Monday, 23 March 2009

A trillion dollar clean up; the numbers just keep getting bigger.

A trillion dollars - wow - just to clean up the detritus left from the US housing bubble. A casual review of the headlines suggest another massive hit for the US taxpayer.

As this neat little flow chart from the US Treasury illustrates, the new arrangement isn't about new money; it is about taking some old TARP money and leveraging it up.

(click on the graphic for a sharper image).

Geithner wants to take $75 to $100 billion in current TARP scheme, and add further capital from the FDIC and the Federal Reserve. In total, he thinks he can raise $500 billion. Then the scheme turns to the private sector, where Geithner hopes to raise an additional $500 million. One dollar of public money for one dollar of private money.

With a trillion dollars in their pockets, the managers of this scheme will go out and buy those toxic assets that have killed the US banking system. The participation of the private sector is supposed to align incentives. Investors won't want to buy overpriced assets and therefore this limits the potential hit to the taxpayer.

This scheme has a couple of advantages. First, Geithner doesn't have to go back to Congress, since he is using funds authorized under older schemes. Second, by co-opting the Fed, the FDIC and the private sector, he turns a modest amount of public money into a big toxic assets buy-out. Third, the price issue is resolved with private sector managers, who will do their best to turn a profit from this scheme.

The most immediate question is about the price of those toxic assets? If it is too low, banks will have to absorb large losses on their balance sheets. If the price is too high, and the scheme can not recover its initial investment, then the taxpayer, along with the scheme's new investors, will have to suck on a straw and slurp up a loss.

Ultimately, the price of these assets will determine the distributional question. Due to the housing crash, the banks have accumulated a massive loss, and it needs to be distributed somehow. Who will pay? Taxpayers? New investors? Bank shareholders? Only time will tell how this latest scheme resolves this question.


Josh said...

A trillion dollars of madness.

sobers said...

The Onion has it best:

Satire is dead, you can't satirise what's going on these days!

Anonymous said...

Who will pay? Taxpayers? New investors? Bank shareholders?

The list needs to include Pension Savers of course - pension savers are easily converted into "investors" in crap debt.

London estate agent said...

Britain needs something similar. Anything to get a few customers in the door.

Slagella said...

Oh a trillion here, a trillion there...relax, it's only your money.

Anonymous said...

I have an idea to clean up the debt from the housing bubble: this may sound radical and all, but why don't make current home owners put the wealth and ownership of their homes into a global fund. And then this fund is liquidated until the point is reached at which all the bad debt is paid off. That means selling houses and flats at the price they can get until all the debts are wiped out. This would not cost the tax payer or savers a penny. As for those people losing their flats or homes? Fuck em: they brought it on with their greed, they can clean it up with their need.

Anonymous said...

Actually the banks won't absorb large losses, that's the point of the plan. If any losses are made, 93% is absorbed by the tax payer. Only 7% is absorbed by the private sector.

Yep, pretty stupid. I'm with Krugman: NATIONALIZE. Don't pussyfoot around with half-arsed schemes like this that won't work.

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