Geitner announces plan for toxic assets

[Ivan Seeking]

From what I understand, Geitner announced the new plan fifteen minutes before the markets opened this morning. As of right now - 7:25AM PDT - the DOW is up over 260 points, but I'm not sure if Wall Street already has the details of the plan or not. I don't have a link yet.

 

[Vanadium 50]

Details are so last year. Did Congress need the details to pass the stimulus package?

 

[rootX]

I was just reading about it:

US unveils $1tn toxic asset plan

http://news.bbc.co.uk/2/hi/business/7958501.stm

The plan was originally announced in February, shortly after Mr Geithner took up his post as Treasury Secretary but details were scant on how it would work.

The Bush administration abandoned its earlier plans to buy up toxic assets in October 2008, and decided instead to use funds from the Tarp programme to take stakes in banks.

 

[waht]

Supposedly this will add 10 trillion to our existing national debt.

 

[WhoWee]

I've posted this before to other threads, but it's very relevant.

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid={B9E54A5D-4796-4D0D-AC9E-D9124B59D436}

You'll want to read the whole article...here are the highlights...ref> Warren Buffet."Derivatives bubble explodes five times bigger in five years
Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:

1.
Sarbanes-Oxley increased corporate disclosures and government oversight
2.
Federal Reserve's cheap money policies created the subprime-housing boom
3.
War budgets burdened the U.S. Treasury and future entitlements programs
4.
Trade deficits with China and others destroyed the value of the U.S. dollar
5.
Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

*
U.S. annual gross domestic product is about $15 trillion
*
U.S. money supply is also about $15 trillion
*
Current proposed U.S. federal budget is $3 trillion
*
U.S. government's maximum legal debt is $9 trillion
*
U.S. mutual fund companies manage about $12 trillion
*
World's GDPs for all nations is approximately $50 trillion
*
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
*
Total value of the world's real estate is estimated at about $75 trillion
*
Total value of world's stock and bond markets is more than $100 trillion
*
BIS valuation of world's derivatives back in 2002 was about $100 trillion
*
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.
Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."
Bubbles, domino effects and the 'bad 2%'
However, while that may be true as far as the parties to an individual deal, there are broader risks to the world's economies. Remember back in 1998 when LTCM's little $5 billion loss nearly brought down the world's banking system. That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.
This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded:
"There's nothing intrinsically scary about derivatives, except when the bad 2% blow up." Unfortunately, that "bad 2%" did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was "contained."
Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time. "

 

[Ivan Seeking]

The DOW is up 400.00

That's over 5%

 

[mheslep]

I don't claim to understand all the risks involved, but that Marketwatch piece misleads by painting all derivatives with the same brush. Most of the volume of derivatives trades for a long time has been, still is, and will be in interest rate and foreign currency trading, which has been working well as those currency options are regulated and by law must be sold on an exchange where they are overseen by the CFTC. The problems are all in the CDS derivatives (not sold on any exchange) including the so called 'bad' 2%. I also think they mislead by citing the $516 trillion figure, when as WhoWee points out the $11 trillion gross market value is the meaningful figure. They know this full well, IMO, and cite it anyway knowing the large 'scary' figure will be picked up and misused, meanwhile they get more web hits.

 

[Vanadium 50]

I also think they mislead by citing the $516 trillion figure

I agree, particularly since it covers both ends of the transaction.

 

[Brilliant!]

You mean to tell me our government wishes to infringe further upon our individuality using socialistic policy in the name of capitalism?

I'm so surprised.

 

[russ_watters]

Supposedly this will add 10 trillion to our existing national debt.

No it won't. The various bailouts account for only something like 20% of that, if you include Obama's big bailout* and Bush's big bailout**, the rest being plain ordinary deficit spending. Obama just plans on spending a lot of money while he's in office.

*IMO, Obama's bailout is just plain, ordinary deficit spending, but whatever - for the sake of argument, we can assume it is somehow different than any other politician's pet pig.
**Time will tell, but Bush's bailout's cost will have to be constantly adjusted. It was designed, however, to be cash neutral at worst. It isn't up to him anymore, but it very well could turn a profit.

 

[WhoWee]

The DOW is up 400.00

That's over 5%

Here's why...

http://finance.yahoo.com/news/February-existing-home-sales-apf-14717398.html

 

[Ivan Seeking]

The housing report helped, but if Wall Street didn't like the plan, the response would have been resoundingly negative. Instead the DOW was up almost 500 points.

