Geithner Update: Grab Yer Ankles and Say “Uncle Sam”

Timothy Geithner refuses to take underwater banks into receivership and resolve them, but has no problem turning the FDIC into a hedge fund. That’s right; under Geithner’s “Public Private Investment Partnership” (PPIP) FDIC chief Sheila Bair will assume the mantle of Bernie Madoff and oversee the establishment of Hedge Fund USA, a behemoth government-owned operation that will enlist the talents of five or six Wall Street managers to conduct auctions for toxic home loans and other repellent securities. The new program, which will provide lavish subsidies to investors, marks the first time that a standing government has transformed itself into a financial institution for the sake of its primary constituents, the banks. The PPIP creates a state-funded clearinghouse for overpriced junk derivatives and then passes the windfall on to over-leveraged Wall Street speculators. Go figure?

Here’s what everyone needs to know: The US government (you) will provide up to 94 percent of the financing (low interest, of course) for dodgy mortgage-backed assets that no one in their right mind would ever buy so that wealthy and politically-connected banksters can scrub up to $1 trillion of red ink from their balance sheets. Ugh!

The so-called “private partners” in this confidence scam will get non recourse loans, which means that if the plan backfires and they lose their skimpy six percent investment, they can call it quits and leave the taxpayer holding the bag. ($1 trillion in potential losses!) Here’s how Paul Krugman sums it up:

“The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. This isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.”

“Markets”? Who said anything about markets? This is corporate welfare, pure and simple.

Also, the partnerships will be conducted through off-balance sheets operations (Enron-type structured investment vehicles or SIVs), so the parent company (our new business partners) can avoid liability when they dump all types of ineligible, unmarketable, toxic garbage into the program, which they will, since the average banker has moral scruples of Hannibal Lector.

The opportunities for fraud in Geithner’s public-private Banker’s Bonanza are truly breathtaking. All the bank has to do is shovel its mountainous pile of B-grade dog dung into its newly minted SIV and then hide behind its government issue “no risk” loan and claim ignorance when the FDIC tries to get its money back.

“I’m so sorry. How did that 2006 vintage subprime CDO made up of liar’s loans from unemployed Pizza Hut workers get mixed up in there? My bad.”

Geithner’s plan assumes that the market has made a terrible mistake misjudging the true value of these unloved assets. He thinks that if the government just adds a trillion or so of liquidity and its explicit Seal of Approval, the securitization markets will miraculously spring to life, the credit logjam will loosen, and Wall Street will return to the high-flying Maestro days of easy money and burgeoning profits. Geithner refuses to accept that the market is right; that assets which originated through lax lending standards, faulty ratings and hyperbolic market conditions are actually worth only pennies on the dollar. Thus, the whole concept of the PPIP — which is to keep asset prices artificially high through government injections of leverage — is wrong and only puts off the inevitable writing-down of bad debt until a later date. Geithner’s job is to fix a system that is on its last legs and needs emergency triage. Instead, he is merely adding a few more gusts of helium to a burst bubble.

In Geithner’s defense, we should try to understand the challenge he is facing. It’s not easy pulling the wool over people’s eyes, especially when they’ve been repeatedly fleeced. The Treasury Secretary’s main job is “to keep the big banks in private hands” and to remove over a trillion dollars of toxic mortgage-backed assets that are worth only a fraction of their original value. According to economist Dean Baker, these junk assets are worth roughly 30 cents on the dollar, although the banks have them listed on their books at 60 cents on the dollar. If the banks are not able get full price, then many of them will be forced into bankruptcy. Geithner’s job is to make sure that doesn’t happen, which is why he has created the “public-private partnership” smokescreen to conceal the fact that the government is intentionally overpaying for significantly downgraded sludge. Here’s how economist James Galbraith puts it:

“The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don’t want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.”

Galbraith explains why Geithner has avoided “price discovery” at all cost. Consider this grim factoid for a minute: We are now 19 months into the biggest economic catastrophe since the Great Depression and STILL the public has no fixed idea of what these rotten assets are really worth. The business media, the government and big finance have engineered the biggest cover-up in history just to protect the interests of crooked banksters. Is that how a free market is supposed to work?

The question that should be on top of everyone’s list is this: Why would Geithner create a program that rewards bankers and hedge funds at the expense of the public? Or to be more specific: What manner of man would conjure up a transaction where taxpayers put up 94 percent of the investment but only stand to get 50 percent of the profits?

Who is Geithner working for anyway?

There’s no getting around the fact that Geithner is a financial industry representative planted in the White House to do Wall Street’s bidding. Institutional bias precludes him from doing his job. That said, the first step in any financial rescue plan must be to hose down Treasury, banish the fraudsters, and bring in a whole new economics team. That will pave the way for nationalizing the banks and providing debt-relief to the people who need it most, the victims of Wall Street’s Ponzi-credit bubble scam.

Mike Whitney lives in Washington state. He can be reached at: Read other articles by Mike.

8 comments on this article so far ...

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  1. Tennessee-Chavizta said on March 25th, 2009 at 11:17am #

    A letter i sent to the President of United States Barack Obama

    Hello Mr. Obama: Dear Excelent Mr. President Dr. Barack Obama. Congratulations on becoming our president and on saving the United States from the fascist dictatorship of George W. Bush, zionist-neoconservatives and the Republican Party. We have to thank God and the US voters for The Democrat Party for saving us from John Mccain and Sarah Palin who as zionist warmongers as they are, were real eager and ready to take the whole world to the brink of a nuclear-armageddon war against our allies and against the people of this world.

