The Old Switcheroo
It's hard to argue with the stock market. On the other hand, one expects bank stocks to do well when they're being subsidized by an opaque system that may well plunk down (or is plunking down) more than a trillion dollars, maybe several trillion. And the explanations for the scam get complicated — at least to me — when they start plugging numbers into expected values. But here's what I think: house prices are too high. It's not reasonable, for example, that a young hospital resident and his social worker wife should be able to afford a no money down mortgage on a million dollar home. They may think they can, but they can't. And those would be the quality mortgages. How many mortgages were written for super double-wide trailers owned by televangelists, or McMansions for cubicle tech workers? Way too many. All those house prices have got to fall to normal, truly affordable levels. So a lot of the toxic paper out there is absurdly overpriced. We're not talking about 'restoring stability to markets' but in fact about ordinary people paying for enormous losses by big banks.
Think of it another way. In the movie The Lavender Hill Mob, Alec Guiness conceives and executes a scheme to steal gold bullion in London, melt it down into tourist trinkets (Eiffel towers, supposedly made of gilded lead), and export it to Paris, where he can sell it without arousing official suspicion. Take one thing, make it look like something else, and sneak off with it. In the movie, however, he gets caught after living the high life for a year in Rio and is led away in handcuffs (at the beginning Audrey Hepburn makes a delicious momentary appearance as his 'niece' which segues into the story told through a flashback). In real life, unfortunately, our criminal justice system isn't on top of this unprecedented switcheroo.
Posted by George Kenney on March 23, 2009 6:34 PM 
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Comments
The outline of the plan is out and most of us are optimistic, but there are still issues. What will motivate/compel the banks to offer these supposed toxic assets? If the government people really want to calm the markets and make this plan work, then they have to have an answer to this question. Possibly, they should come up with a mandatory percent of toxic assets that have to be sold, or liquidated during the first offering. This will ensure that the banks free-up enough of their balance sheets to begin lending. This might be done in stages, where a distressed bank must offer at least 20 percent at first, or the FED will call their note. Obviously, the point of this post is that there still isn't enough information to convince even the average person like myself that this will really work. While it is very doubtful that the government will play hardball with the banks, the percentage during the first offering will have to be significant, and then the next offering must take place within a very specified time. These are holes that must be addressed, or else the banks will just play hard to get, and hem and haw with all the parties involved — the banks and the new asset managers — served to higher rewards, except the American people.
[I'm with James K. Galbraith on this — he calls it "dangerous" — but if there were really an upside to the investment as opposed to the subsidy then I think James Kwak is right: let individual investors participate. g.]
Posted by: Mike H | March 23, 2009 10:02 PM