receipt of more than 100 unique
applications from potential fund managers interested in participating in the Legacy Securities portion of the Public Private Investment Program (PPIP). A variety of institutions applied, including traditional fixed income, real estate, and alternative asset managers.

Successful applicants must demonstrate a capacity to raise private capital and manage funds in a manner consistent with Treasury's goal of protecting taxpayers. Treasury will also evaluate the applicant's depth of experience investing in eligible assets. Finally, the applicant must be headquartered in the United States.

The PPIP is the program that Treasury Department created to try and remove the so called "toxic assets" from the books of the banks. As the readers can read, the Treasury Department had plenty of interest in private firms wanting to partner up with the government in order to buy these toxic assets currently held by banks. Furthemore, the criteria the Treasury used implies that companies chosen would be of the highest financial shape.

Here is the statement listing the companies chosen. This PPIP was always a dubious program. PPIP attempted to try and maximize the dollar amount that companies would pay for these "toxic assets". In so doing, they gave a very good deal for any company chosen to be a bidder. The companies would only have to come up with one twelfth of the money. The rest would be loaned by the government. Furthermore, the government would forgive the loan if the investment turned into a loss. As such, any company participating in the auction of these assets, from the buying side, saw plenty of potential upside with little downside.

It should surprise no one that the Department of Treasury received an overwhelming amount of applications. There's more. Initially, the program was supposed to be $1 trillion. Now, it's only $30 billion. At $1 trillion, it was frightening. At $30 billion, it's worthless, at least to the overall economy. After all, it isn't as though we are going to see much difference in lending by removing $30 billion in toxic assets. Estimates put the total toxic assets as much as $5 trillion.

So, why have a PPIP program at all? Well, one of the companies chosen for this program is GE Capital. Wait a minute. GE Capital was itself the recent recipient of a bailout. If GE Capital is the recent recipient of its own bailout is it really one of the ten best companies that can "demonstrate the ability to raise private capital" and "manage these assets in a manner consistent with the goal of the Treasury to protect the tax payer". If they could easily raise private capital, they wouldn't have needed a bailout not but two months ago. If their fund management skills were congruent with protecting the tax payer, THEY WOULDN'T HAVE NEEDED A BAILOUT.

Well, of course, GE Capital just happens to be owned by GE. GE also owns NBC, MSNBC, and CNBC, the three networks that have been the most overwhelmingly pro Obama. So, what do we have? We have a program so scaled down that everyone should question why we even bother moving forward with it. One of the companies chosen appears terribly dubious and not in line with the standards the Treasury is supposed to maintain. That company just happens to be owned by the same company that has provided the President with his most favorable coverage. Resp Ipsa Loquitor. (the facts speak for themselves)

The New and Improved PPIP Is Ready to Launch

It received much fanfare, speculation and criticism when it was first introduced both in February and in March. Now, the Private Public Investment Program (PPIP) is about set to launch. Secretary Geithner first talked about this in February. When he made his initial speech on the matter, he was very vague and general. The market proceeded to plunge four hundred points in the aftermath. Secretary Geithner came back in March with a much more detailed plan and the market responded more favorably. The plan is extremely complicated and it's ultimately unclear if it will work. It has also since gone through a major rework. The PPIP is the Treasury's plan to try and get so called "toxic assets" off the books of banks. Removing these so called "toxic assets" (very poorly valued Mortgage backed securities for instance) was one of the center pieces of the administration's economic recovery. It would allow for an auction among selected hedge funds and other private financial firms to buy these "toxic assets. The private firms would put up some of their own money and the federal government would loan the rest. (as such the public private investment) Now, it's just about ready to launch.

The PPIP has gone through a long gestation process, interviewing many prospective investors and scaling back its scope, which at one point was hailed as a $1 trillion endeavor. It now looks to do business worth around $50 billion.

Markets initially rallied when Treasury Secretary Timothy Geithner announced back in March, a two-pronged plan to offer government financing to lure investors into buying bad loans and toxic securities from banks.

Originally, the program was supposed to be worth near one trillion dollars. Some estimates put "toxic assets" at near five trillion dollars. Clearly, what we have now won't resolve much of anything. I can only hope and assume that the Treasury has decided to roll it out in a small way to see how it works. If so, that might be wise. This plan is terribly complicated and rolling it out all at once could spell disaster. Still, given the enormous amount of toxic assets banks hold, it's easy to see just how difficult this task will be given they are only rolling out $50 billion for now.

