FT published its “exclusive interview” with President Obama today.  The interview of the “much like FDR” portrays the President as one who, in comparison to his predecessors, “conveys a degree of pragmatism” and “modulated phrasing” and who has a good chance to succeed in uniting the world at “the most important world economic gathering in decades”:

“Many believe that the G20 summit will prove a vacuous waste of time and that the world economy will continue to be sucked into the recessionary vortex. Mr Obama, however, projects a Zen-like calm towards the emergencies that he faces. If his rescue operations fail to arrest the tide, history may show him to have been too unfazed. If things started to stabilise and improve, Mr Obama could be hailed as the new FDR.”

In a guest post at Naked capitalism, Tyler Durden, publisher of Zero Hedge, builds on his breaking story that  AIG sold securities (unwinding large portfolios of CDS’s) at ridiculously low prices to the money center banks so the banks could make those much ballyhooed assertions of profits in January  and February which sparked a rally in bank stocks.  Approximately $1 to 2 billion per bank was made on these shenanigans.  This conspiracy is clearly undertaken with the full knowledge of the Obama Administration.  If this is confirmed by other sources, there should be resignations and prosecutions over this…

So…after Pandit and other bank executives blatantly manipulated their stock price by commenting about how they “made money” in January and February, now they start backpeddling.  Here’s a sheepish Jamie Dimon of JP Morgan with Erin Burnett (about minute 6:40) on CNBC after the Bank Oligopoly’s meeting with the president to plan future cheer leading activities:

Simon Johnson, who was formerly with the  IMF and who founded the Baseline scenario site has a great article in the  The Altantic about how the bankers oligopoly have staged a “quiet coup”, bringing the US government under their thumb since World War II and the urgent need to put them in their proper place before we spin off into depression. Hat tip, ZeroHedge. Here are a couple of quotes:

“The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.”

“The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.”

Nouriel Roubini on Bloomberg says the bank plan will help banks that are not already insolvent, but those that already are insolvent will have to be taken over.

But what about the banks?  It is indeed a travesty that the taxpayer is funding most of the “deal” and is giving up most of the upside to the bond daddy’s, like PIMCO and Blackrock.  However, the greed of said bond daddy’s will make it hard for them to turn this deal down.  Setting conscience aside, I can’t blame them. It’s a bird’s nest on the ground!

But, will the banks sell?  If they don’t, then the plan is a failure. If they do, it’s true, the taxpayer suffers ($2 trillion, maybe more?), but the banks will indeed unload those “toxics”.  And, if those toxics are off the banks’ books, does that make the banks able to lead us into economic recovery?  Well…there’s still CMBS’s and Credit card loans left to go really bad and be dealt with.  Will those be more upside opportunity for the bond daddy’s?  Well, it could be that if the Treasury pulls off this first heist, or gift to the bond daddy’s, they will be able to pull off the second and third for CMBS’s and credit cards, respectively, too.  So… in summary, it all depends on whether the banks will accept the bond daddy’s offers.  If they do-looks like we should be buying bank stocks…and bond daddy’s too.   The market today clearly thinks the banks WILL accept their offers.  The WSJ reports the big banks are likely to take the offers:

“By Matthias Rieker

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Strong banks will benefit from the Treasury’s new plan to buy to $1 trillion in troubled loans and securities; for weak banks, the plan may require them to face write-downs they can ill afford.

Thomas B. Michaud, a vice chairman of KBW Inc., agreed. “The market went from too much leverage to no leverage,” and that led “to a massive problem in price discovery” for assets banks would like to sell, he said. Private investors had to rely on the loans or securities alone to generate their returns, but with the benefit of the government’s leverage, investors are able to pay higher prices.

The Treasury intends to establish an auction process for assets banks want to sell.

“Those [banks] with enough capital” will benefit, Michaud said. “Those who can afford to rid themselves of the bad assets at the prices offered. If you are a very thinly capitalized institution you may feel as if you cannot afford to sell assets at the required prices.”

However, in concert with the other government programs already put in place, the banking system might be on its way to stability, Michaud said. Though he said many will need to raise more capital to make it through the crisis.”

