Happy Financial Fools day

That's right, rather than today be called April Fools day, it might be more appropriate if the day is labeled Financial Fools day. At least that is what the Treasury Secretary hopes that we all are: 'financial fools'. Economics Nobel winner Joseph Stiglitz's analysis of the bad asset bailout plan unveiled late last week by the Obama administration calls it a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

From here: Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership! Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan. If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

Even the Wall Street Journal, long a voluptuous cheerleader for capitalism does not like what it sees in this plan.

We have no idea if Treasury is playing favorites, but it certainly doesn't look good. All the more so given that some of these big players may have consulted informally with the Obama Administration as it was writing the plan. Not to mention that the big asset management companies that are most likely to land plum fund-management jobs are also the ones that have been most vocally praising the Treasury plan.

Recent photographs from a visit to see Barnaby Whitfield's pastel works in an exhibition titled 'Ah For A Man to Arise in Me / That the Man I Am May Cease to Be' currently on view at the Stefan Stux Gallery, Chelsea. More information here.

Putting a price on toxicity...

One of the ideas put forth by the Obama administration is to create a bad bank that will help absorb bad assets (like toxic mortgage securities) from good banks, hold it over time and then sell the assets to recover some or most of what it had paid thus aiding the taxpayer. Freed from the drudgery of holding onto these toxic assets, the good banks would start lending again and bring our economy back to full steam.

Sounds easy - until one considers on how best to value the underlying toxic assets... as this example from the Times amply demonstrates...

The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency. The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors. The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

One hopes fervently that the Obama administration will do a fair job of valuing these assets in ways that will provide incentives for the taxpayer rather than give it all away to the banks who led us into this mess. Given the ill conceived mish-mash loaded into the current stimulus package winding its way through the Senate, one hopes that the financial bailout will contain less excreta.

Quick comment...

As mentioned here before, Geithner is a good pick for Treasury. Looks like the markets liked it. Seemed to close 500 points up. But then, who believes the markets these days...

Comment on Obama considering Summers for Treasury

The Times is agog with the news that Mr. Lawrence Summers is in the short list to be the next Treasury Secretary. It is commendable that President elect Obama is looking to allay jittery markets and appoint someone as quickly as possible at the Treasury who can project an image of stability, values and infuse continuity at the Treasury.

The only problem is that Mr. Lawrence Summers is not that man.

From his speech to the National Bureau of Economic Research:

Women often don’t want to work the hours needed to get to the top and that girls are socialized toward nursing while boys are socialized toward building bridges. In the special case of science and engineering, there are issues of intrinsic aptitude, and particularly of the variability of aptitude, and that those considerations are reinforced by what are, in fact, lesser factors involving socialization and continuing iscrimination.

In other words, this man was telling us that women were intrinsically inferior to men when it came to math and sciences.

That he was the President of Harvard University when he made that comment was another thing... Now he is being considered by President elect Obama to be the Treasury Secretary. No way. Now how. Not ever.

Obama can do better than that. Geithner is the right individual for this job.