Buying Off The Banksters

My college friends and I used to call anything this truly horrific a-good.

The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.

The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.

To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

I don't have to rehash the arguments against this idea, just link to them. Basically, the government will subsidize investors to overpay for bad assets, meaning that cash will simply flow from taxpayers to banks. Instead of shrinking the wealth and value of the financial sector relative to the greater economy, this plan would keep it in place. The White House clearly sees paying off the banksters as equal to saving the economy, making the solution far more expensive than the problem, especially considering that this probably won't work. John Cole sums it up:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

At this point, the only thing we should offer a significant class of banksters is a plea deal. Instead Geithner will preserve the institutions.

If you want to truly fill yourself with dread, consider that the Federal Reserve started buying mortgage-backed securities as early as August 2007, bought up a bunch more in January, and just announced the purchase of even more THIS WEEK. And yet Treasury needs to eat some of this crap as well. That's how many of these little buggers are out there.

OK, I'm going to go watch college basketball and slowly rock back and forth.

...Me again. James Kwak hits on something, connecting for me the Geithner plan to modify loan terms, thus reducing the value of mortgage-backed securities by definition, and this TALF plan, which would overpay for them well above their true value. The investors of the MBS could actually sue under the Takings clause of the Fifth Amendment, if structured improperly. What a fucking mess.