From Silla Brush at The Hill:

“We like it,” said Scott Talbott, a lobbyist at the Financial Services Roundtable, which represents 100 of the nation’s top financial corporations. “Our banks say, ‘We’ll be selling,’ and our private equity clients say they’ll buy.”

Of course the prices haven’t been established yet so it’s unclear how the lobbyist’s banks can know they will sell…or do they really already know and the fix is in? Are there those who think otherwise?  On Sunday, Mark Williams of the  Associated Press reported:

“It’s quite possible we could make bad banks out of good banks,” Sung Won Sohn, professor of economic and finance at the Smith School at California State University, said Sunday.

Sohn wonders whether the sale of assets at bargain prices, to remove them from banks’ balance sheets, would then force other banks to have to write down the value of similar assets they might not want to sell…”

IF one bank IS forced to write down their assets due another bank accepting the offer from the bond daddy’s…this could bring a panic as all banks scramble to find capital to offset the losses and scramble to find other bond daddy’s to buy their toxic assets too.  The Treasury program might then have to morph into a much larger plan…even before the CMBS’s and credit cards go really bad.

Felix Salmon says the plan could make things worse due to the same things we point out above: setting a market that other banks can’t live with:

“The status quo, absent any Treasury proposal, is basically the Hempton plan: let profitable-but-insolvent banks work their way slowly back to solvency by making large operating profits and not paying dividends. But the problem with the Hempton plan is that it only works on a kind of don’t-ask-don’t-tell basis: the banks can’t be publicly insolvent, since then they need to be taken over by the government.

The minute the Treasury plan is put into action, we’ll have a lot of public price discovery for the banks’ bad assets. And if the prices don’t clear — if the minimum price the banks will accept is higher than the maximum price that the public-private partnerships are willing to pay — then no one will any longer be able to perpetuate the fiction that America’s banks are solvent. And without that fiction, the Hempton plan — the muddle-through status quo — is toast.

The big hope of the Treasury plan is that the private sector will be willing to pay a higher price for leveraged assets than it would for unleveraged assets.”

Following up on Felix Salmon’s last sentence, if investors pay 10% more than they think the underlying  assets are worth (without leverage) they increase the risk of complete wipeout of the scant equity they put up…If investors (the bond daddy’s) truly believe the value of the toxic assets will at least stay stable, if not rise, this may be a good bet. But if there is much risk they will fall, then they won’t buy them.  This is true even if the assets are held by the investors to maturity because if the value falls it is because the cash flow stream has fallen.

Liberal Arianna Huffington wants Geithner to resign and calls the Geithner plan a rehash of Paulson’s ideas:

But the issue isn’t Geithner’s delivery, it’s what he’s delivering: an approach to the crisis that is as toxic as the assets that have hamstrung the economy. Geithner, brilliant and hardworking though he is, is trapped within a Wall Street-centric view of the world and seems incapable of escaping.

That’s why every proposal he comes up with is déjà vu all over again — a remixed variation on the same tried-and-failed let-the-bankers-work-it-out approach championed by his predecessor, Hank Paulson. For Paul Krugman, this “insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice?  That is, are they stupid, or do they think we’re stupid?”

Well, if you are confused about who exactly IS stupid here and about whether the banks will accept the offer and whether we should buy banks – We are too.  How can the market be so sure?

The Treasury has released its new plan to remove toxic assets from banks.  It provides an example of how the plan would work for legacy assets.  Perhaps as we read it, we should mentally substitute a lower price than the 84 used in the example.  Then estimate best and worst cases for the resale value of the example asset (say) 4 or 5 years from now.  Here is the example:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Bank bond holder should not come out of a bad bank unscathed.  Jeremy Bulow at VOX submits a viable plan to deal with the banks:

A plan that isolates the bad liabilities rather than the bad assets of the banks, and pays the owners of those claims everything they legally deserve in liquidation but does not fully immunise them from losses, will achieve three major objectives.

