Monday, March 23, 2009

Geithner Bailout Program

Wall Street has liked the program whereas most of the ‘blog sphere’ - both Left and Right - is sour on that program. Of course in this world even after bankrupting America, it is the Wall Street which rules. Even one of the most progressive leaders of America is also not immune to the gravitational pull of ‘money’ and we see President Obama essentially fallen for these Wall Street bankers.

1. Based on Sec. Geithner’s PPIP program fact sheet, around $100 Billion will be poured as the core capital which will come from TARP II fund pool. For the ‘legacy loan program’ FDIC will be on hook for the implicit guarantees it would offer. Ball park figure for such guarantees after subtracting asset value (say priced at 40% of the face value) seems around $200 Billion. So we are talking here upwards of $300 Billion on the expense ledger of the Fed budget.

2. Most of the blog sphere is lamenting about the extraordinary subsidy which is there for private parties in these programs. Indeed all these programs (there 2 – one for loans on the books of the bank and another for CDOs) are designed so as to make private participation extremely lucrative without much of down side whereas taxpayer loss potential is quite high but upside is limited.

3. As a principle of governance Obama Administration is wrong here – it is essentially wooing the same Wall Street Bankers who are culprit in all this mess. This is because Obama Administration firmly believes that for America’s prosperity these bankers (who are saddled with toxic assets because of their own carelessness) need to start lending again.

4. President Obama’s dependence on Wall Street bankers is disgusting and in the end betrayal to Americans. This is because with the same $300 Billion or so ($100 Billion cash and $200 Billion as guarantees for uncovered asset prices); Obama Administration could have started ‘direct lending’ to American people via ‘new start up banks’ or existing banks (local credit unions for example) which are not saddled with toxic assets.

5. Some time back Wall-Mart requested for Banking permit and at the lobbying of Banking Industry; it was forced to pull back. Why should not Wall-Mart of the world be allowed Banking permit so as it starts catering to market these existing bankers have refused to serve? Obama Administration could have simply ‘bypassed’ these recalcitrant existing banks and directly addressed the problem of Main Street without succumbing to ransoms of these bankers.

6. All such new banks could have been easily subjected to revised guidelines of ‘leverage’ as well as ‘compensation guidelines’. This would have essentially avoided the furors like AIG bonuses and executive planes of Citi and JP Morgan Chase.

All in all this obsession, as Krugman aptly describes, of trying to ‘improve’ balance sheets of existing banks has blindsided Obama Administration from any new creative initiatives at the same cost which would have solved America’s problem directly. What a shame.

President Bush wasted more than half Trillion dollars on Iraq War. President Obama, looks like, intend to waste another half Trillion dollars potentially in favoring Wall Street. What is with these White House Occupants? Why do they cost so much to Americans? It is sad.

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