Are you ready to be Geithnerized?

Geithnerize, vb: To make somebody grossly overpay for something, and still end up not owning it.

The core problem for the banking sector is that the banks have lost far, far more money than they could have and remained solvent. As Yves Smith pithily puts it:

Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but ... a significant portion of the very biggest banks are insolvent.

The fair solution is that the insolvent current banks have to be shut down, their owners wiped out, their managers fired, and new banks started with new owners, new managers, and new capital. Fair, efficient, and straightfoward - but it will ruin many of those responsible for the disaster, especially current bank management. Their solution? Make the taxpayer pay to keep them rich - via Geithnerization!

We've already had a lot of Geithnerization already - the TARP, which overpaid by at least 87 billion for equity that doesn't carry voting rights; the Citibank bailout, where the US government gave Citibank guarantees so grotesquely underpriced they won't even let us find out what they guaranteed; and the similar BOA bailout. And the public is getting wise to the Geithnerization process.

So the new Geithner plan cleverly dresses up another (and huge!) round of Geithnerization with some platitudinous frills (but little substance) to disguise the ravenous monstrosity at the core of the plan. Lurking at the core:

a) TARP style useless equity in the "Capital Assistance Program". Undercapitalized banks get money from the treasury in return for preferred shares - inevitably underpriced, since the bank are undercapitalized. The preferred shares aren't voting, so no control over the bank for the taxpayer who's going to pay so much for it. Just like with Citi, we get to pay more than the banks are worth, and somebody else still owns it.

b) A "public-private investment fund" which will take equity mostly (read all) from the private sector to take loans from the public sector to buy assets that can't be valued accurately. Result: if the assets go up, the private investors take all the gains; if they go down private investors lose a little and the public loses a lot on the bad loan. Geithnerization for uncertain assets!

The plan has some nice-sounding frills calling for bank audits (but with no specifics), posting some information to the Web (but again, no details), and some expanded programs for mortgage modification. Of real merit is a plan to expand the Term Asset-Backed Securities Loan Facility (TALF) to 1 trillion. This really helps, because as I've said, the fundamental solution is to have new bank with new money take over lending. With the TALF the Federal Reserve will be doing it. Of course the point is that since Geithnerizing the public won't actually help the credit market, they needed to put in a program that would. We don't have to rip off the public to expand the TALF.

But no detail can disguise the 1 trillion plus plan to make the taxpayer pay for investors to own and get rich on assorted shady assets. But what do you expect when you appoint a Treasury secretary whose primary goal is saving the banks from nationalization?

Are you ready to be Geithnerized now?

Recessionary employment declines

In response to some widely circulated and controversial charts of employment declines in major recent recessions, I took a look at the employment to population ratios. I looked at the recessions from an employment ratio perspective, starting at peak employment ratio and continuing until it recovered. The conclusions are somewhat surprising.



First, some recessions merge. The 1980 and 1981-82 recessions do, and we have never gotten out of the 2001 recession. 2001 on kind of looks like a Long Recession by this measure, and may be turning into a Long Depression. The current recession by itself (2007) does indeed show up as bad - it's the worst of all at 25 months. It's not quite as bad as the 1981-82, but it's very close, and it's worse than everything else, including 1974-75 (except of course 2001 with 2007 added on). Also, the lurch downward over the past 7 months is unprecedented and worse than anything else, although the 1974 lurch down is very close. Another bad month will make the 2007 recession unsurpassed.

Isakson Pro-Fraud Amendment passes

Senator Isakson recently proposed an amendment to defraud the federal government of 10's of billions of dollars by paying people 15,000 to buy a house. Of course, even an idiot can see this will just make millions of homewoners swap houses with each other, collecting 15,000 from the federal government for doing NOTHING useful. Of course, he supports this because he's a realtor and hopes to collect vast fees assisting people in defrauding the government. Even more horrifyingly, the Senate passed this outrage unaninmously.

They should all be impeached, and Isakson should be indicted for corruption.

Um - try 23 years.