    We all know that the world capitalist system is in its final stages, and that neoliberalism destroys nations, and that socialism as Hugo Chavez has said is the only solution for this world’s economic crisis. It would be worth studying to change the economic advisors in your cabinnet, because i am sure that they are real good intentioned, but their neoliberal-ideology is the problem. It would be better for the whole United States economy and future, to consider people like Joseph Stiglitz, Dave Korten, and Michael Hudson (Dennis Kucinich’s economics advisor) in your cabinet, and Dennis Kucinich himself.

    Also, like you said Mr. President you are willing to have a bipartizan team, why not considering well intentioned people of the Republican Party like Ron Paul, and Paul Craig Roberts (Ronald Reagan’s advisor)

    What USA needs is a gradual change toward a participative-democratic socialist system of the XXI Century, thru a Constitutional Reform by a Constitutional Assembly like many modern nations today are reforming their own political and economic system. A Political Reform would not be complete without a democratic economic reform, so that USA could move from a corporate-capitalist country toward a real nationalist-econonomic system, where the key elements of the US industries would be owned by the US government, a Robin Hood fiscal reform, in order to shrink the gap between the rich and poor. Another good worth pondering is to stimulate a plan of workers-cooperative businesses, under workers-ownership who are the creators of wealth like Karl Marx said.

    The wealth of this great land belongs to all US citizens and specially *workers* who are the creators of wealth, but they won’t be able to claim that wealth without a nationalization program under state and workers-control of the key elements of US industries like oil, water, communication, electricity, gold, mines, etc.

    US citizens would greaty benefit from a socialist subdization program of basic utilities, basic goods and services. Americans also need access to subsidized or free Universities and Colleges, this country needs more public socialist education instead of private education. It would also be a great idea for US government to regulate right-wing stations like CNN and FOX and also to create a state-owned progressive TV station with progressive media people like Amy Goodman and Juan Gonzalez, in order to spread the ideology of egalitarian-democracy, the US founding fathers, to teach americans democratic egalitarian values, so that thru a good education programs americans truely be free individuals and architects of of our own destiny and wealth. On the international level it is worth studying the closing of most US military bases, the incorporation of USA in the ALBA (Bolivarian Alternative of the Americas), and it would be a great idea to consider Jimmy Carter as peace missioner on the Israeli-Palestine conflict.


    Just an average joe who is awake

  2. Deadbeat said on March 25th, 2009 at 3:57pm #

    “Markets”? Who said anything about markets? This is corporate welfare, pure and simple.

    I think it is unwise to use the phrase “corporate welfare”. I know this phrase has been popularized by Ralph Nader for the past 20 years but I think it has quite the opposite effect on the American psyche. The attack on “welfare” stated with Reagan who used the stereotypical image of an overweight African American woman with many children feeding on the public dole. This imagery created a backlash against social programme s and social spending in general. To label these exercises in raw power as “corporate welfare” demonstrates how ruling class thinking affects even those who should know better.
    The term “corporate welfare” doesn’t come with advocacy of “universal welfare” it is used as a catch phrase to highlight that the corporation are getting all the money just like all those Negroes on the dole. The natural tendency is not only to eliminate corporate welfare but welfare in general. This use of the term “corporate welfare” then become a REACTIONARY tool that helps promote the Libertarian bromide to all government social spending – cut everything and “reduce government”. It promotes and opens the door the kind of “Ron Paul/small government” reactionary approach rather than one that will serve to redistribute wealth and resources.
    Part of the reason why Reagan won office and was given the green light to slash social spending was due to the stereotypical imagery of people needing social services. This crisis now uncovers that we all need social and economic services and now is the time to EMBRACE welfare rather than to continue to belittle it.

  3. bozh said on March 25th, 2009 at 4:34pm #

    deadbeat, yes,
    as i’ve said before, If we swim in one genetic pool, we shld swim in one economic/caring pool.
    it is the genetic pool that produces bach, stravinski, pucciny, tesla, einstein, pasteur, dostoyevski, darwin, bohr, newton, euclid, dante, shakespear, picasso, et al and not 2-5% of people of any country that creates these and other geniuses.

    it is these geniuses that have produced knowledge in every field of human endeavor; if it is up to O, most priests/nobles/politician, most of us wld be slaves even today.

    pols and priests rule over us with cunning methods; perfected over millennia; so, serfdom may be on the way out and slavery once again institutionalized. tnx

  4. Jeff said on March 26th, 2009 at 5:35am #

    Unfortunately, this is leading by design to the NAU and a common currency for this union.

    All but the lines on the map are about to change.

    Watch for a shift mid summer.

  5. Jeff said on March 26th, 2009 at 7:12am #

    bozh, is not serfdom just the “middle class” of yesteryear? Is not slavery just “homeless” of yesteryear?

    The names change but the game remains the same.

  6. Tony S. said on March 26th, 2009 at 2:39pm #

    It is time for the United States Socialist Reclamation – USSR for short.

  7. Kaelieh said on March 27th, 2009 at 2:35am #

    Geithner is the epitmoy of what is wrong with this country, the Federal Reserve. He was president of the NY Federal Reserve. It is a private banking institution and its existence is a direct threat to the Republic. The Federal Reserve is the greatest of all enemies, foreign and domestic.

  8. Max Shields said on March 27th, 2009 at 5:02am #

    This Geithner crap is getting as tired as the Madoff crap, and the $165m AIG bonus crap, and the Wall Street crap, and the bailout crap.

    The system is collapsing. It has the seeds of its own destruction and they are blooming big time.

    The collapse needs to happen to make the necessary changes. The rest is petty small talk. The party is over, the unraveling is in process.