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Financial Rescue Watch

What to make of the administration's new financial rescue plan? You tell me. Comments are open.

Here's what I read with interest this morning:

Neil Irwin and David Cho write in The Washington Post: "Financial markets roared ahead yesterday as investors reacted with near-euphoria to the Obama administration's new trillion-dollar plan to stabilize banks by relieving them of their troubled assets and risky loans.

"But even as markets exulted, conflicting interests among the program's participants -- banks, investors and taxpayers -- were emerging, leaving in doubt the fate of a program meant to revive bank lending and in turn reinvigorate the overall economy."

Edmund L. Andrews and Eric Dash write in the New York Times: "The Obama administration's new plan to liberate the nation's banks from a toxic stew of bad home loans and mortgage-related securities is bigger and more generous to private investors than expected, but it also puts taxpayers at great risk....

"Administration officials outlined a three-part Public-Private Investment Program that offers private investors vast amounts of cheap, taxpayer-supported financing for every dollar they put up of their own money. In essence, the Treasury and the Federal Reserve will be offering at least a tablespoon of financial sugar for every teaspoon of risk that investors agree to swallow."

Jim Puzzanghera and Tom Petruno write in the Los Angeles Times: "Skeptics said it wasn't clear that enough investors would step up -- or that banks would be willing to unload assets at the prices offered. But a banking trade group sounded a note of optimism. And some of the country's biggest investment firms expressed support for the program and said they planned to participate."

Binyamin Appelbaum writes in The Washington Post: "Investors may have cheered the administration's latest financial bailout plan yesterday, but a chorus of academics and financial experts expressed skepticism, saying there are better ways to restore the health of the banking system.

"Some warned that the new plan will likely fail, or fall short, because banks will demand higher prices than investors are willing to pay.

"There was also widespread agreement that the Obama administration, like its predecessor, has not done enough to explain its choice of a fraught and controversial approach."

Peter Nicholas and Peter Wallsten write in the Los Angeles Times: "Aside from President Obama, the administration has yet to find a commanding figure who can carry economic policy messages and inspire confidence in White House prescriptions."

Michael Hiltzik writes in his Los Angeles Times business column: "The plan looks like the best hope yet for creating a viable market for all the toxic mortgage-based investments plaguing the balance sheets of banks large and small...

"The plan turns the government into 'the world's largest hedge fund investor,' UC Berkeley economist J. Bradford DeLong wrote on his blog Sunday.

"DeLong, one of the plan's more outspoken supporters in academia, argues that this could be a savvy investment for the taxpayer. The assets at issue are 'probably fundamentally undervalued,' he said, and placing them in the hands of investors who can afford to hang on to them until markets recover, rather than leaving them with banks that are desperate to unload them quickly, could produce 'an immense profit' -- for the private investors and the government alike.

"The doubters argue that the plan merely prolongs a doomed effort to place an artificially high price on toxic assets that may indeed be worth as little as the current market says they are. In doing so, critics contend, the plan only delays a necessary radical recapitalization of the banking industry."

Steven Pearlstein writes in his Washington Post business column that "the plan looks to me like it has a good chance of bringing significant amounts of private capital back into the financial system and relieving banks of some of their worst assets."

Simon Johnson and James Kwak write in a Los Angeles Times op-ed: "We believe the best mechanism for solving the banking-sector crisis is government-supervised bankruptcy, also known as receivership. However, the Obama administration has made it abundantly clear that it will not consider this option, except perhaps as a last resort."

The "anemic" Geithner plan, they write, "could work -- but only if the banks agree to sell at reasonable prices. If it doesn't work, we'll need to come up with another approach, either one that is even friendlier to banks or one that confronts them head-on. Banks in this country have become too big economically and too powerful politically. Going forward, we have to fix this. We simply cannot afford to have another problem of this magnitude."

Susan Fenton and Deborah Kan write for Reuters: "The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday....

"The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

"'Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.'"

Monica Langley writes in the Wall Street Journal: "The Obama administration, after months of criticizing Wall Street, has been scrambling to woo top bankers and financiers to back its latest bailout plan.

"In recent days, in spite of public furor over huge bonuses paid at American International Group Inc., the administration has concluded that it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for the bailout plan announced Monday, which will rely on public-private investments to soak up toxic assets."

But the wooing was not exactly returned in kind: "Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun 'slow-walking' the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions."

Langley describes ebbs and flows in the relationship between the White House and Wall Street. But her anecdotes may in fact better conform to the narrative of a White House riven by tensions between a populist political apparatus and a pro-Wall Street economic team, as described in the New York Times last month.

And word of Obama's nice talk to banks reminded blogger Digby of something the president said in a town hall meeting in California on Thursday about the banks and other financial institutions the government is bailing out: "Here's the problem. It's almost like they've got -- they got a bomb strapped to them and they've got their hand on the trigger. You don't want them to blow up, but you got to kind of talk them -- [to] ease that finger off the trigger."

Meanwhile, Binyamin Appelbaum and David Cho write in The Washington Post: "The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.

"The government at present has the authority to seize only banks."

By Dan Froomkin  |  March 24, 2009; 12:20 PM ET
Categories:  Financial Crisis  
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Next: Obama's Big Budget Push

Comments

Krugman was right.. this is a bad idea. But I'll wait for it to play out badly before accusing the Obama administration of completely bungling this whole response.

The irony here is that Obama's commendable desire to entertain opposing viewpoints is probably what led him to allow Wall St. to compromise this plan to the point of uselessness.

No, wait. The REAL irony here is that this plan creates EXACTLY the dynamic that Obama said was the fundamental problem with the economy - it rewards investors at the expense of hard working taxpayers.

Posted by: BigTunaTim | March 24, 2009 1:34 PM | Report abuse

I think that this is a prime example of the government going to far to try and fix the economy. A Capitalistic economy is based on very little government involvment and usually when the government reacts it goes to far and does more damage to the economy than any good! It will be interesting to see how this plan will affect our country and economy 5 years from now!

Posted by: biggsjo | March 24, 2009 1:52 PM | Report abuse

biggsjo

I think you're conveniently forgetting the recent past. Didn't the unregulated credit-default swap and hedge fund market just implode in spectacular fashion taking the rest of the global economy with it?

Posted by: troyd2009 | March 24, 2009 2:27 PM | Report abuse

"three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions"

I wholeheartedly encourage them to return our money as fast as possible. If those jerks don't need it then send it back now!

I think we should go further and enact a 50% surcharge on the profits of all financial institutions which had substantial assets in CDOs to pay for this mess.

Posted by: troyd2009 | March 24, 2009 2:31 PM | Report abuse

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