Stoopid Stuff

Money Talks and Bullshit Walks

Timothy Geithner's "Legacy Loans" program that caused so much angst a few months ago is now officially off the table. This may or may not be good news, as the very idea of taxpayers guaranteeing loans that private firms could then use to overpay for some of the banks assets without any risk of financial loss appalled most people as they came to understand it. And that's not to mention the various ways for banks to game the system and further enrich themselves at the expense of the American taxpayer. But the most interesting thing is WHY the policy failed.

If you recall, the idea was for Treasury and FDIC to help the banks they deemed "too big to fail" to improve their balance sheets by being able to sell off a substantial part of what have come to be called "toxic assets". The banks haven't been willing to sell them, because in order to do so, the market would have to determine what they were actually worth, not what the bank values them at as an asset on the books. If a bank says it has 100 million dollars in CDOs, it can show 100 million dollars in assets. If those CDOs are sold for 18 million dollars, the bank no longer has assets worth 100 million dollars, it has 18 million dollars in cash. In essence, it finds itself insolvent.

But the Geithner plan was for the US government to offer "no recourse" loans to anyone willing to purchase these assets at auction. The assumption was, if there was little or no risk in buying them, the funds that did so would be willing to essentially overpay for them, as any losses they would take down the road would be passed off to the taxpayers.

Apparently, that's not what happened. Nobody was going to come close to paying what the banks claim these assets are worth, and as such, with implicit guarantees from the government in place even without the auctions, the banks simply refused to offer them for sale. They would keep them to maturity, insisting all along that they would make a profit on these investments, without being required to expose them to the market for a valuation.

The ride these giant banks have taken the American people on is just horrendous, by any measure. Their ruthlesness and overarching self-interest makes the mob look like a caring and compassionate organization. To borrow a phrase from the presidential campaign, how can we expxect our government to stand up to the likes of Vladimir Putin and Kim Jong Il when they are utterly cowed by their own financial industry. The banks take billions from the US treasury and refuse to offer up even the slightest concession, knowing that there will be no sanction, and should they require even more billions, they'll get them without question. They continue to sit at the table in a game that is fixed in their favor, one that they cannot lose no matter what decisions they choose to make. In this game, they not only flaunt the rules, they do it blatantly with sneer of disrespect, for they know there will be no consequences.

This is a glimpse into the interconnected, globalized world of twenty first century capitalism. Increasingly, nations serve only as platforms for business operations, and the real power is in the hands of the bankers and the CEOs. Increasingly, people and resources will be brutally exploited in the name of quarterly profits simply because there will be no entities who have an interest in protecting them. Increasingly, the gap between the rich and the poor will become a chasm, and there will be nothing in between. It has become desperately clear that this is not a place we want to go, and yet already we find we are powerless to affect the outcome...

posted by mikey @ 7:50 AM