Wednesday, January 21, 2009

Caroline Kennedy Calls it Quits

Late word tonight is that Caroline Kennedy has told Gov. Patterson that she cannot accept the Senate seat of Hillary Clinton.

The supposed reason? That she has to care for her uncle, Ted Kennedy, who collapsed during the inauguration.

Now if I had been Gov. Paterson, the way I might have handled this is to get word to Mrs. Kennedy that if she withdraws for her own personal reasons, then I would not have to choose someone else over her. Which outcome do you prefer -- or need that be said?

TARP: Take Two (Hopefully in Earnest This Time!)

It appears that the core of the original TARP idea is being resurrected: buying bad assets and securities from banks and putting them into a government-controlled vehicle with the intent of reselling at a later point. From the WSJ over the weekend:

"The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phase of its rescue attempt, with plans to purge bad assets that are paralyzing the financial system.

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials."

How is this different from the first incarnation of TARP? Well, even less detail on how the bad assets would be acquired -- at least Paulson had the idea of using an auction -- and also now there is talk of creating a government bank.

So leaving out talk of an auction and introducing the sketchy idea of a "government bank" makes things better (does a government bank take deposits from anyone other than the Fed?)

The allure of injecting equity was the idea of leverage: if we put $100 of equity into a bank, and they are leveraged 10 to 1, then we will get $1,000 of new loans made. Ah, but where does that $900 of capital to lend out come from? With toxic assets on the balance sheet, no new lenders want to throw new funds into the pot that will just go to protect all the existing creditors and equity holders. Indeed, judging from the last few months, the equity injections by themselves have done very little to create more lending.

The balance sheets of the banks have to get purged of the assets that are currently so hard to value. That was the genius behind TARP, and could still be implemented. I bet that we will soon see something very similar to the Resolution Trust Corporation. Hopefully we will not have to wait for banks to actually fail to get assets into the new institution. Talk to some auction theorists and get those auctions moving to buy assets from solvent but illiquid banks, put them into a new RTC, re-securitize them (this time with only one class of pass-through certificates) and return the profits to the taxpayer.

Geithner Should Not be Confirmed

Timothy Geithner is on path to be Treasury Secretary of the United States, with among other duties oversight of the IRS.

On his own failure to pay the employer portion of Social Security tax on his IMF earnings: "As I look back at all the documents that I provided the committee . . . both in the initial documents the IMF staff gave me to explain the way the IMF system works, in the quarterly statements I received from the IMF, in the annual tax forms I received -- in all those documents, looking back, it was very clear," Geithner said.

Yes, it is actually one of the simpler parts of our terrible personal income tax code.

And on his failure to pay the taxes owed for mistakes in 2001, 2002 when the IRS only audited 2003 and 2004:

"Sen. Jon Kyl (R-Ariz.) asked Geithner pointedly whether he choose not to pay the earlier taxes because they were beyond the IRS's three-year statute of limitations.

Geithner replied that he simply did not think about the issue.

"If I thought about it more at the time, I would have asked a lot more questions. I would have handled it differently and I regret not having done so," Geithner said. "This is my mistake, and it's my responsibility."

He simply did not think about the issue. Social Security, one of the burning issues of our time, for a Treasury Secretary to worry about -- and he simply did not think about the issue of paying his own fair share??

Sorry, but this is definitely an exclusionary mistake. Do not pass go, do not collect $200. Worse than not paying taxes on a nanny, which has disqualified certain female nominees. There are two critical issues: One, he was actually paid by the IMF for the taxes that he was supposed to pay; and two, he did not 'fess up and pay the early year taxes after caught for the later mistakes. If that does not disqualify you for the post of Treasury Secretary, then we are in trouble.

I have already heard from people who feel that they do not need to pay their credit card bills since some banks are not paying their creditors, and since the Treasury nominee does not pay his taxes. Where is the tipping point, where the vast majority stop being law-abiding because they feel like suckers?

Where are the Republican backbenchers on this one?