Tuesday, March 31, 2009

More on Treasury looting

I continued to be amazed at the disconnect between the blogosphere and the MSM on this Geithner plan. The blogs have made excellent arguments that the whole Geithner plan is basically a scam, created to steathily move massive losses from a handful of banks and funds to taxpayers. Mish has another good rant on the subject, but I particularly wanted to highlight a post from Steve Waldman, to which Mish himself linked. The first two sentences particularly capture my sadness at the way this looks like it is going to play out.

I am filled with despair, not because what we are doing cannot "work", but
because it is too unjust. This is not my country.

I think that critics of the Geithner plan are missing some of its tactical
brilliance. My guess is that behind the scenes, Geithner has arranged a kind of
J.P. Morgan moment.

I don't think the scandal of the Geithner plan is going to turn out to be
the subsidy to well-connected investors embedded in the non-recourse loan put
option. On the contrary, I think that Treasury has already lined up participants
for the "Legacy Loans Public-Private Investment Fund" and persuaded them to
offer prices so high that despite the put, investors will expect to take a major
loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the
world, the asset managers who do well by "shaking hands with the government",
will agree to take a hit on relatively small investments in order first to help
make banks smell solvent, and then to compel and provide "good optics" for a
maximal transfer from government to key financial institutions.

Why would PIMROCK go along with this? Because they feel it is their
patriotic duty to work with the government for the good of the financial system,
even if that involves accepting some sacrifices. And because they hold $100B in
J.P. Citi of America bonds, and they've received assurances that if we can get
the nation out of the financial pickle it's in, there will be no haircuts on
those bonds. "Shaking hands with the government" means that nothing ever has to
be put in writing.

The caveat here is that this is just Waldman's theory. But there are several other plausible theories out there, and they all suggest that however exactly this plays out, connected players are going to game the hell out of the system. You (and your children aand their children) will be paying down debt for years to ensure bondholders get fully paid and bankers get their bonuses.

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