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Tuesday, February 10, 2009 1:16 AM

Insanity Prevails

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The New York Times is reporting Geithner Said to Have Prevailed on the Bailout.

The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

On Monday evening, new details emerged after lawmakers were briefed on the plan.

It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.
My Comment: Notice how insane this is. The market cap of Citigroup(C), JP Morgan Chase(JPM), and Bank of America (BAC) combined is $158 billion, yet the program is going to provide an initial $250 billion to $500 billion (with more insanity coming) just to deal with "soured mortgage-related assets".
A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans.
My Comment: Just how sane is it to attempt to "unfreeze" commercial, student, auto and credit card loans when unemployment is soaring, savings are at zero, and consumers are in debt up to their eyeballs?
A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.
My Comment: Why not get it over with? Just give every bank in the country $1 trillion and be done with it. But if you do, don't expect any results, because it is still insane to lend when there are not any jobs.
A separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages is to be announced next week.
My Comment: This sounds suspiciously like a fourth component. I suspect components five through twenty will soon be on the way, and none of them will work either.
For his part, Mr. Geithner will blame corporate executives for much of the economic crisis, according to officials. He will announce rules that require all banks receiving capital from the government to submit plans that describe how they intend to strengthen their lending programs and generally restrict them from using the money to acquire other banks until the government money is repaid.
My Comment: Oh the shame! The only punishment I can think of that could possibly be more severe would be three lashes with a wet noodle.
In an interview on Monday Mr. Axelrod did not deny that there were differences of opinion as the policy was being crafted or that he had taken a harder line on issues such as executive pay restrictions, as other participants to the discussions recalled. But he said he was ultimately satisfied with the final product put forward by Mr. Geithner.“We had a great and productive discussion and as a result we came up with a good set of guidelines and rules,” he said. “I didn’t come away disappointed in any way.”
My Comment: Those looking for proof Axelrod is out of his mind, just found it.
Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment.

Nor will the government announce any plans to replace the management of virtually any of the troubled institutions, despite arguments by some to oust current management at the most troubled banks.
My Comment: Hmmm let's see. We let executives rape the shareholders, pass out huge bonuses, use ridiculous amounts of leverage, and we let them stay in charge. Just how sane is that?
And for all of its boldness, the plan largely repeats the Bush administration’s approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis and failed to foresee many of the problems plaguing the markets.
My Comment: I rest my case.

Mike "Mish" Shedlock
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