Not long ago it seemed a given that the Obama bank rescue plan would be on the ‘bad bank’ model — i.e., you and I as taxpayers create what might more aptly be called a ‘suicide bank’ where you go to all the other banks and buy their poor investments at prices those banks wish they were still worth. Then, when that just seemed too silly it was going to be a plan to insure the banks against excessive loses on these bad investments. Sort of the slo-mo version of the bad bank. But CNBC is now reporting that the ‘bad bank’ is out. And they add these details …
The Obama administration’s wide-ranging plan to stabilize the financial system no longer includes creating a “bad bank” but will still contain measures to buy up toxic assets from financial institutions, according to a source familiar with the plan.
In addition, funding for the bank-rescue plan is unlikely to exceed the $350 billion currently available under the TARP, this source said.
So the ‘bad bank’ is out. There’s some vague talk of buying back ‘toxic debts’. But if I’m reading that right they’re not going to be asking for any more money.
As the same source tells CNBC, “They have to have enough to calm the markets, but there might not be as many details as previously thought.” I’d say that’s an understatement.
Obviously, we’ll know more details tomorrow with Geithner’s speech (or maybe not). And I’ll be very curious to see what others make of this. But this sure sounds to me like they’ve decided to punt. No big new plan. And no more money.
I wonder if what’s happening here is that they realize that none of these TARP-like workarounds are going to work. So no point asking for a politically and perhaps fiscally debilitating amount of money on something they’ll have to abandon in six months. But they also don’t have their ducks in a row yet, or haven’t come to grips yet, with something more like the Swedish model — which is to say, letting failed banks actually fail, government takes them over like has been happening to little banks, government runs the bank for a while and then sells it to private investors. Regardless, at least from CNBC’s discussion it looks like a big punt.
8:13 PM … Hey, this guy’s pretty good.
8:17 PM … We’re going to pull some segments from that lengthy answer to question one. It’s really the argument that the inside DC mumbojumbo had not allowed him to make.
8:26 PM … You watch this performance and you can see that every day Republicans keep this guy off TV is a win for them. Like every great pol, Obama’s a great communicator. And he’s making the argument.
8:37 PM … Key passage from Obama’s answer to question one. Nice dig at the FDR revisionists …
I think the power of President Obama’s presentation tonight speaks for itself if you saw it. (Below I’ve included his answer to the first question on the economy, which was the essence of the press conference.) There’s an important debate about the proper outlines of stimulus bill. But there’s little serious debate over whether a large bill, predominantly focused on spending, is necessary. And yet that’s what the Washington discussion has been about.
Yet the real key to understanding that press conference is in information that came out earlier today: two polls showing the public is overwhelming on Obama’s side in this battle (see Gallup and CNN). According to Gallup, 67% of the public supports Obama on the Stimulus Bill versus 31% for congressional Republicans. 58% of Americans disapprove of the Hill GOP’s stand on this issue.
What’s most striking about these numbers is the continuing disconnect between the mood of the capital and that of the country. For me, a lot of that is a product of how Washington continues to be wired for Republican control. A president, and particularly one like Obama, is the one person who is in a position to cut through that.
Well, maybe CNBC was wrong. The Times is saying that it’s a bit more of the ‘bad bank’ after all. And the big story seems to be that Geithner won out against what the Times refers to as “some of the president’s top political hands” who wanted tougher controls over the banks and less giveaways for the banks’ shareholders.
Bank bailout 3.0 rolls out at 11 a.m. ET, and the Senate votes on the stimulus package later today. That and the day’s other political news in the TPMDC Morning Roundup.
Buried down at the bottom of the Times article on the Obama bailout plan is this short passage …
Under the category of sticks, private investment managers are closely watching how the Treasury rolls out its “uniform stress test” for grading the health of banks. If the government takes a tougher line with more banks, it could force them to sell off more of their loans and take their lumps sooner rather than later.
Remember, the heart of the problem in the banking sector is not simply that a lot of the banks are probably insolvent, it’s that they’re not willing to admit it and government regulators are not forcing the point. Specifically, the banks are refusing to recognize steep losses on a lot of bad assets. If this stress test were to force valuing these assets at something like market values that could force the sorts of financial reorganization (i.e., bankruptcy and a period of government ownership) that is probably the only way out of this mess. That’s a big ‘if’. I doubt that’s the plan at the moment. But it’s a detail in the plan that might later be built on.
Yep, that was a punt.
Perhaps they realized that the situation is too fluid and uncertain to come out with a definitive plan that brings us to the post-Economic Crisis promised land. And they may be right in that regard. But I can’t help thinking that this is in some level a punt. Maybe they couldn’t actually come to an agreement on what to do. So they came forward with this.
I’ll be curious what others make of it.
Late Update: In some ways, I think the stalemate interpretation is the most optimistic one, since it suggests that coming up with a sensible plan is still a future option.