I wanted to revisit my earlier blog entry about the public-private partnership that Geithner has laid out for buying up distressed banking industry assets. It appears that I occupy a lonely, contrarian position. The Net has been rife with theories about how banks will profit big, private investors will profit big, and the taxpayers will get the royal shaft. If this is all correct, banks should be secretly gleeful, not terrified.
I’m not sure it’s the full picture though. First, hit rewind: Bush and his Merry Bunglers wasted more than three months playing pattycake with the U.S. banks, then left Obama in a pretty bad spot. Sure, they dumped a financial crisis on his doorstep. But they also left behind something else fairly poisonous: a populace and a set of talking heads that have grown deeply skeptical of anything the government proposes. (Of course Obama’s team didn’t help itself by continuing in the footsteps of the Bushies.)
So when the Geithner plan gets unveiled, the reaction is ... “Let’s tear it apart and figure out how the Treasury Department, i.e., the West Wing of Goldman Sachs, has designed a new scheme to rip us off.” As Americans, let’s face it: we’re just in a much more cynical place right now.
The best opportunity for a plan resembling Geithner’s to succeed was early on. We Americans were all dazed and uninformed (credit default whats?) and malleable and wondering what the hell was going on. Had Paulson learned anything from Bear Stearns’ collapse months earlier, he could’ve prepared for another disaster and acted decisively when the real crisis hit. He could’ve marshaled support and pushed through a bold, smart plan for the U.S. banking industry. Instead we just kind of muddled along. He jammed his fingers in the dyke holes until the clock ran out on the Bush team, at which point they scurried out of Washington.
What that means for Geithner’s plan: in the current climate of distrust, the question for most people isn’t whether we’re being screwed, but how. The baked-in assumption for Joe Taxpayer these days is he's being screwed from the get go. That's largely how the plan is being perceived and analyzed.
If you're a bank, that's probably got you sweating a bit. That is of course if -- big IF -- you can't game the plan. Let's assume you can't (I know, a HUGE assumption, but much of the worst gaming takes place in dark corners, and right now everything about this plan has a bright floodlight aimed squarely at it). Also consider it this way: the Treasury must realize that if there’s an orgy of profiteering through related party transactions and such, Geithner is absolutely dead politically (and Obama will suffer large collateral reputational damage too).
So if you assume the bidding process will be fairly realistic (though subsidized), how much toxic junk can be moved off the books at “market prices”? Assuming the benefit from the low-interest FDIC loan isn’t too large (see entry below), the banks may not be happy at all. If overpayment is less than 10 percent, this plan seems like a total disaster for them, especially in a climate of deep suspicion where the public figures there will be overpaying of at least 30 percent.