Thursday, June 4, 2009

Hate to Say I Told You So, But ...

When Geithner whisked the veil off his bank rescue plan (to set up public-private partnerships to buy toxic bank assets through auctions), everyone immediately began crawling over it with a magnifying glass, looking for flaws. The informed commentariat was screaming about the taxpayer being ripped off, about huge subsidies for overpayment on crappy assets, and on and on. At first blush, it looked like the banks were playing us for fools again.

I proposed a counter-theory early on, on March 25 (and was one of the rare few to throw my weight behind this particular viewpoint, as far as I can tell; Roger Ehrenberg was another):

The major banks, weighed down with toxic debt, weren't celebrating Geithner's auction plan; rather, they hated it. Huge overpaying on the part of the buyers (investors paired with the government) wasn't baked in at all. Unless the system could be gamed, which seemed unlikely, overpayment would be relatively small. Once the banks took a good hard look at PPIP, they swallowed hard and said: "Damn. We are in a LOT of trouble if we have to be part of this. We'll have to stop pretending our crappy assets are worth so much. We'll be exposed as insolvent for the world to see. We need to find a way to deep six this PPIP."

The banks aren't stupid though. If they had attacked PPIP out of the gate, they would have seemed obstructionist, ungrateful and even mendacious (they kept complaining they couldn't obtain a "market price" for selling their assets; now Geithner's program offered buyers of the assets cheap money, on great terms -- so if they still couldn't get a "market price," what was their excuse going to be?). So they laid back, waited and maneuvered behind the scenes.

The tottering banks realized they needed to reject the Geithner plan from a position of strength. Their strategy became evident by mid-April, as I noted on April 16 in "JPMorgan Flips Geithner the Bird."

The moribund institutions took a three-step approach:
1. Get strong enough to lean forward.
2. Get strong enough to sit all the way up.
3. Spit hard in Geithner's face, aiming for the eyes, if possible.

Of course the banks didn't actually achieve #1 and #2. This being a crisis of illusory profits, illusory values and such, they instead activated the banks-getting-up-and-looking-healthy hologram, for us all to behold. In other words, they accomplished #1 and #2 by getting accounting rules bent for no good reason (except to allow them to more easily overstate the value of bad assets) and reporting glowing first-quarter earnings that, when examined close up, either made no sense at all or benefited totally from massive government intervention to prop up the banks.

Then one of them had to hawk a loogey in Geithner's pretty white-boy face and see how everybody (Washington officials, news columnists, commenters far and wide) reacted. Jamie Dimon of JPMorgan got the honor (after all, he's got the best cred in the White House, having been on the short list for the Treasury Secretary position). So Dimon came out and said, "JPMorgan isn't going to participate in PPIP; forget it."

The other banks waited, peering anxiously through spread-fingered hands, to see if there would be a huge outcry of protest ... but Dimon didn't get his hand slapped, and the blogosphere pretty much ignored his statement.

So that brings us predictably to now, where half of PPIP (the legacy loan component) is being postponed (read: dead) and believe me, the second half (the auctions for the securities) should be headed into the grave too. Just wait.

Here's the lead on the New York Times story:
The Federal Deposit Insurance Commission indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.
The reason given, quite bluntly:
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
And why were a bunch of sick, ailing banks allowed to get away with this? Well, because they outsmarted Washington, sucking hard at the federal teat and muscling accounting rule changes, until they could appear healthier than they really are:
F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.
Again, hate to say I told you so, but ...