We still don't have nearly enough information about the various aspects of the Geithner plan for anyone to offer an informed analysis. This isn't just obsessive lawyering on my part. Material terms relating to the financing, fund structure, asset eligibility, etc., are still unknown. For example, regarding the Legacy Securities program (i.e., TALF 2.0), the Treasury's fact sheet states:

Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.
Does anyone honestly think it's possible to properly assess the Legacy Securities program without knowing these terms? I didn't think so. Most of the terms of the programs announced today haven't been finalized yet, and since a Treasury official told me earlier that they want to get these programs up and running by the end of April, all these terms have to be hammered out in negotiations between the Treasury, the banks, and the buy-side in a very short window of time.

7 comments:

shunted said...

I'm not an economist and I didn't study mathematical finance but my cynicism is such that I think it's a bad plan because I don't trust the policymakers. Maybe we don't have regulatory capture right now but it sure looks like it from my perspective. Too many policymakers are from Citi, Goldman, etc. What reason do we have to trust these people?

Don said...

I'm actually following your advice and waiting. There are blog posts that I disagree with, but what's the point if the plan isn't clear. I am puzzled by the idea that the owners of the TAs won't sell idea. From my point of view, they were waiting for government involvement. I guess I will either be proven right or wrong on that one, as on the subsidy issue. I should add I believe that the pricing of the TAs isn't a huge puzzle. They have been selling all along. On this too, we'll soon find out.

Don the libertarian Democrat

Jeff said...

I still think that it is perfectly okay to judge the plan as Krugman did. Once again, even though details of the plan are not available, it is clear that the plan only works if the banks are illiquid. It does nothing to solve problems of insolvency that could not be done better through more transparent, straightforward means (nationalization, bad bank, transparency). Krugman (and I) believe that the banks' problem is insolvency and, as such, the plan does nothing to cure the problem,

Economics of Contempt said...

Jeff,

The problem is that Krugman has absolutely no idea whether the banks are truly insolvent. Neither do I -- although I'm pretty sure I have a better idea than Krugman, since I've actually seen some of the banks' run-off books.

How does Krugman know that the problem is insolvency rather than illiquidity? Based on his extensive inside knowledge of the banks' assets? It's literally impossible to say with any degree of certainty how "toxic" banks' assets are -- the publicly available information isn't nearly sufficient to judge the quality of these assets. How could Krugman possibly know how to value Citi's MBS portfolio when there's no information available about the vintages of the underlying mortgages (were they largely originated during the bubble years?), or the average FICO score of the borrowers, or the loan-to-value (LTV) ratio? He doesn't know. He's just saying the banks are insolvent because that fits his story-line. (For all Krugman's talents, he's way out of his league when it comes to structured securities and derivatives.)

The point is, it's impossible for anyone who doesn't work directly with a bank's toxic assets portfolio to know whether the problem is insolvency or illiquidity. But if there's anyone who's in a position to know how undervalued the banks' toxic assets are, it's Treasury and Fed officials, who have had virtually unlimited access to the banks' books since September.

Anonymous said...

Most of the termsD3 Gold of the programs announced today haven't been finalized yet, and since a Treasury official told me earlier that they want to get these programs up and runningGuild Wars 2 Gold by the end of April

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