Why Toxic Asset Plan Is A Terrible Idea

The New York Times offers the following on the Obama Administration’s toxic asset relief plan:

WASHINGTON — 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.

The uproar over the American International Group’s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.

My “favorite” part of all of this is the way the Obama administration is now relabelling “toxic assets” into “legacy loans and securities.”  Like the Stalinists whose worldview they largely share, liberals love to label people and things, and then change those labels when it becomes convenient for them to do so.  But “toxic assets” by any other name are still “toxic assets.”

Let me give you my objection in a nutshell: who is going to buy up this toxic mortgage debt (I’m sorry, these “legacy loans and securities”)?  Are YOU the gentle reader planning to buy up some of this debt?  I’m sure not.  My point is this: it won’t be a bunch of little people buying up this debt; most analysts agree that it will be big institutional investors who jump into this.

That’s right.  The same institutional investors who have been holding all the toxic debt in the first place.

So, here’s the bottom line: the government is going to buy and basically back the same debt to the same people that the government has already bailed out to begin with.

And just who gave these institutional investors the money to play this game?  You did, you silly taxpayer!  Or more precisely, big government did, with your money.

It’s like a gigantic merry-go-round with the same big players that bought up all these toxic assets now being encouraged to sell them to the government and then immediately buy them back again – only this time the federal government is jumping onto the merry-go-round, too.

And the merry-go-round is spinning on sweetheart deal risks.

The Obama administration is talking up the private investor “sharing” the debt: but the big investors will only end up “sharing” somewhere around 25% (and as little as 10%) of the debt; the rest is “shared” by the taxpayers.  There is an element of, “heads we win, tails the taxpayers lose.”  It smacks of the same mentality of Fannie Mae’s and Freddie Mac’s “profits are private; losses are public” mentality.

As NPR reports:

The government will also promise to cover a significant portion of the potential losses that investors could face. Should a toxic asset investment prove worthless, the private investor may lose only his cash down payment…

…The federal government promises to guarantee most of the financing for the toxic asset purchases. That stands to be hundreds of billions of dollars if the plan achieves its goal of absorbing up to $1 trillion in bad debt.

As hard as it is to believe, this deal actually puts the American taxpayer on an even bigger hook even higher off the ground than he or she was already on.

And as much of a sweetheart deal as this appears to be, the institutional investors may STILL not be willing to get involved.  Why on earth would they pass up such a deal?  Because many may realize that the same Democrats who just voted to tax 90% of AIG’s bonuses can easily vote to become “outraged” over any “excessive” profits institutional investors eventually receive by buying up these toxic assets, and tax them the way the government voted to tax AIG executives.

You can say, “Well, the government can provide a guarantee that it won’t come after these profits.”  And the obvious retort would be, “You mean, just like AIG had for its bonuses?

How many major investors still want to get in bed with the federal government, given the fact that government has proven that it has a marked tendency to be a major bed hog?

A big problem is that we very likely have not seen the bottom of the housing market.  If home values go down further, we will be going through the same phenomenon we just went through all over again – only this time the taxpayer will be even more on the hook than before.

Another problem is that this plan assumes that the toxic asset debt is only $1 trillion; it is most likely at least $2 trillion, and could very well be as high as $4 trillion.  CBCNews reports, “Right now, American banks and other businesses have as much as $4 trillion US in financial assets that cannot be sold in the current environment.”

The conspiracy theory view (and conspiracy theories are starting to make more and more sense these days) is that Barack Obama actually WANTS the toxic asset relief plan to fail.  Rather than stepping out and backing the plan himself, he put already-under-the-gun “Turbo Tax Tim” Geithner out in front of this plan.  And if it fails, Obama isn’t personally exposed, he fires Tim Geithner, and then he socializes the banks in the name of averting the “crisis.”  As Ayn Rand put it:

“One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.”

Barack Obama is literally making Atlas Shrugged come alive, as a Wall Street Journal article explains.

Please understand: if this plan fails, it is NOT because “capitalism” failed; it is rather yet another massive government intrusion into the private sector that failed.

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