Cash For Trash 2.0...

I have a huge blog-crush on Steve Waldman, and no more than today (emphasis mine): 

I am filled with despair, not because what we are doing cannot "work", but because it is too unjust. This is not my country.

Consider a hypothetical asset manager, PIMROCK. PIMROCK reviews a pool of loans held by the bank J.P. Citi of America, and its analysts determine they are worth 30¢ of par value. The bank holds them at 80¢ on its book. PIMROCK agrees to put down $10B to purchase loans from the pool at 82¢ thrilling stock markets everywhere. It was all just a bad dream!

Under Geithner's plan, PIMROCK's $10B permits a $10B equity investment from the Treasury. Then the FDIC levers the whole thing up, providing $6 of debt for every one dollar of equity. So, $140B of bad loans are lifted from J.P. Citi of America, nearly $90B of which is sheer overpayment to the bank.

Of course, as cash flows evolve, PIMROCK's $10B is wiped out entirely, as is the Treasury's investment. The FDIC gets repaid in a bunch of securities worth about $50B, taking a $70B loss. But, as Calculated Risk, likes to say "Hoocoodanode?" These were real market prices, Geithner or his successor will argue. Our private partners lost everything. There was no subsidy here.

Meanwhile, taxpayers will be out around $80B.

Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they've received assurances that if we can get the nation out of the financial pickle it's in, there will be no haircuts on those bonds. "Shaking hands with the government" means that nothing ever has to be put in writing.

Welcome to America, 2009. Change we can believe in.

When the powers that be are interviewed about why this option, why this incessant fixation on the cash for trash solution (how many misguided iterations must we go through before we change tactics), they always ALWAYS point to the catastrophe that was the failure of Lehman Brothers. 

I am still waiting for a full accounting of what exactly happened after the bankruptcy of Lehman Brothers (other than the rather vague stories of massive outflows of cash from commercial paper and money markets) and why the apparently gigantic whole on Lehman's balance sheet has yet to lead to any sort of fraud investigation.  (Meanwhile, we are dedicating our justice resources on AIG bonuses?  Obscene, yes?  But srsly?)

And there has been this oppressive, seeting anger in me that here we are, half a year after Lehman (and that's only if you don't count Bear Sterns, giving our government the benefit of the doubt) and we have not yet patched up the bankruptcy code so that a "run on the bank" wouldn't happen when another financial firm collapses?

And then this post turned on a light: the government at this point, is beholden to so many bondholders, the PIMROCKS of the world and not to mention CIC (the Chinese investment arm) or the royal families of the Middle East, that bankruptcy is essentially being thought of as a non-option.  BECAUSE THE GOVERNMENT HAS EFFECTIVELY PROMISED THAT ALL THESE INTERESTS WILL NEVER HAVE TO TAKE A HAIRCUT ON THEIR BOND HOLDINGS!

This is not my country (TINMC) anymore either.