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Saturday, March 21, 2009


son of super-SIV

calculated risk highlights leaked sketches of treasury secretary geithner's plan to sink bad assets into a bad bank.

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve. ...

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

the FDIC loans will be non-recourse for good measure! this is why the guys at fortress are calling the expansion of TALF and geithner's asset sink "the great liquidation". the treasury is about to wildly overpay for hundreds of billions in non-performing loans in a backdoor bailout of the entire shadow banking system.

this isn't an idea so much as a dumbing-down of hank paulson's M-LEC.

this is government balance sheet that we will shortly regret not having preserved for fiscal stimulus. geither and the obama administration still believe that, if the banks are repaired, they will be able to create money supply through credit expansion. they likely will not -- the private loan demand will not be there, forcing even healthy banks to sit on excess reserves.

but, having dredged rapidly growing private savings to recapitalize the banks, they will not be able to tap those savings for fiscal stimulus as money supply continues to contract -- which will leave treasury to try to sell debt to a vanishing overseas market, or leave the federal reserve to monetize the treasury's excess issuance in size far beyond the $300bn announced this last week (though at least the skyrocketing excess reserve pile on the fed balance sheet should finance those purchases).

this crisis is two years and two administrations old, and the government still is operating without any understanding of what is actually happening. this is incredibly bad news.

UPDATE: yves smith outlines just what a disaster of a "plan" this is.

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hyperinflation on Weimar scales is on the way thanks to Helicopter Ben!


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I've been calling him Zimbabwe Ben since July. Hop on board!

I call the latest "plan" MLEC 3.0. It's the same story: overpay for the assets and obfuscate the issue as to what you did.

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ia -- between you, me and the rest of the world -- we'll have to monitor the outcome. i think he would love to be zimbabawe ben; he's taking every such ridiculous action. but how can he create real inflation in an environment of broken banks and extremely slack loan demand? all his pumping and printing ends up as excess reserves.

i can see how money-center banks could be washed (at incredible taxpayer risk) by a combination of a trashed-up TALF, MLEC 3.0 and QE to finance it all. so let's give them that as a hypothetical.

who do these banks loan to?

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