March 22, 2009

Obama's Plan to Save the Financial System Likely to Help Destroy It

Obama's Treasury Secretary is scheduled to roll out the administration's plan to save the financial system tomorrow. The complete details of the plan have now been leaked and reaction is beginning to trickle in. By tomorrow it will be a flood of feedback. The advance take on the plan is that its bad, very bad. Obama was on 60 Minutes pledging his full support of Geithner and he may come to eat those words and soon. What Geithner is coming out with is looking like victory for the zombie banks. The folks at Naked Capitilism, who understand this stuff much better than I, led off with a post titled Investor on Private Public Partnership: "One would have to be a criminal to participate in this". Neville, a commenter on this post, broke it down to laymans terms like this:

Does anybody remember that the last people who brought in 3% equity partners to take control of an off-balance sheet hedge fund in a no-loss deal designed solely to absorb toxic assets at inflated prices, were sent to jail by the government for misleading the public? Their names were Andrew Fastow, Jeffrey Skilling and a raft of other managers, at Enron.

The goal of their off balance sheet partnerships was to conceal where and when the real losses had occurred and thus who was responsible for them, until some later date when they could either be transferred back onto the public (Enron's shareholders) in a way they would not notice, or at least after the Enron managers had a chance to unload their shares.

Now we have a virtually identical scheme, but this time it's being promoted jointly by the banks and the US Treasury. Once again the effort is to construct a vehicle into which toxic assets can be transferred at inflated prices, positioning the public to take the losses while disguising them in the short term, and giving the managers of our biggest banks a chance to both profit now and then sell out ahead of the public.

I know very little about high finance, but this analysis resonates with my gut. If we're lucky, the administration can be turned from this course. If we're lucky, the GOP will do more than simply say no, they will come forward with a better plan (note that does not mean ideologically correct) and fight for it.