Kneale: The Rescue Plan Needs a Rescue Plan


Even fans of George W. Bush might have a hard time arguing he was brilliant. Conversely, even foes of Barrack Obama might have a hard time arguing that our new President is stupid. He clearly is a thinker of Big Thoughts, an articulate rhetoric-monger who thrives on intellectual debate.

But sometimes the brightest guys are too smart for their own good.

And so it is with the President and his Treasury secretary, Timothy Geithner, and their cure for toxic mortgage assets. Their rescue plan needs a rescue plan. Though they unveiled it three weeks ago to resounding applause on Wall Street, it is a Rube Goldberg machine gone awry —too clever and convoluted, rife with potential for chicanery and favoritism.

Big Banks vs. Big Government

Obama’s minions call their plan the P-PIP, for Public-Private Investment Program, with no apologies to Gladys Knight and her backup singers. A better title would be the TAP, for Toxic Assets Plan.

The TAP would anoint a handful of giant firms to act as middlemen and fund managers to bid on the mortgage-backed securities and home loans now tainting formerly blue-chip banks. The feds would put up $100 billion, which could be leveraged to acquire up to $1 trillion in ailing assets (which still won’t be enough). The private “partners” would put up less than 10% of the total money at risk yet pocket fully half of any profits. Sounds great.

Yet a lot of folks on Wall Street are wary of plunging into this profit opportunity because of the virulent, anti-business rage now infecting Washington (stoked, in part, by Bam himself). They fear stepping up, only to have Congress retroactively slap a huge penalty tax on TAP profits (see the recent idiotic House vote on AIG bonuses).

“The fundamental issue,” says a managing director at one investment bank, “is ensuring that people understand: For this to work, there has to be a degree of certainty which doesn’t exist at this time. The sense of outrage beyond Wall Street is palpable.” The President “is beginning to roll it back,” but can he tame Congress? “They made him look ridiculous” with the AIG vote, this guy says.

Another snag: Treasury aims to limit TAP players to the few behemoths that already hold $10 billion or more in mortgage securities. It’s the hair-of-the-dog-that-bit-me method. This artificial constraint means that, perversely, the banks that are so hungover from toxic assets also could be the most likely candidates to become buyers of same—J.P. Morgan Chase , Citigroup , Bank of America , Goldman Sachs , Morgan Stanley and their ilk.

That could produce a nifty, government-guaranteed shell game: Citigroup, let’s say, taps the TAP to get funding to buy the lousy loans of Bank of America; B of A bellies up to buy the assets of J.P. Morgan — which then lines up TAP to acquire the toxic beauties over at Citi. Or, what the hell, Citi could just form a front company, and line up government funding to buy its own ugly portfolio from itself, as Columbia University economist Jeffrey D. Sachs has noted.

Too much sugar for a dime. Why not just have the feds directly guarantee all the toxic stuff outright, rather than issue guarantees to the would-be buyers of this junk? With government backing those assets would start trading again, and their value would rise.

That would let the feds proceed with my Rob Plan, which I’ve touted before : Swap out the toxic holdings for new ETFs that carry a federal guarantee and a 4% tax-free dividend. Thus you remove a grave threat from bank balance sheets and replace it with income-earning ETFs that could then be sold into a transparent market with thousands of daily bidders.

Treasury may be coming around to this approach. The New York Times has a Page One story today saying the Obama administration is talking to BlackRock and others about setting up a kind of toxic-backed Liberty bonds. But ETFs are more popular with investors and more liquid, and the O-men’s main aim is to spruce up the political image of the bailout with patriotic appeal. When the real goal should be profit and broader market transparency.

Rather than designate only five or six giant bidders, Treasury should welcome dozens of players by lowering the threshold to qualify from $10 billion in mortgage holdings to, say, only $1 billion. It further needs to assure bidders and buyers that while prices and asset descriptions must be publicly disclosed, many other details of their transactions will remain private.

Oh, and the Treasury folks also might try resorting to group prayer. Because, so far, their TAP won’t be enough to lift us out of this toxic morass.

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