Monday, March 23, 2009

More smart takes on Geithner

Here is Brad DeLong's Q&A about the plan and its potential .  He comes down on the positive side, but noting that this is "part of the plan", not "THE plan".  That is, this will not magically fix everything wrong with the economy.

The rationale for the Geithner plan is roughly as follows:
a) "toxic" assets (mortgage-backed securities) are worth less than they originally were, but they are not worthless.
b) Normally, we'd see different financial groups (hedge funds, private equity funds) buying up these toxic assets for pennies on the dollar, and making a handsome profit as either i) the market comes to its senses and they can resell these assets for more pennies, or ii) they just hold the assets to maturity, banking the monthly mortgage payments that fund these assets.
c) Times are not normal, and no financial groups are stepping up to buy these toxic assets. Mainly because they cannot secure funding from the major banks.
d) The Treasury is going to step in and buy up these assets. To manage this, they are going to hire the financial groups (hedge funds and private equity funds) to do the actual purchasing.  They'll pay these financial groups by giving them a share of the profits that the Treasury thinks it could make by buying up the assets for pennies.
e) By buying up these assets from the major banks, the major banks will no longer look like hedge funds and will be able to resume acting like real, boring, regular, banks.

It's important to note that we are not buying these toxic assets for the hedge fund managers.  We are buying them for ourselves.  We're paying the hedge funds to do the buying, and giving them a cut.  It's like engaging a realtor to buy a house. They get a cut of the transaction - you get the house.

Could the Treasury make money on this?  Yes.  Will they?  Don't know.  Why bother?  Because it gets the toxic assets off the bank balance sheets, and therefore banks can go back to being banks. That will help the regular economy get moving.

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