Bloomberg - Surprisingly Balanced Discussion Of Geithner Plan

[Median Democrat]

It includes Krugman and Stiglitz's criticisms with revelevant links. So, it is nice to have the for and against in one place. You have their criticisms, as well as Bill Gross's statements regarding his plan to participate.

The question is what really bothers people? The possibility that investors like Bill Gross might profit from this program? Or, the possibility that the government might insure a substantial portion of the losses in the event the investors over price the assets?

The real issue in my opinion is to prevent the gamesmanship discussed by Sachs and Stuglitz, by adopting laws and regulations preventing TARP recipients from participating in the program.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aEDHFtFqc_ko&refer=home


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‘Taxpayer Loses’

Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success.

“The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”

Krugman wrote in the Times last month that “Obama is squandering his credibility” with the plan.

* * *
If the Fed provides a five-year non-recourse loan and requires an investor to put up only 85 percent of the cost of the securities, then that investor could “walk away” when the loan expires and still have earned 25 percent returns, Lehman and Tcherkassova wrote. That assumes losses on the underlying loans don’t exceed 30 percent.

That type of bond has risen more than 10 cents on the dollar since the plan was announced, according to Wheeler.

The amount of leverage available under the Fed’s program hasn’t been announced. The FDIC program will offer as much as six times the money raised by the private-public funds from individuals and the Treasury.

‘We intend to participate and do our part to serve clients as well as promote economic recovery,’’ Pimco’s Gross said in the e-mail.

/snip

[jkshaw]

1. Thank you for this, Median