Livin' Large in the Ivory Tower

Speaking candidly, I dig Jeffrey Sachs. It’s a bit of a man-crush really. Strictly platonic though; not a situation that would give rise to any moments for awkwardboners.com. Anyway, when he’s not off gallivanting around the developing world with Bono and Angelina Jolie, Sachs spews out some brilliant insight. Such is the case in his latest economic dress down: The Geithner-Summers Plan Is Even Worse Than We Thought.

I was going to summarize Sachs’ take on one of the many gaping loopholes in the “plan,” but I figured you’d probably rather hear directly from a man named among the 100 Most Influential leaders in the world, as opposed to a dude referred to by a close friend as a “more pervy Larry David” (thanks, Sloane).

Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.

Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank's net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.

More significantly, Sachs raises the issue of transparency, or lack thereof –

Let them explain the hidden and not-so-hidden risks to the American taxpayer of the plan that they have put forward. Let them explain why they are so intent on saving the banks' bondholders, even the long-term unsecured creditors who clearly knew they were taking market risks in buying Citibank bonds. Let them work with their critics to fashion a less risky and less costly plan. So far Geithner and Summers tell us that their plan is the only option, but without a word of further explanation as to why.

Geithner and Summers don’t deserve to shoulder all the blame for their plan’s opaqueness. On his first day in office, President Obama promised “a new era of openness is this country.” And yet now he seems either unwilling or unable to force his fiscal minions to honor that sentiment. Perhaps Obama should take a cue from Harry S. Truman, who frequently referenced the sign on his Oval Office desk that read: “The buck stops here.” Except that nowadays it would need to read: Trillions of bucks stop here.

A Well-Styled Bailout

“There’s a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands. It’s almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . .I mean, couldn’t you all have downgraded to first class or jet-pooled or something to get here?”
-Rep. Gary L. Ackerman (D-N.Y.), to the chief executives of the Big Three automakers arriving to beg for cash from the public.

I must admit, I’m torn over this auto bailout. I’m not torn over what to do to the CEOs of Chrysler, GM, and Ford. They should be publically drawn and quartered, but by American cars in lieu of horses. It would give them a sporting chance, and thus, make it more fun to watch.




On Tuesday, I read Mitt Romney’s New York Times Op-Ed, Let Detroit Go Bankrupt. I found myself nodding my head, thinking that he really made some valid points. And indeed he did. But every time I find myself agreeing with Mitt Romney, I secretly wonder if it’s his hair? I’m convinced that if I stared at his immaculately well-coiffed dome long enough, I’d stop drinking, put on a nametag, and start going door-to-door singing the praises of Jesus and that Smith guy. I might even have sex to procreate. The horror.

Then I remembered the Mitt Romney we all met circa January 2008. The Republican Presidential Candidate who told his native Michigan: “Look at Washington. What have they done to help the domestic auto industry? Look, you can't keep on throwing anvils at Michigan and the auto industry and then say, ‘How come they are not swimming well?’” and, “I hear people say, ‘It’s gone, those jobs are gone, transportation’s gone, it’s not coming back.’ I'm going to fight for every single job. I'm going to rebuild the industry. I'm going to take burdens off the back of the auto industry.”

It’s hard to remember everything Romney said during the Primary (again, the hair gets in my way), but I don’t recall him mentioning anything to the autoworkers about a massive catastrophically spiraling bankruptcy. Of course, handsome Mitt is no stranger to contradicting perspectives. Although he professes to believe that the consumption of alcohol is morally repugnant, he keeps a fully stocked bar in his house for entertaining. Go figure.

Ultimately, concerning the auto bailout, I think I’m steering towards the perspective of economist Jeffery Sachs. I won’t bother to re-articulate the argument he made this week in The Washington Post; you can read it here: A Bridge for the Carmakers. The opening of his last paragraph sums it up: “We face an unprecedented financial calamity, energy crisis and environmental threat. A vibrant, growing U.S. automobile industry should play an essential role in solving all three.”