What's much more curious is the list of hedge funds involved in the PPIP. There are reported to be nine and those nine includes GE Capital. It's frankly nothing short of uncanny how often GE, and its subsidiaries, are on the receiving end of a favorable Obama program. It's no secret that both MSNBC, CNBC, and NBC, all GE affiliates, have given President Obama very favorable coverage. Now, we have another example of GE receiving a favorable business deal from the administration.

In April, Bill O'Reilly featured this Talking Points Memo about a GE subsidiary that would stand to benefit handsomely from cap and trade.



Meanwhile, after working behind the scenes, GE was able to convince the Obama administration to change the guidelines of TARP and TALF in order to qualify for bailout funds.

At the same time, GE has avoided many of the restrictions facing other
financial giants getting help from the government.

The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE. As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP.

GE qualified as a bank merely because they own two small banks in Utah. Of course, it is the very same GE Capital that was the recipient of the bailout.

This of course brings up another issue. Why was GE Capital chosen as one of the hedge funds to participate in the program? Aren't we only supposed to be dealing with hedge funds that are healthy? More than that, if GE Capital received a bailout, then wouldn't it stand to reason that they would be using government funds to buy these toxic assets. Wouldn't that remove the "private" from the public private partnership. Here's how the Treasury Department describes the sort of company it wants in the partnership.

The Treasury Department today announced the receipt of more than 100 unique applications from potential fund managers interested in participating in the Legacy Securities portion of the Public Private Investment Program (PPIP). A variety of institutions applied, including traditional fixed income, real estate, and alternative asset managers.

Successful applicants must demonstrate a capacity to raise private capital and manage funds in a manner consistent with Treasury's goal of protecting taxpayers. Treasury will also evaluate the applicant's depth of experience investing in eligible assets. Finally, the applicant must be headquartered in the United States.

Now, given that GE Capital needed bailout money, wouldn't that mean that both their ability to raise PRIVATE capital and their ability to manage funds would be suspect?

Just think about this for a minute. Here's how the PPIP is supposed to work. The private companies would put up only one twelfth of the money. The rest would be loaned from the government. If the investment ultimately lost money, the loans would be forgiven. Any profits would be shared by the private firm and the government. That's a pretty sweet deal for any firm chosen to participate. It's even sweeter when said firm recently received a government bailout. It sounds as though GE Capital will essentially be allowed to buy up toxic assets with no risk and all government money. (I have emailed GE for comment. So far I haven't received a response. I will update if one comes. The Department of Treasury says they will soon release their guidelines for choosing companies to participate in PPIP and have no comment until then)

Rushing to Radicalize

I've noticed a pattern in the manner in which the president frames each and every one of his policies. No matter the policy proposal, ultimately, it must get done immediately. That's what we heard in the debate over the stimulus. It was passed at lightning speed because, presumably, our economy would crumble without it. Since then, we've spent about one tenth of the money allocated so far. It appears we needed to pass it right away just not implement it all that quickly.Now, we have a similar call on health care. The president has all but demanded that health care get passed by August. Here's how the president characterized it earlier in the month.

The status quo is broken. We cannot continue this way," Obama said in his weekly address. "If we do nothing, everyone's health care will be put in jeopardy."

The president wants a health reform bill that covers all Americans on his desk by August, reaching for a goal that has eluded presidents for decades -- in a single summer.With cap and trade, the president has indicated he'd like that to be on his desk by October.

Now, the administration is encouraging the same kind of speed for their financial regulatory reform.

U.S. Treasury Secretary Tim Geithner urged Congress to pass the Obama administration's regulation reform proposals quickly today. Testifying in front of the U.S. Senate Banking Committee, Geithner said changes were needed to rebuild confidence in the U.S. financial system. Debate over the plan and lobbying efforts are expected to occupy Congress for the next several months.

If you've ever been part of your fair share of business deals, you have come across your fair share of folks that try and rush you into decisions. Now, it's a simple matter of salesmanship to create urgency in any business transaction. After all, if you never create any reason to buy now, the buyer will never decide.

