Geithner’s Bank Bailout Plan: An Unmitigated Disaster

Treasury Secretary Geithner just finished his long-awaited speech on why he needs MUCH more of our money to give to financial institutions. Geithner and Obama both window-dressed this crap with promises to curb executive compensation, as if this will make a difference in a plan that will cost north of $1 Trillion. $78 billion has already disappeared out of the first $350 billion from TARP 1, and despite lawsuits from Bloomberg and Fox Business, there has been continued stonewalling on where ANY of the the dough went.

The New York Times yesterday called the financial bailout plan a “Fiasco” and noted that despite contentious arguments among Obama’s advisors:

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid. Because of the internal debate, some of the most contentious issues remain unresolved.

In other words, Geithner followed the Hank Paulson script of pushing hard to make the bailout industry-friendly and compromised the effort to flesh the plan out in adequate detail.

Just now, Geithner outlined a sweeping overhaul and expansion of the program on Tuesday. The NEW program will attempt to grab more than $1.5 trillion from the Treasury, private investors and the Federal Reserve. Good luck getting private investors to buy the trash on the balance sheets of the banks. It will also be interesting to see who the “professional asset managers” (Wall Street) are who are tasked with valuing the trash.

Of course Geithner vowed that the Treasury will greatly increase the program’s transparency to the public and demand much stricter accountability from financial institutions that receive government help. Sure. Of course, there is another transparency website…financialaccountability.gov, and ustreasury.gov has more detail on the growing number of these Obamasites, which purport to inform the public about what is happening with their money.

Mr. Geithner laid out a 4-pronged program that will include several major components:

1) A new program, jointly run by the Treasury and the Federal Reserve, with financing from private investors, to buy up hard-to-sell assets that have bogged down banks and financial institutions for the past year. The program, often described as a “bad bank,” is expected to spend $250 billion to $500 billion.

2) Direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program.

3) A vast expansion of lending program that the Treasury and Federal Reserve had already announced, which is aimed at financing consumer loans. The two agencies had originally announced their intention to finance as much as $200 billion in loans for student loans, car loans and credit card debt. Instead, the program will be expanded to as much as $1 trillion.

4) A separate $50 billion initiative to enable millions of homeowners facing immediate foreclosure to renegotiate the terms of their mortgages is to be announced next week.

Despite objections from several in the administration, Geithner successfully fought against more severe limits on executive pay for companies receiving government aid. He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

The plan is supposed to work on multiple fronts, with promises to invest billions of dollars in many ailing banks and creation of a new institution to relieve bank balance sheets of their most troubled assets. (Bad Bank.) The plan renews a legislative proposal giving bankruptcy judges greater authority to modify mortgages on more favorable terms to borrowers and over the objections of banks.

But Geithner prevailed, and the plan stops short of intruding too significantly into bankers’ affairs even as they get taxpayers money. The $500,000 pay cap for executives at companies receiving assistance, for instance, applies only to very senior executives. Some officials argued for caps that applied to every employee at institutions that received taxpayer money. The government also has NO plans to replace the management of any of the troubled institutions, despite arguments that current management at the most troubled banks should be canned.

Finally, while the administration will ask the banks nicely to increase their lending, and possibly provide some incentives, it will still not dictate to the banks how they should spend the billions of dollars in new government money.

In summary: same old, same old, except the numbers are massively larger. No concrete details on any of these new “plans”. The stock market is CLEARLY not pleased. If all of these new spending items go through, government spending as a percentage of GDP will be around 40 percent. The Europeanization of America.

This idiocy will cause massive inflation, and will NOT solve the problem of trash derivatives on the bank’s balance sheets. Private investors are not dumb, and they are certainly not going to buy that crap unless they’re guaranteed some incredible return percentage. And if private investors are insured against any losses for participating in these “investments”, why would the banks give them up? We have to wait and see how this will be fleshed out, but no matter what, no surprise…this is an unmitigated disaster.

Share this Right Soup with others: