toxic asset buy-up

Markets Rally on Hopes of Regulatory Relief

by Hans Bader on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Global Warming, Precaution & Risk, Regulation, Stimulus to Nowhere

The stock market has gone up by 280 points so far today, fueled by FASB’s vote to relax rigid mark-to-market accounting rules, which require financial institutions to value assets at their current fire-sale prices, and magnify boom-bust economic cycles.

The market may also be getting a boost from the Senate’s earlier vote undercutting the Obama Administration’s proposed $2 trillion cap-and-trade carbon tax, which would impose burdens on the economy akin to Herbert Hoover‘s disastrous 1932 Revenue Act at the beginning of the Great Depression.

The market’s rise contrasts with its fall in the weeks after passage of Obama’s $800 billion stimulus package, which Obama falsely claimed was needed to avert “disaster” and “irreversible decline.” Obama made that claim even though the Congressional Budget Office, controlled by his own Congressional allies, admitted that the stimulus package would shrink the economy over “the long run.”

Many commentators have called for relaxation or repeal of mark-to-market accounting rules to stem the financial crisis, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee.

While pushing through $8 trillion in bailouts, and trillions more in debt from massive budget increases, the Obama administration has until recently ignored inexpensive possible ways of mitigating the financial crisis like reform of “mark-to-market” accounting rules.

The Obama administration’s footdragging on accounting-regulation reform is inconsistent with the rationale for its trillion-dollar toxic-asset buy-up program, which defies mark-to-market concepts in a much more extreme way than a mere relaxation of mark-to-market accounting rules. The Treasury Secretary claims taxpayers won’t lose a full trillion under Obama’s toxic-asset program, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why did he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules were right — in which case taxpayers will end up losing a trillion dollars — or they were wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).

It’s not even clear that all these bailouts are needed. As William Seidman, the banking official who helped clean up the S&L Crisis as head of the RTC, notes, the government’s $170 billion AIG bailout was absurdly expensive and wasteful. “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do.”

That includes a huge unneeded windfall for the investment bank formerly headed by Treasury Secretary Paulson, Goldman Sachs, a major donor to liberal politicians, which received billions of dollars from taxpayers that it did not even need, through the AIG bailout.

Obama’s record-breaking tax and spending increases violate his campaign promises to enact a “net spending cut” and not to raise taxes “in any form” on anyone making less than $250,000 a year.

Ironically, Obama’s “cap-and-trade” carbon tax might have the perverse effect of increasing, rather than reducing, greenhouse gas emissions. Cap-and-trade is a pernicious “form of tax farming.”

“Robbery of the American People”

by Hans Bader on March 31, 2009

in Bailout Watch, Economy, Energy, Environment, Global Warming, International, Politics as Usual, Stimulus to Nowhere

“Nobel Prize-winning liberal economist Joseph Stiglitz points out that the Treasury Secretary Tim Geithner’s plan to have the government subsidize investments in ‘toxic assets’ creates a serious moral hazard: Private investors will pocket any gains, while the federal government promises to cover virtually all potential losses: ‘Quite frankly, this amounts to robbery of the American people.’”

It’s the London Telegraph that’s reporting this, though. U.S. newspapers are too busy running puff pieces about Barack and Michelle Obama — and describing critics of Obama’s $800 billion stimulus package, which the Congressional Budget Office admits will shrink the economy in the long run, as being opposed to what the papers dishonestly refer to as the “economic recovery plan.” (With a few exceptions, the press did not report the CBO’s finding that the stimulus will actually shrink the economy, which contradicts Obama’s false claim that failing to pass the bloated stimulus package would lead to “irreversible decline.”)

Although many economists oppose the Administration’s policies, the newspapers make it sound like only right-wingers object to the Obama Administration’s bailouts. They do that even though the liberal Nobel Laureate and economist Paul Krugman, a big Obama supporter, admitted that Obama’s trillion toxic-asset buy-up program is a rip-off best described as “heads I win, tails the taxpayers lose.”

The result is that although Obama has proposed record budget deficits (expanding deficits by $4.8 trillion to an eye-popping $9.3 trillion, despite tax increases of $1.9 trillion), public opinion polls show 52% of the public approves Obama’s handling of the deficit.

In 2008, Obama explained to the San Francisco Chronicle that electricity bills would “skyrocket” under his Administration due to its global-warming regulations. But the press by and large wasn’t interested in reporting it, since it would have hurt Obama’s chances of getting elected.

Now, the Obama Administration is backing a two trillion-dollar cap-and-trade carbon tax. But that, too, is getting little press coverage — as are Obama’s broken campaign promises, like his pledge of a “net spending cut” if elected.

The U.S. press has barely mentioned Treasury Secretary Geithner’s role in the destruction of the economy of Indonesia, a major oil-producing nation of 200 million people, in the 1990s (even though Australia’s long-time Prime Minister Paul Keating has been scathing in his criticism of Geithner).

Given their unwillingness to print interesting — but ideologically inconvenient — news, it’s no wonder that lots of newspapers, like the Seattle Post-Intelligencer, have folded in the past year. Biased coverage is boring coverage not worth paying for.

Toxic-Asset Buy-Up: “Pure Plunder”?

by Hans Bader on March 24, 2009 · 1 comment

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Regulation, Stimulus to Nowhere

People who have actually read the fine print of the Administration’s trillion-dollar toxic asset buy-up program don’t like it. One calls it “pure plunder.”

Both liberals like Nobel Laureate Paul Krugman, and conservatives like Chris Stirewalt, sum up the program as “Heads I win, Tails the Taxpayers Lose.”

Others argue it provides “public subsidies” for hedge funds that don’t need them, and for “zombie banks” that ought to be shut down to cut the taxpayers’ losses.

Even Harvard business law professor Lucian Bebchuk, who once advocated buying up toxic assets, now says that taxpayers may end up being fleeced by the toxic asset program, and that it would have been better and cheaper to let AIG go bankrupt rather than spending $170 billion bailing it out.

In essence, the U.S. Treasury will “become the new AIG. In order to get hedge funds to buy up toxic debt, Obama is proposing that the Treasury provide loans up front and insurance against potential losses on the back end.”

The Administration claims taxpayers won’t lose a full trillion, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why does it continue to enforce accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules rightly value assets — in which case taxpayers may end up losing a trillion dollars — or they are wrong — in which case the rules should be repealed, so that banks, not taxpayers, can take on the risk of holding the assets. (If these rules, known as “mark-to-market” accounting, had been in place in the 1980s, “every major commercial bank would have collapsed.” As we noted earlier, many banking officials, economists, and lawmakers support junking those accounting rules).

Many bailouts, like the $170 billion AIG bailout, have been grossly wasteful, as former banking regulator William Seidman notes. For example, “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do.” That includes paying billions to AIG customer Goldman Sachs, which Goldman readily admits it did not need to survive.

Don’t trust politicians who say their spending programs are needed to avert disaster. Obama claimed the $800 billion stimulus package was needed to avert “disaster” and “irreversible decline.” But the Congressional Budget Office admitted that the stimulus package would actually shrink the economy in the long run.

In the Asia Times, Martin Hutchinson notes Fed Chairman Ben Bernanke’s role in spawning asset bubbles and the current financial crisis, his refusal to face his mistakes, and his inflationary policies, which now threaten to erode the dollar’s status as the world’s reserve currency (impoverishing America in the process).