At the same time, you know there is a huckster when they dismiss reasonable concerns in order to create urgency. That's what we have here with the president. The president is dismissing reasonable concerns: the enormous power of the fed, the gateway from the government option to single payer, the hidden tax of cap and trade, by creating a sense of urgency. With each of these pieces of legislation, the president eschews the deliberate debate process that is supposed to happen in the legislature in favor of speed meant for emergencies.

How many emergencies do we have? It seems that President Obama's entire agenda is a response to emergencies. What would happen if health care reform passed at the end of 2010 as supposed to this summer? What would happen if energy reform passed at the same time? Would the sky really fall if we actually allowed the legilative process to move along in the speed it was intended? There is a fine line between someone creating a sense of urgency and someone dismissing legitimate concerns using a sense of urgency. The latter is a huckster and that's the president's M.O. in all these debates.

Assessing Obama's New Regulatory Framework

In an oped today in the Washington Post, Obama's two chief economic advisors laid out the principles for the administration's new regulatory framework. There are five principles.

1) More focus on systemic risk

The administration believes that not enough care was put toward making sure that companies that posed a so called systemic risk were both fully capitalized and safe in times of systemic risk. The administration will thus propose that bigger firms will have to carry more capital and they will make the Federal Reserve the new systemic risk manager.

The second idea is a horrible idea. The Federal Reserve is far too powerful as it and the administration now wants to give that organization even more powerful. I think controlling the world's money supply is plenty power enough. I think being in charge of banking regulation is enough power along with controlling the world's money supply. To give them the duty of systemic risk manager continues to consolidate power in an organization with far too much power already.

The first idea may or may not be a good idea. The devil will be in the detail. It all depends on just how much capital will be required of these massive institutions. If they require a very cumbersome amount of capital in reserve then it will slow down lending and investment. That will mean that in order to avoid an economic collapse the administration will guarantee a perpetual state of small growth.

I am not convinced that under capitalization was the problem to begin with. I believe the problem was that too many of these institutions were far too capitalized in Mortgage Backed Securities. That is an issue of a lack of diversification not a lack of capitalization.

Second, they will impose more transparency on Mortgage Backed Securities and also require that the originator carries some of the risk. This is both needless and counter productive. There is almost no market left for MBS and other similarly securitized assets. After their blow up, the market for them went away. Coming in to impose major regulations is sort of like demanding better levees in New Orleans after Katrina. The damage has been done and they are really no longer being used much.

I am all for more transparency in these though of course the devil is in the detail here as well. Giving the originator some financial risk in the asset is both ludicrous and unnecessary. First, most of the contracts between banks and securitizers already have some financial risk exposure in case of serious defaults. Second, any onerous financial risk applied to the banks only insures that banks never ever get back into this market again. If we want some sort of sub prime mortgage market ever again we aren't going to get there by imposing significant risk to players that get into it with the assumption that they have little risk. Banks aren't ever going to get back into subprime still face default exposure even after they have sold the loan. The whole point of selling the loan is to remove that exposure. There has the be some buyer be ware in this market.

This also runs counter to the manner that loans are structured. When a loan is approved it is approved based on guidelines created by the securitizer not the bank. It isn't Wells Fargo that approves your loan ultimately but Fannie/Freddie. The same is true for MBS. The securitizers decide how they will approve the loans they buy and securitize. So, they should run the risk for defaults. The administration wants the banks to run those risks even though they aren't ultimately the ones creating the guidelines.

3) Fighting predatory lending. I predicted this and in this piece I explain why it is ridiculous. You can read it to see why this will be nothing more than a sham.

4) A new tool to manage the resolution of financial crises. Here's how they describe it.

resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse.

If you have noticed a theme it is that the government doesn't currently have enough power and they need a lot more. Anyone who is a libertarian must be rolling over right now. This is by far the scariest portion of their plan. The language here is so vague that it's impossible to know just how it will be used and for what purpose. Keep in mind that we already have an SIPC, FDIC, Federal Reserve, SEC, FTC, among many, many government regulators designed to regulate financial services firms. If that isn't enough, how much is enough?

5)They want to make all of this global.

That speaks for itself and should put a chill on anyone that believes in the libertarian foundations of our country.

Mark to Market Augmentation a Good Start

There is a rather peculiar and ironic story on CNBC today.

The potential changes to the mark-to-market accounting rules could hurt the government’s plans to entice private investors into buying toxic assets, but as long as the problems with bank capital are being fixed, it doesn’t matter, Robert McTeer, former president of Dallas Federal Reserve, told CNBC.

“The objective is to stop the destruction of bank capital, it's not to get toxic assets off banks' balance sheets. That's a means to an ends,” McTeer said, adding that there could be numerous ways to achieve the result

It turns out that we didn't actually have to spend $1 trillion in order to resolve the issue of the toxic assets. At the risk of sounding too wonky, the issue of the "toxic assets" was essentially an accounting issue. They were constantly in decline. This created an ever declining asset base on their (the bank's) balance sheets. As such, they had to raise capital elsewhere just to make things equal.

Solving this problem essentially comes down to an accounting issue. This is where mark to market comes in. Mark to market forced these banks to assign current market value to these Mortgage Backed Securities. As such, to solve the issue, what we really needed to do was allow these banks to assign a more long term value to these same assets. Today, FASB did just that.

The independent Financial Accounting Standards Board voted to adopt new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions. The board was meeting at its headquarters in Norwalk, Conn.

The changes will allow the assets to be valued at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale. The new guidelines will apply to the second quarter that began this month.

Now banks will be allowed to give a long term value. Not only will it be higher than a current value but that value won't change each and every day. The other thing this does is render moot Geithner's plan to sell these assets. Now banks don't need to sell them. The tax payers don't need to over pay them. The Treasury doesn't need to bribe private players with great deals to buy them. This accounting problem was solved using accounting and it will now cost the taxpayers about $1 trillion less than it was about to.

Some Thoughts on the Beginning of the New Regulatory Framework

Treasury Secretary Geithner laid out some broad principles today for a significant increase in new regulations of the financial sector.

The Obama administration is proposing an extensive overhaul of financial regulations in an effort to prevent a repeat of the banking crisis last fall that toppled once-mighty institutions and wiped out trillions of dollars in investor wealth.


Congress would have to pass new rules to regulate the market for credit default swaps and other types of derivatives and require hedge funds to register with the Securities and Exchange Commission.



...



Let me be clear," Geithner added. "The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers must end."


The program the administration was presenting to Congress includes a recommendation for creation of a systemic risk regulator, possibly at the Federal Reserve, to monitor risks to the entire system.

There is a lot here I agree with. It's long past time that Hedge Funds and Private Equity Firms become more transparent and this will go a long way toward doing that. That said, such regulations often have unintended consequences. McCain/Feingold lead directly to the proliferation of 501 (C)3's. In much the same way, such regulations of Private Equity and Hedge Funds can, and in my opinion will, lead to the proliferation of other financial services firms that aren't regulated. Furthermore, it also means that hedge funds and private equity firms will likely move off shore to places where the regulations aren't as stiff.

I also agree that credit default swaps are desperate need of regulation (I have called for this as well), however, in my opinion, the market is a much better regulator of such markets. Once markets like credit default swaps collapse, the market is usually much more ruthless than any regulation. I suspect that most of the regulations that the government will propose have already been created by the market. In fact, I suspect that credit default swaps are rarely used at this point entirely.

I can support a systemic risk regulator. I am also in favor of figuring out a way to stop too big to fail. I am, however, troubled that the Obama administration wants to allow the government to step in and take controlling interest in any company deemed too big to fail. In fact, I was concerned myself about making such regulations a power grab.

To update Sherman to include companies that are too big to fail would consolidate an obscene amount of new power in the hands of the government. As such, a new law would have to be narrowly defined to determine just how it would be determined that a company is truly to big too fail.

So far, this regulation is rather vague and vague regulations lead directly to the government consolidating far too much power. There needs to be something done to prevent further companies from becoming too big to fail, but it must be much more specific than it is now.

Finally, most disappointing is that while there is a plethora of new regulations in the financial industry there is no new regulations for Fannie/Freddie. Given that the company owns and runs both now, they might see them is not needing regulations, but in fact they are both in desperate need of it. I have proposed breaking them up and privatizing them however that is the antithesis of what is going on now. Their reform is not necessary for a vibrant financial system but it is vital for a vibrant real estate market. Hopefully, their reform is coming soon.

Dick Morris Goes Conspiratorial

It's no secret that Dick Morris is no fan of Barack Obama's domestic policies. In fact, Morris has coined the term, depressflation, to describe what he thinks will happen to our economy as a result. He believes we will have significant unemployment, on the level of a depression, at the same time we will have hyperinflation. (as such depressflation) Yet, now, Morris is just downright conspiratorial.

