Sunday, March 29, 2009

>Greed & Fear (CLSA)


The best thing to say about Tiny Tim’s latest ruse for the banking system is that it will probably
take two months or so to see if it has a chance of working. This from a market perspective is
encouraging since it has the potential to keep equity investors hopeful. The second best thing is
that the teleprompter driven Obama administration made sure that on this occasion live televisions cameras were banned from the Treasury Secretary’s press conference.

That said, there are two ways of looking at this bank plan, now known as the Public-Private Investment Program (PPIP). The first is whether it is good public policy. The second is whether it has a chance of removing these toxic assets, or rather (puke) “legacy assets” from weaker hands to stronger hands.

On the issue of public policy, GREED & fear agrees completely with the criticism of the policy made by Paul Krugman in an op-ed in the New York Times published on Monday (“Financial Policy Despair”, 23 March 2009). This is a re-visit of TARP but a more complicated version where the government is providing an indirect way to subsidise for a select group of institutional investors the purchase of bad assets.

Quite why the Obama administration continues with this bizarre sneaky approach is beyond GREED & fear and certainly beyond an increasingly disillusioned Krugman, a once fervent Obama supporter. For all it is doing is seeking to protect the current vested interests on Wall Street which is hardly politically popular or radical. Indeed at a time when the political process is up in arms about bailouts and bonuses, the new administration is proposing to offer more sweet deals for Wall Street types via seemingly federally guaranteed non recourse funding. For this reason, if the scheme fails, Obama’s credibility will be badly damaged politically. In this respect Tiny Tim and his boss are taking a massive political gamble akin to putting everything on black on the roulette wheel. It would clearly be far better from every point of view to take temporary control of the insolvent banks and put the bad assets in a separate entity for their orderly distribution. This is why, contrary to some press reports, this current scheme is not the same as the Resolution Trust Corporation (RTC) which was set up in 1989 to deal with the consequences of the savings and loan crisis. For the RTC was selling assets which belonged to institutions which had already gone bust.

To see full report: GREED & FEAR