Lets imagine that last year we borrowed $500,000 for a house we couldn't really afford. Now, the house is maybe worth ~$400,000 (if we can find a buyer), we haven't paid our mortgage for the last six months, and the bank is threatening foreclosure. We could put up (picking a round number) $25,000, have the government put up another $25,000 and guarantee tan additional $300,000 and buy the mortgage for $350,000. We would now have taken the house off the bank's balance sheet and moved it onto the government's tab. If we turn around and sell the house for $375,000 (now the house is a bargain!) and we split the profit with the government, we will have made a nice %50 profit on the transaction. If the house doesn't move, we can simply bail on the deal, we're out $25,000 and the government is on the hook for the rest. If two deals work out of every three,we are doing pretty well; if we price the houses aggressively, and we have no reason not to, they will sell and we will make out like proverbial bandits!
There is only one problem with my plan. There is no way the government will allow me to get in on the deal (even if I have the spare cash to invest.) No, that is reserved for the banks, hedge funds, and other friends of Congress (although to be fair, they have some pretty powerful disincentives, since if they make so much money that it becomes an embarrassment for Chris Dodd, Barney Frank, or the President, they are likely to be threatened with exposure and bodily harm.)
This is my best guess for how these public-private partnerships are supposed to work. The government (ie, you and me and the rest of us taxpayers) take on most of the risk and the private parties gain most of the profits. There is a term for this kind of public-private partnership: Crony Capitalism. Crony Capitalism has a long and glorious history, finding traditional expression in South America and more recently coming to fruition in post-Communist Russia.
[Disclaimer: I am not a financial expert and don't claim any particular expertise when it comes to investing; if my characterization of the Geithner plan is completely askew, please correct me. I hope I am wrong but thus far, haven't seen any reason to question my take on the plan.]
In his article in Rolling Stone, which contains many points upon which one could quibble, Matt Taibbi focuses his anger on those who engineered this mess and now are standing to profit from it:
In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations.
In other words, it's AIG's rip-roaringly shitty business model writ almost inconceivably massive — to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that's been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren't such a nightmare.
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In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.
God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. "This is exactly what the financial system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren't many people who don't run hedge funds who have expressed anything like that kind of enthusiasm for Geithner's ideas.
As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.
In Matt Taibbi's world, of course, most of the evil is intentional, the work of Wall Street barons and their paid for friends in Congress. He fails to note that an incredible number of Wall Street jobs simply no longer exist (since those who lose money on Wall Street lose their jobs, as opposed to those who lose money in Washington.) But the anger he expresses, which captures the sense that those who got us into this mess are now being offered obscene profits to get us out of the mess, is ubiquitous.
What a comment on our country: We will "save" such disastrously mismanaged entities as AIG, Citi, and Bank of America, reward Goldman Sachs for having friends in the right places, and burden our children and grandchildren with debt beyond belief. What happened to churn, creative destruction, failure? (And don't get me started on GM, Chrysler, et al; propping up failed business models with my tax dollars seems counter-productive, at best.)
Further, one way of thinking of Geithner's plan is that it seeks to artificially (re)inflate the sinking value of our real estate, which begs the question: Isn't that what got us into this mess in the first place?
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