Paul Krugman has a post about the fall in employment ratio to numbers not seen for sixteen years.

Except it's actually 23. And probably more to come.

Europe headed to the liquidity trap?

Ugh. Now the Europeans want to join the US, Britain, and Japan in the liquidity trap. In England, banks are now no longer able to collect interest on some mortgages. What's that going to do to bank stability? But still they cut, in the face of evidence that extremely low interest rates are actively harmful to economic stability.

A better CPI

From Mish Shedlock, here's a graph of the CPI with owner equivalent rent replaced by the Case-Shiller Index aka the CS-CPI. It would have led to much better Fed action in the current cycle. The Fed would have pulled back credit in 2003, tempering the bubble, and would be broadly inflating now, tempering the depression. Wouldn't it be nice to have a Fed that used good metrics?

Toxic loan modifications

There has been a big push to address the current mortgage crisis via mortgage modifications, notably by Sheila Bair of the FDIC. For most borrowers, modding down loan principals to house values generally just recognizes reality; most borrowers either can't or won't pay far more than the value of their house to live in it. However, a lot of mods just reduce interest rates - here's a particularly spectacular million-dollar 1% balloon loan from WAMU. Not only do these mods not acknowledge reality, they are adding to the toxic debt problem.

A big part of toxic debt, and arguable the worst for the financial system, is debt which cannot be accurately valued by any method. This can arise from exceedingly complicated derivatives, but a relatively new problem arises from our being in uncharted economic waters. Predicting the value of a long-term security requires projecting the future, which in turn must be done with models from the past. However when you're in a strange and unprecedented situation, old models aren't going to be accurate. This means long-term securities become un-valuable - nobody can figure out what they're worth. Since market mechanisms are just an opinion-averaging system, market prices are as arbitrary and meaningless as the unfounded opinions they're based on.

When you have this "mystery meat" toxic debt, it becomes impossible to fix companies reliant on it, even with unlimited resources. There's no way to know how much to allocate to cover losses. Too little means the company is still bad. Too much is an unfair windfall. And almost any amount could be either - there's no way to know, except to wait and find out.

This WAMU balloon loan is exhibit A for a "mystery meat" toxic debt. What will currently overpriced houses be worth in 5 years? We have no idea, basically. How much of the underwater amount will the borrower be able to cover? We have no idea. How possible will it be to get a rollover loan in 5 years? We have no idea. So, what had been a relatively easy-to-value foreclosure has become a million-dollar slug of toxic mystery meat which has to molder on the plate for years until it can be resolved.

Instead of the garbage getting taken out, it's been added to the food. We are worse off than before. I'm all for constructive loan modifications, but these kinds of mods have to stop.

Drama Geisha?

Yves Smith of Naked Capitalism passes on a report from Frank Veneroso decrying the massive collapse in Japanese manufacturing, which is the fastest on record for a major industrialized country. He complains that he's "crying from the rooftops" but it's "like a neutron bomb had gone off" because nobody cares. He blames the EEEVIL speculators, picking - of all agents to blame for a manufacturing depression - technical analysis traders. Blaming that fractious bunch earns him an "Oh Please" award.

Japan, a supercreditor nation, is now running a small trade deficit, which is what it should be doing, so the yen is about right. Of course they're getting a depression in switching from an insanely low manipulated exchange rate to a reasonable one, because they've had truly massive misallocation of resources over the past 30 years, due to the crazy low yen value. Basic economics, folks - bad prices cause bad decisions.

Venerosa is right that the rest of the world doesn't care - because we all know this is about where things should be. The depression which will result from this return to sanity isn't something we can do much about anyway. Normally there would be more sympathy but since Japan Inc. has been wrecking everybody else's manufacturing longer than most working people's memory nobody's going to feel too sorry for them now.

Maybe we can get a bunch of really, really small violins to play along with MITI's sob story about manufacturing disaster from unfair trade practices - their own. Heck, Japan's into miniaturization and classical music. Maybe they can provide the violins for us!