• It will help unfreeze the credit markets by creating healthy banks able to lend.
• It will assure that depositors are paid in full, and all creditors are paid at least their entitlement.
• It will make the bailout cheaper for the government, increasing its flexibility.

VOX is on the right track. We believe, for any plan to work it must:

a. Make the bank bondholders pay before taxpayers do, and,

b. prevent CDS’s on bank bonds held by those without an insurable interest from spreading panic. We have previously discussed how this issue can be dealt with through taxation.

This is in line with VOX’s suggesion to focus on the liabilities and not assets.

David Brancaccio interviews Kenneth Rogoff, Harvard economics professor and former chief economist of the International Monetary Fund on NOW on PBS.  Dr. Rogoff says we won’t be back to the same level of GDP as 2008 until after 2011 and that we have to take the big banks “through some form of” bankruptcy…

The President should explain exactly why bank creditors are being bailed out under the systemic risk exception of the “least cost” way to take over a bank .  Why are bondholders more important to him than Taxpayers? Zero Hedge (hat tip), writing a great piece about the FDIC chastising Bloomberg for “inaccurate reporting” regarding FDIC’s dwindling resources, highlights what a legal dictionary says about the systemic risk exception in taking over a bank:

§ 360.1 Least-cost resolution.

(a) General rule. Except as provided in section 13(c)(4)(G) of the FDI Act (12 U.S.C. 1823 (c)(4)(G)), the FDIC shall not take any action, directly or indirectly, under sections 13(c), 13(d), 13(f), 13(h) or 13(k) of the FDI Act (12 U.S.C. 1823 (c), (d), (f), (h) or (k)) with respect to any insured depository institution that would have the effect of increasing losses to any insurance fund by protecting:

(1) Depositors for more than the insured portion of their deposits (determined without regard to whether such institution is liquidated); or

(2) Creditors other than depositors.

(b) Purchase and assumption transactions. Subject to the requirement of section 13(c)(4)(A) of the FDI Act (12 U.S.C. 1823(c)(4)(A)), paragraph (a) of this section shall not be construed as prohibiting the FDIC from allowing any person who acquires any assets or assumes any liabilities of any insured depository institution, for which the FDIC has been appointed conservator or receiver, to acquire uninsured deposit liabilities of such institution as long as the applicable insurance fund does not incur any loss with respect to such uninsured deposit liabilities in an amount greater than the loss which would have been incurred with respect to such liabilities if the institution had been liquidated.

[58 FR 67664, Dec. 22, 1993, as amended at 63 FR 37761, July 14, 1998]

To get a grip on the too big to fail problem, Congress established a difficult-to-trigger systemic risk exception. A least-cost resolution can be foregone – and by implication a resolution method selected that results in uninsured depositors and other creditors being protected – only if the Board Of Directors of the FDIC, The Board of Governors of the Federal Reserve System, and the secretary of the Treasury, in consultation with the president, determine the least-costly approach “would have serious adverse effects on economic conditions or financial stability.”

Nobel Prize winning, self-described liberal economist Paul Krugman said on his blog Saturday:

“…it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.”

Basically, Dr. Krugman says the banks have to be taken over in a way similar to the way the Swedish did and we did with our S&Ls and that Geithner’s plan will not be accepted. Krugman refers to Yves Smith’s blog in Naked Capitalism:

“The New York Times seems to have the inside skinny on the emerging private public partnership abortion program. And it appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper….Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.”

It appears we will have to look harder for a thoughtful supporter of this new plan.  We expect Obama’s press secretary, Robert Gibbs to be supportive…if he can quit stammering long enough.  Sadly, this extremely complex “set-up” is intended to whitewash the fact that if assets move off the books of banks under this plan, the taxpayer is going to pay virtually the entire difference between their current market value and the amount the banks are currently carrying them on their books. As Krugman says, “the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines”, so they instead wrap it up in this dribble for camouflage.  Remember too –it’s the taxpayer who pays this difference in Geithner’s plan, private investors really are just window dressing and  bank bond holders remain completely unscathed! We think the Obamunists have just begun to here the public outcry..