The Obama administration says that its plans to remove up to $1 trillion in toxic loans from banks’ books, called the Term Asset-Backed Securities Loan Facility — or TALF, could be announced by Treasury Secretary Timothy Geithner as early as Monday. AP reports that, “if banks are not burdened by the soured loans, then they would be in better shape to resume more normal lending”.
AP says that, “Geithner’s new plan is meant to attack what is widely viewed as the major failure of the bailout program so far: the inability to rid banks of a mountain of soured loans and troubled mortgage-backed securities”.
How will the plan work?
The plan is said to be composed of three major parts all of which rely on some form of partnership between the government and private investors. One form of partnership would involve the government “matching private investors dollar for dollar” in buying up toxic assets and then later “sharing any profits equally”. The other partnerships involve the government loaning private investors money to buy up the troubled assets.
But there’s a problem. AP continues:
Some industry officials said that participation by the private sector may be harmed because potential investors will now be worried that the government will change the terms of the deal or impose new restrictions because of the current political backlash against Wall Street.
Hedge funds and other big investors are likely to be more leery of accepting the government’s enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.
So the plan that everybody has been waiting for. The plan that will address the “major failure” of the bailout program. The plan that our government is putting great hopes in getting us out of our current economic mess. It likely won’t be successful.
Why? Because private investors are “leery” of getting into a partnership with a government they can’t trust and don’t know what to expect from next.
Think I am exaggerating? Here’s what Joe Nocera in the New York Times says:
How can you run a company when the rules keep changing, when you have to worry about being second-guessed by Congress? Who can do business under those circumstances?
Take, for instance, that new securitization program the government is trying to get off the ground, [the TALF]. Although it is backed by large government loans, it requires people in the marketplace — Wall Street bankers! — to participate.
This program could help revive the consumer credit market. But at this point, most Wall Street bankers would rather be attacked by wild dogs than take part. They fear that they’ll do something — make money perhaps? — that will arouse Congressional ire. Or that the rules will change. “The constant flip-flopping is terrible,” said Simon Johnson, a banking expert who teaches at the M.I.T. Sloan School of Business.
Andy McCarthy in the National Review puts it this way:
To have the slightest prayer of succeeding, Geithner’s program will require the close cooperation of private enterprise. But based on the last two months, what private business in its right mind would trust this government or willingly collaborate with it? Even now, relatively healthy financial institutions that took the TARP money are desperate to return it and get out from under Big Brother’s thumb.
Nocera says that, “By week’s end, I was more depressed about the financial crisis than I’ve been since last September. Back then, the issue was the disintegration of the financial system, as the Lehman bankruptcy set off a terrible chain reaction. Now I’m worried that the political response is making the crisis worse.”
But it’s not just that Congress is destabilizing the banking industry. It’s also devaluing the very assets Congress has acquired using the hard-earned money of taxpayers. Nocera continues:
During his testimony on Wednesday, Mr. Liddy pointed out that much of the money the government turned over to A.I.G. was a loan, not a gift. The company’s goal, he kept saying, was to pay that money back. But how? Mr. Liddy’s plan is to sell off the healthy insurance units — or, failing that, give them to the government to sell when they can muster a good price.
In other words, it is in the taxpayers’ best interest to position A.I.G. as a company with many profitable units, worth potentially billions, and one bad unit that needs to be unwound. Which, by the way, is the truth. But as [banking consultant] Mr. Ely puts it, “the indiscriminate pounding that A.I.G. is taking is destroying the value of the company.” Potential buyers are wary. Customers are going elsewhere. Employees are looking to leave. Treating all of A.I.G. like Public Enemy No. 1 is a pretty dumb way for a majority shareholder to act when he hopes to sell the company for top dollar.
Mark Steyn of the National Review puts it more bluntly when commenting on Nocera’s column: “The political class has done nothing this last week but destroy the wealth of this country”.
Once again I ask, who in Congress will stand up and lead responsibly??