From your link

Prices, however, are expected to keep falling well into the year. Tens of thousands of homes reman tied up in the foreclosure process and are not yet for sale. Plus, as the recession deepens and job losses mount, many buyers are likely to stay on the sidelines.

http://abcnews.go.com/Business/story?id=7153525&page=1

If anything, after the recent gains, Wall Street was just as likely to see some profit taking. Not to mention that DOW was already way up before the housing report came out around noon.

 

[Ivan Seeking]

No it won't. The various bailouts account for only something like 20% of that, if you include Obama's big bailout* and Bush's big bailout**, the rest being plain ordinary deficit spending. Obama just plans on spending a lot of money while he's in office.

Also, there is no way to know what the final losses or gains may be. In the end we could make a profit.

*IMO, Obama's bailout is just plain, ordinary deficit spending

I don't get your point. What is it supposed to be?

but whatever - for the sake of argument, we can assume it is somehow different than any other politician's pet pig.

There is a huge difference. He doesn't have any choice.

**Time will tell, but Bush's bailout's cost will have to be constantly adjusted. It was designed, however, to be cash neutral at worst. It isn't up to him anymore, but it very well could turn a profit.

That is true of both parts of the bailout. But the initial bailout was intended to stop a collapse of the financial system, which apparently it did. It is probably one of the few things that Bush did right - he abandoned the failed Republican philosophy that brought us where we are today and did what needed to be done. When you have Paulson and Bernachy pointing a gun at your head and telling you the world as we know it is about to end, it is easier to abandon the nonsense philosophies.

 

[Al68]

. It is probably one of the few things that Bush did right - he abandoned the failed Republican philosophy that brought us where we are today and did what needed to be done. When you have Paulson and Bernachy pointing a gun at your head and telling you the world as we know it is about to end, it is easier to abandon the nonsense philosophies.

Wow! I guess the Community Reinvestment Act was "failed Republican philosophy".

Assuming absurdities to be true instead of just proposing them to be true seems to be the modern modus operandi of lefties.

 

[WhoWee]

As a taxpayer, somehow I think I'd feel better if the $1 trillion was allocated out to us in the form of direct ownership shares...that is 100 million $1,000 shares.

If the average taxpayer was issued 1 or 2 shares with the hope of a "profit" (in reality a chance of paying less taxes in the future) it might be more palatable. (Yes, I admit I still believe that you shouldn't get a tax refund unless you actually paid taxes.)

Otherwise, Geithner's program just feels like another "shell game". I don't think we learned anything from the AIG shuffle.

While Wall Street responded to the double dose of positive news...(beware the Bear Rally)...I'll be very surprised to see firms lining up to participate without absolute assurances from Congress that a special "windfall" type tax will not come later if a profit is realized from an investment in these "toxic assets".

Just to keep things interesting...a prediction...I still think we'll see the DOW at 5,000 before there's a real recovery.

 

[russ_watters]

Also, there is no way to know what the final losses or gains may be. In the end we could make a profit.

No we can't. You can make someone else a profit by buying a dvd player or a car or a bridge, but you can't make yourself one.

I don't get your point. What is it supposed to be?

Spending targeted in ways that address the economic problems in the US. To be fair, some of it is. Money for expanded unemployment benefits is targeted to deal with a specific economic problem. Money to build a bridge is not.

There is a huge difference. He doesn't have any choice.

Quite obviously, that is baloney. You can agree or disagree as to the merrit of the different choices, but there are plenty of choices. He could spend $100 trillion (instead of $10 trillion) or he could spend nothing - are two obvious alternative choices.

There have been other bad recessions in history and they did not always include huge added deficit spending as an attempt to fix them. The economy is cyclical and it may just be better to let it recover on its own. Politicians, however, have a personal incentive to appear to be doing something positive, thus, bailouts.

That is true of both parts of the bailout.

No, it isn't. See the first line, but the difference is real simple: one bailout bought products, the other companies. Buying a product holds no possibility of profit for you, buying a company (especially if the cost is artificially depressed) does.

nonsense philosophies

Ivan, you put on display a lot of irony by saying such things after displayinig a complete lack of understanding of a simple economic issue, not to mention fundamental principles of logic.