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Tim Geithner's Black Hole
From: David Farber <dave () farber net>
Date: Wed, 11 Mar 2009 04:38:45 -0400
Begin forwarded message:
From: dewayne () warpspeed com (Dewayne Hendricks)
Date: March 10, 2009 11:28:56 AM EDT
To: Dewayne-Net Technology List <xyzzy () warpspeed com>
Subject: [Dewayne-Net] Tim Geithner's Black Hole
[Note: Worth reading & scary! DLH]
Tim Geithner's Black Hole
By David M. Smick
Tuesday, March 10, 2009; A13
Pity Barack Obama's economic advisers. The blogs are now demanding
their scalps, and Treasury Secretary Tim Geithner and his colleagues
face a nasty dilemma: There are no solutions to the banking crisis
without extraordinary political and financial risks. Thus, they have
adopted a three-pronged approach, delay, delay, delay, in the hope
that somebody comes up with a breakthrough.
Here's the problem: Today's true market value of the U.S. banks' toxic
assets (that ugly stuff that needs to be removed from bank balance
sheets before the economy can recover) amounts to between 5 and 30
cents on the dollar. To remain solvent, however, the banks say they
need a valuation of 50 to 60 cents on the dollar. Translation: as much
as another $2 trillion taxpayer bailout.
That kind of expensive solution could send the president's approval
rating into a nose dive. Consider: $2 trillion is about two-thirds of
the tax revenue the federal government collects each year.
The logical alternative -- talk show hosts' solution du jour -- is to
temporarily restructure or nationalize the banks and leave taxpayers
alone. Remove the toxic assets, replace management and cut the too-big-
to-fail financial dinosaurs into smaller, nimbler entities. Then
reprivatize these smaller banks and let the recovery begin.
Oh, if it were that simple. I suspect Obama's advisers would like
nothing more than to dismantle an irresponsible firm such as
Citigroup. They are afraid to do so, for one reason: All the big banks
are connected to a potentially lethal web of paper insurance
instruments called credit default swaps. These paper derivatives have
become our financial system's new master.
The theory holds that dismantling a big bank could unravel this paper
market, with catastrophic global financial consequences. Or not.
Nobody knows, because the market for these unregulated financial
derivatives, amounting potentially to over $40 trillion (by
comparison, global gross domestic product is now not much more than
$60 trillion), is the financial equivalent of uncharted waters.
Geithner has reason to be terrified. He was part of the Henry Paulson-
led team that underestimated the devastating global-contagion effect
of the collapse of Lehman Brothers. Geithner won't make the mistake of
Geithner also knows that the mood in Congress has changed. Were a
global financial brush fire to break out as a result of bank
restructuring or nationalization, today's populist Congress might just
let it burn. Congressional anger is likely to intensify when
policymakers realize that credit default swaps demand a stream of
premium payments like a life insurance policy, not just a payment due
at termination. And recent signs indicate that firms such as
Citigroup, in recycling their taxpayer bailout funding, may have
helped other financial firms, including some in Europe, meet these
In addition, Geithner worries that because the troubled insurance
giant American International Group (AIG) is a conduit for the banks'
use of credit default swaps, a collapse of AIG (as an unintended
consequence of dismantling the big banks) could be catastrophic. AIG's
more than 300 million terrified holders of insurance-related
investments and pension funds, who have investments totaling $20
trillion (U.S. GDP is $14 trillion), could suddenly rush for
redemptions -- the equivalent of a run on a bank. Geithner would face
a worldwide insurance collapse to accompany his global banking collapse.
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- Tim Geithner's Black Hole David Farber (Mar 11)