Morris believes that Geithner's plan to rid banks of toxic assets is doomed to fail. After all, the Obama administration has spent the better part of the last couple months demonizing entities like Hedge Funds. Yet, Geithner's plan relies on exactly those entities, like Hedge Funds, that the Obama administration has been demonizing all along. Morris wonders aloud just how the Obama administration expects to get these folks to now join the government in a partnership, the one proposed by Geithner.

In fact, Morris believes that this has all been orchestrated by Obama in order to make sure that Geithner's plan fails. Why? That's because this will leave Obama with no choice so to speak but to nationalize banks. In Morris' view, bank nationalization is Obama's plan all along.

Furthermore, bank nationalization is all part of an even bigger master plan to socialize the country.

Now, I won't speak on Obama's motivation. It's impossible to know what someone's intentions are unless you truly can read minds and I can't. I do know one other thing. President Obama won't get anymore chances if Geithner's plan fails. If President Obama thinks that he will try and do an end run toward nationalization, then he doesn't know as much about politics as he thinks he does. If Geithner's plan fails, then Obama's entire agenda is in jeopardy. If Geithner's plan fails, the credibility of the entire domestic agenda will be questioned.

At that point, the Republicans will be attacking Obama on just about everything. The mood of the public will be for change in philosophical direction. Rather than an appetite for more government control and power, the public will demand less of each. So, while I won't speak to Morris' thesis, I can say for sure that there's no way it will ever happen.

Some More Thoughts on Geithner's Toxic Asset Plan

I have had a chance to read several pieces analyzing Geithner's plan to deal with the toxic assets. Before I go on, as I have said, there is no magic bullet and so while I will find plenty to criticize, there is likely plenty there for any plan. The plan is an attempt to thread several sharp needles and thus it is loaded with potential dangers.

As I have said before, the real problem with all of these toxic assets is that in order to sell them at approximately what people will pay they would sell at 30 cents on the Dollar, however in order to keeps banks solvent they would need to be bought at 60 cents on the Dollar. As such, it's important to understand that the problem isn't merely that banks have "toxic assets". If merely removing them from their books was the problem, they would just give them away for free. The problem is that they can't sell them at a price that will keep them solvent.

In order to close this gap, the plan attempts to provide so many incentives that it will drive more buyers into the market. It's simple economics really. The more buyers show up, the higher the ultimate price. It's of course impossible to know if the incentives are big enough, however the incentives are massive. That presents its own problems. These private firms would be required to only come up with one twelfth of the money it takes to buy these assets. Five sixth will be loaned out by the FDIC and the other sixth will be paid by the treasury. As such, the tax payers are on the hook for the other eleven twelfth. Yet, these private firms decide entirely which assets to buy and how much to buy them for. Furthermore, it is also up to their discretion when to sell and for how much. Finally, if these private firms take a loss, they are not responsible for paying back the loan to the FDIC.

As you can see, in an attempt to create a vibrant market, this plan also puts all sorts of tax payer money at risk with almost no control. Furthermore, by limiting the down side risk to the investor, this plan also encourages the investor to dump the investment in a manner they wouldn't if they were on the hook for more.

As such, this plan could very well work in removing these toxic assets at a price that will allow the banks to stay solvent, but that plan will then likely cost the tax payers somewhere near another trillion Dollars. Remember, while the incentive to buy these assets initially is made more enticing through these nice government terms, whoever these investors then sell them to won't get the same terms. As such, this plan will likely drive up the price well beyond what they are worth. By doing so, these investors will find it rather difficult to make money on said loans. As such, the tax payers will then ultimately be on the hook for most of the losses.

So, what we have is two issues and neither of which have anything near a guarantee of success. The first issue is that the plan needs to inflate the current market well beyond where it is now. The second issue is that these incentives might be so favorable that the taxpayer will then be on the hook for buying up most of these toxic assets. It's impossible now to tell if either will be resolved. This plan can succeed however a lot of things will have to go right in order for that to happen.

Here is my plan to deal with these toxic assets.

