I Told You So
Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners.
Now I read that, so far, PPIP has generated a 36% annual return for the Treasury. That’s not the point. The point is that it has generated approximately no profit or loss for the FDIC, because the FDIC refused to be played for suckers. They key sentence is
The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program.
Note that the acronym FDIC doesn’t appear.
*Sorry for the brief uninformative title. I foolishly precommitted to the title:
OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”
I note that Krugman, Stiglitz, Atrios and others have NOT come back with an explanation of their errors.
And Stiglitz has gone on to make nonsensical statements about the Fed MBS purchase program
JSKit is responsible for that stuttering.
i think “so far” is the key operative…
There’s no “so far” because the scenario Krugman/Atrios forecast was a ridiculous scam in which investors would be stupid enough to use “expected value” to try to stiff the government and that has not happened and cannot happen. The problem was that taking the assumption that the Obama administration was both stupid and in league with the banks to rip-off the public and combining it with the confusion that neo-classical economics applies to the meaning of probability theory produced a scary tale that had no rational basis at all.
Good job Robert.
However, look at the small size of the program: $29B. If anything the rules were too favorable to the taxpayer, as the 36% return indicates, and didn’t buy enough troubled assets.
This caused the plan to shift to direct preferred stock nvestment in banks, which was actually a better solution. Overall, the Federal Government backstopped the financial crisis extremely well.
Wow so he actually adds value. Who knew?
I think you’re on to something: Where are all those troubled “assets”? And didn’t the gov’t just announce that it would be converting preferred shares to common? That seems risky under the current state of the financials. There’s at least another shoe to drop before this settles.
What is worrying is if they are taking dividends out before repaying the feds for the loan. But I’m not very confident in Linus Wilson’s reporting.
Where are all those troubled “assets”?
Maybe here: Tab for Fannie, Freddie could soar to $259B
……Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion.
The bill for rescuing Fannie and Freddie has been rising, while the estimates for other rescues have been sinking.
Here’s Stiglitz’ new nonsense
” The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting. But no one should be fooled.”
This is such a weird argument that the fact error ( of course there is an active market for agency debt and mbs) almost disappears. And then Nomi Prins comes out with this odd claim
“The Fed owns nearly $1.5 trillion toxic assets that already have no bid (actual buyer), and will have less of a bid the more uncertainty there is about the loans that fill them.”
Weird how they have no bid (false) but will have even less of a bid (negative bids?)in the future.
What’s up with this?
Good point. The question is how many of these loans were fraudulently rated before handing them over? There have been some folks calling for the banks buying some of the loans back. The recent revelations with possible fraud in the forclosure mess, coupled with the Fannie and Freddie mess…. as noted earlier, there is still at least another shoe to drop before this settles.
I think the preferred shares purchases were pre PPIP. Also note above, I read the actual PPiP plan because of a comment of yours so thanks.
The preferred to common was specific to Citibank (OK maybe GMAC too I don’t remember). The return on the Citibank common stock has been especially huge (not as huge as the PPIP returns but huger than the returns from just preferred stock and warrents from e.g. Goldman Sachs). Generally taking risks is rewarded. There is no reason why the Treasury should be at all reluctant to bear risk. In fact if the Treasury bears risk (really tricks people into thinking it is bearing risk as someone will have to pay the national debt some time but people are tricked) then it creates an automatic stabilizer.
I think that if there are two assets with the same expected return and one is safe while the other pays high returns in expansions and low returns in recessions, then the Treasury should buy the risky one.
Once someone asked to to anticipate the question yes this means I think the social security trust fund should be invested in common stock (by the social security administration as proposed by Reagan and Clinton not in private accounts as proposed by Bush).
I think that Stiglitz is wrong about the mortgages. He is ignoring default risk in pricing mortgages. This is a rather odd oversight under current circumstances.
He does discus the Fed not TARP, but his general claim that the government does not have to mark to market is false. In TARP accounting (and only in TARP accounting) the government was required to mark to market. This is not a minor issue. In fact it is the reason that TARP subsector Banks and AIG was forecast to make huge losses, then the economy turned out worse than expected and now TARP subsector Banks and AIG is expected to make profits. The expected loss was not the expected effect on the national debt but that expected effect plus a huge penalty for bearing risk. Since it is a positively good thing for the Treasury to bear risk the calculations weren’t off by a mere 300 billion or so (as it seems) but much more, that is the gain aside from preventing collapse of the financial system was much larger than the current estimate of 25 billion (I’d say hundreds of billions larger).
I note that the Fannie Freddie losses are still grossly overstated due to the assumption that the Treasury should be risk averse. Since the Fannie Freddie position is not unwound the incorrect rule about pricing still affects Fannie Freddie estimates. It also grossly miss states the effect of Fannie Freddie bailout on the national debt if Fannie and Freddie were to pay the Treasury back tomorrow. This is a separate issue but both are due to the silliness described below.
It is assumed that if the Treasury borrows at less than 3% and lends it to the GSEs at 10% and everyone pays all that is owed, then there is no effect on the national debt. That is, it is assumed that 10=3. This applies both to past payments by the GSEs and to predictions about future payments. In no other cases except TARP and the FannieFreddie bailouts does the Federal Government use such accounting. I promise you this is all true and the difference is hundreds of billions.
It’s much worse than that because the Fed does not borrow. The Fed printed money to acquire those MBS and bonds and is now sending the interest payments to Treasury. This reduces the national debt at some inflationary cost which means nothing in the current situation. So the Fed moved a $1.5T risk (since those bonds are GSE insured and that now belongs to Treasury) off the books and captured a revenue stream which looks like $70B+/year for the Treasury.
And why both Stiglitz and Prins want to treat the Fed as if it were a bank that had to show asset liquidity, is something I can’t figure out at all. The Fed has zero risk of needing to liquidate those assets in a hurry in order to get cash (since it buys cash from Treasury at the cost of the paper and ink). There are so many injustices and serious flaws in the financial system that it makes no sense to join with the Republicans in bashing Bernanke for things he has done right.