The Political Risk of Toxic Assets
Print
Comment
Email
RSS
Twitter
The Political Risk of Toxic Assets
The administration’s plan is attractive, but are there too many strings attached?
By Ian Bremmer and Sean West
Posted Friday, April 3, 2009 - 11:15am
Last week, markets bounced 7 percent the day Treasury Secretary Tim Geithner released his Public-Private Investment Plan. It's clear why investors reacted positively to a plan that subsidizes private investment through public risk in hopes of getting the financial system functioning normally again. What's less clear is whether participation makes sense for private investors from a political risk perspective—and whether the administration will be willing to insure against that risk with a commitment of its credibility.
The political risk premium attached to U.S. investments is higher than at any time in recent memory. All corners of the market are depending on Washington to "get it right." That a bad speech by Geithner could apparently destroy the Dow on Feb. 10 and a good policy release could boost it a month later demonstrates the strong impact politics is having on finance. No investment is immune from politics for the time being.
The political process has the power to turn a once-attractive toxic-assets plan into something quite ugly. There could not have been a worse time for Geithner to release the PPIP, which calls for more than 90 percent of risk to be borne by taxpayers. Only days before, Capitol Hill was on fire over bonuses paid out to AIG executives—a fire that has calmed down but is still smoldering. The administration had fanned the flames, walking dangerously close to destroying financial-rescue credibility through populist pandering. On the Friday before release, firms expressed serious unease about political risks coming out of Washington. But jockeying over that weekend seemed sufficient to assure potential participants like BlackRock and Pimco that the administration will go to bat for them.
That the plan's release solicited relatively little congressional outcry may make political risk easy to ignore for now, but it does not make it any less relevant. Massive taxpayer subsidies will not go unnoticed, and the risk of an avalanche of required restrictions could really change the participation calculus.
The single biggest thing the Obama administration could do to ensure participation in its new toxic-assets program is to assure participants that it will use its political weight to insulate them from the whims of Congress. It has yet to do so, and, frankly, its willingness to voice public anger over AIG and loosely support a broad retroactive tax on TARP-enabled bonuses calls into serious question how much of its credibility it will put on the line, even though it recognizes private investors' participation as necessary.
The administration must provide its own sort of political-risk insurance—by committing to protect participants—if it hopes to get its plan off the ground. Short of that, the plan will be beholden to a volatile political process that can turn unfriendly to the markets in short order.
Ryan McVay/Photodisc
Comments
political risks of many bailouts
The PPIP is another example of how ill-advised it is for the federal government to get involved in major public investments using taxpayer funds. The TARP plan, the auto bailout, and now the PPIP are all hornets nests of unintended consequences, opportunities for corruption, arbitrage and unfair private profit for select privileged entities using taxpayer funds. The government is increasingly distracted with political, financial and management problems that result. The obsession with saving only insolvent companies "too big to fail" presumably in order to "restart lending," according to the sales pitch, has precluded attention to effective solutions for the consumers whose problems underlie all of the crises. It wouldn't be so bad, if the programs would actually solve the various crises, but that prospect is highly uncertain, and most likely they won't. The money is being thrown at insolvent companies whose problems all stem from now insolvent consumers who have been pretty much ignored, other than prospectively burdening them with the tax and inflation consequences of bailing out only their own insolvent lenders. We have seen, and will continue to see, that the big companies who get the enormous sums of taxpayer dollars prefer to use them to pay executive salaries and bonuses, make corporate acquisitions, pay down their own debt, or speculate in the securities markets, rather than lend to small businesses and consumers who are now in terrible financial situations and fewer every day to borrow more. Those are rational decisions for the managers. Companies don't exist for the public good, they exist for profit. Politicians will get their campaign donations from financial firms and spout rhetoric about the public good that the bailouts are supposedly intended to serve. But trickle down economics will not work to solve the crises, and that will mean a big reversal of political fortune for Democrats, if results don't appear fairly soon. It's a supreme irony of history that the same Democrats who have been lambasting Republicans for years about trickle down economics are now ensnarling themselves in the biggest attempted trickle down experiment in history, and not much else. The problems of lenders, investors, consumers and governments can be solved with certainty all at once, and with a reduction in the federal deficit, with the correctly structured bailout plan directed at the underlying critical problems of consumers. Without that solution all the problems will continue to grow. One such plan is the AllStreets Bailout Plan, the good bank plan, detailed at www.themortgagenews.info. It's a program of low-interest long-term government loans to help individual consumers remove excess mortgage debt from their properties. The government could take, say 60-70% of the drop in value of each property, split it into two equal loans, one for the owner and one for the lender, to pay down the mortgage by the total amount, so they split the loss. The loans would be secured by the tax system and not by the properties, so most owners are once again free to refinance or sell without a big loss. Payments on paid-down mortgages would be reduced based on the new principal, the remaining term and the original interest rate. For fairness, non-owners are given fair opportunities for the government loans to pay off other debt, or finance a business, or as second mortgage money to buy a residential property, or as a personal loan. Their loan would be 10% of the median value of homes in the area they reside. A plan like that is The AllStreets Bailout Plan detailed at www.themortgagenews.info. We estimated The AllStreets Bailout Plan requires about $4.7 trillion of loans, but those replace almost all of the $10.9 trillion that has already been committed by the government for various bailout loans and guarantees. The plan would actually reduce the deficit, since loans are assets, not spending, and interest earned at 3% would be about $141 billion per year, and mortgage interest deductions would decrease by at least $150 billion per year. The plan would probably stop housing price declines, rescue the values of mortgage and other debt securities, restore bank balance sheets, reliquefy the lenders, and certainly stimulate the economy. The plan bails out most consumers where the problem is rooted, and all of their lenders at the same time, not just a few privileged insolvent banks and investors too big too fail.