Geithner's Reprieve

Put away any calls, like those from me, from the lynch mob asking for the head of Tim Geithner. His job is secure and it will be indefinitely. The comeback of Geithner is very remarkable if you think about it. Here he was being pummeled for just about everything. He had been written off by the markets, by the politicos, the pundits, and most of the public at large. With his credibility at its all time low, he delivered what can only be seen as a home run on the most crucial issue of the day, the toxic assets of the banks. I was about to write a piece last night with an investment tip that shorted the markets in anticipation of his speech. That's how little confidence I had in Geithner. I couldn't have been more wrong.

The markets had absolutely no reason to trust anything he said, and yet, his plan was met with overwhelming approval. Markets were generally up about 7% just today. No more can anyone claim that markets are down in response to policies from the administration. In fact, in one fell swoop that has all been erased and then some.

The details of this plan will be debated, and there is certainly plenty to quibble with if that is your want. (I have my problems)There are a few things that must be kept in mind though. First, there is no magic bullet so no plan will be perfect. Second, no one can know for sure if it will work, and so all criticism will have limited effectiveness politically. As such, unless someone with a great deal of respect by the market comes along and trashes the plan in a credible way sending markets straight down, Geithner's credibility is restored for the time being.

Furthermore, the effectiveness of the plan will take months if not longer to judge. As such, Geithner has not only restored his credibility but the restoration will be there for the indefinite future. Now comes the difficult part and that is putting his plan to work and actually making this toxic asset plan work.

Assessing Geithner's Toxic Asset Buy Up

The Treasury Department rolled out its plan to deal with the so called "toxic assets" today. First and foremost, this plan is extremely detailed and complicated. Off the bat, I give them kudos because far too many of the administration's plans have lacked details.

Essentially, this plan relies on private companies, Hedge Funds, Private Equity Firms, and anyone else with a lot of money, to create a market for these toxic assets. It relies on the government, through the Treasury, Fed and FDIC, to back up these companies to entice more private firms to step up. The Feds will back up some of these investments with guarantees, loans, and even with cash. It not only lessens the risk, but the exposure, and the capital necessary.

In fact, I am all for all of this, however the plan doesn't address what I see as the basic problem right now.

RMBS can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents -- either because they really think the loans will experience only a 40 percent loss rate, or because they fear that acknowledging market value will put them into insolvency. Which it might very well.

The problem as I see it is that if the banks were to sell these "toxic assets" at current market prices they would become insolvent. Now, by putting the government behind all of this, it will likely create a much more vibrant market to purchase these "toxic assets", but the numbers appear to be much to out of reach. The market would likely get somewhere around 30 cents on the Dollar and yet the banks need to get about 60 cents on the Dollar in order to stay solvent. While government backing would certainly create a more vibrant market, I don't think it would drive the market for these "toxic assets" to more than double what they are likely worth now.

So, to me, this plan doesn't address the most pressing issue and that is that the current market value of these "toxic assets" makes these banks insolvent. While I believe that we have an adequate plan for a smooth transfer of these assets, if I am right, the banks holding them will not like the price they are given for them now.

Here is my plan for what to do with the "toxic assets".

My Plan for What To Do with the So Called "Toxic Assets"

Here is the the problem as I see it.

RMBS can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents -- either because they really think the loans will experience only a 40 percent loss rate, or because they fear that acknowledging market value will put them into insolvency. Which it might very well.

In other words, If you sold these toxic mortgage bonds right now, the banks would be insolvent if they were sold at current market prices.(30 cents on the Dollar)In order to be solvent, these assets would need to be worth more like 60 cents on the Dollar. These banks are only in a position where they need to sell because they haveYet, banks actually now have plenty of cash. Of course they do, we just gave them $780 billion. In fact, the banks wouldn't even need to get rid of these RMBS if they could assign a value of 60 cents on the dollar.

In fact, the only reason that this is happening now is because of mark to market.

that investors think of the mark-to-market mess by using the following metaphor: A person buys a house for $250,000 and then takes out a $250,000 fixed-rate mortgage for 30 years. The person's income is adequate to make the monthly payments.


But under mark-to-market rules, the bank could call up and say that if your house is not sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth $200 ,000 and to please fork over the $50,000 immediately or else lose the house

These banks are only a position where they need to sell because they have to give these illiquid asset a current market value. If you were to suspend that rule and implement the banks one where they are allowed to value these at 60 cents on the dollar however the banks can't move these assets for at least five years. Force the banks to hold onto these assets long term. You could even create an onerous penalty for early withdrawal.

This keeps them solvent. Meanwhile we force the toxic assets on those that deserve to hold onto them. This also keeps the banks solvent. It also requires absolutely no more cash outlays. It gives everyone a chance to take a deep breath because finally we could all assess the damage without the fear that things would only get worse and you'd have to write down even more. Furthermore, all of these bonds are backed by real estate. Because that real estate is currently falling, the current market value of the bonds has no bottom. No one is paying back the mortgage and the underlying value of the real estate is dropping. Giving these bonds five years allows the price of the real estate behind them to settle.

The banking system could thaw without the uncertainty that assets would tighten up again. It's really so simple that no one in the government would ever think of it.

From Messiah To Hack in 100 Days?

A month and half ago, I predicted this would happen earlier. There are those folks out there that have always believed that President Obama was a hack and his entire persona was nothing more than a media creation. Now it appears, a series of events will speed up a process some of us thought would take years not months. Make no mistake, while President Obama would be the biggest loser, the American people would be great losers as well as he would become nearly impotent in domestic policy.

Right now, events are getting out of his control and unless the president gets ahead of them soon, he will get past the point of no return. His problems are so layered that its hard to pin their beginning. Most of them center around his Treasury secretary, Tim Geithner, however Geithner is part of his larger problem involving his nomination process in general. The process has lead to high profile disasters like the nomination of Tom Daschle and those the media ignored like the nomination of Chas Freeman to head the National Intelligence Council. While several of his nominations have wound up in disaster, the Treasury department has has only one appointee that has been confirmed. (that being Geithner himself)

Geithner has now become toxic himself. His entire term has become one in long series of positions in which President Obama is now stuck between the proverbial rock and hard place. Everything else being equal, I think that Obama would rid himself of Geithner. Of course, everything is not equal. Geithner is not merely some obscure Secretary. Instead, he is the face of the effort by the administration to turn around the economy. Furthermore, the president pronounced that Geithner's tax troubles must be overlooked because he was a one of a kind and uniquely qualified individual. Dropping him now is likely something that Obama can't afford. Instead, he will face a constantly growing chorus of pundits, politicians, and other media calling for him to fire Geithner.

Then, there is the great distraction of the AIG bonuses. It is a great distraction for the Obama administration along with the politicos in D.C. in general. The whole city has been paralyzed unable to do or talk about anything else besides these bonuses. Obama's entire domestic policy has been put on hold until this is resolved. Resolving it is no easy task. So far, we are in the process of finger pointing. Getting the bonuses back is a much harder thing to do. Besides some hokey idea for a punitive and onerous tax, the Congress has limited power to take back something they themselves authorized. Of course, like I said, until this is resolved all other things are left to the back burner.

As such, President Obama's entire domestic agenda hangs in the balance of just under $200 million worth of bonuses. Meanwhile, the Congressional Budget Office has run its own numbers, and their conclusion is that President Obama's budget will lead to larger deficits than even President Obama's own projections called for. With both politicians and voters already uneasy about the rising deficits, these new projections have put his entire agenda in jeopardy. Now, even his Democratic colleagues like Kent Conrad, the Senate Budget Committee chairman, has now stated publicly that Obama's budget must be scaled back.

So now, with confidence in his administration and its architect, Tim Geithner, starting the wane, the administration still has big tasks ahead. It has still not proposed any plan for all of these "toxic assets". That plan will come out this week. The point man on this plan will be the aforementioned Tim Geithner. It will involve a private/public partnership. Now, imagine how motivated any private company will be to get into bed so to speak with the government, after witnessing the populist class war set against them this past week (after the AIG flap).

So, what President Obama has found himself in is a series of situations in which he is stuck in a no win situation. His entire agenda is held hostage to a series of distractions that may stoke outrage but are of little economic consequence. Yet, he is ultimately nearly paralyzed until they are resolved. He is stuck with a Treasury secretary that almost no one has any confidence in. Yet, getting rid of him brings with it just as many problems as keeping him in place.

On Monday, the O'Reilly Factor will run a segment asking whether or not President Obama is in over his head. Don't expect the rest of the MSM to follow too soon. Don't forget these questions to go away either. The president continues to personally be popular, but most presidents are at this point. No president has seen his popularity disintegrate the way his has outside of Jimmy Carter. Worse yet, his policies are very unpopular. Very few people have confidence that his policies will be successful, and nothing he has done so far has made that notion anything but correct.