Toxic Tim

I really don’t get the big terror over taking over the asphyxiating large commercial banks—the dreaded ‘N-word’. After all, isn’t that exactly what the FDIC does every Friday when it declares a bank insolvent and seizes it? This utterly uncontroversial federal entity then sells off its deposits and tries to dispose of the remaining assets in the cheapest possible way while announcing up front an estimate of what the cost to taxpayers will be.

No doubt it is easier when dealing with smaller operations or those limited in their field of activity like mortgage banks or S&Ls, but the principle seems to little ol’ unsophisticated moi to be exactly the same: regulators recognize a teetering bank, swoop in, socialize the unrecoverable loss, restore normalcy. Everyone is happy, and bank runs are the stuff of old movies.

One line of gossip in the business and economics blogs is that Obama’s people know this is inevitable but haven’t got the 60 votes supposedly needed to just go out and do it. So they are setting up this latest version of the Geithner plan as the only possible compromise until the next round of failure permits them to take the proper course of action.

Who knows if there’s any truth to this, but if so, it’s a helluva way to make policy. Not to mention a rather expensive one if the bank behemoths and their eager counterparties scurry off with a trillion of our dollars in the meantime. Wall Street’s celebrations are not entirely encouraging in this regard.

Another view somewhere between support and condemnation is that the Geithner plan builds on mutual strengths by pulling in private investors to these asset purchases, thus avoiding a wholesale raid on the public purse. Since they are liable for the initial investment (and can lose it), they will be more cautious and astute than the feds would be alone.

That’s fine if the economy doesn’t further tank from its current miserable state. But that’s a big ‘if’, and the quiver of policy arrows is not limitless. The fact that Geithner proposes to use FDIC and Fed as well as Treasury funds gives him the opportunity to avoid congressional approval, which becomes less likely for any big-ticket items with each passing day. The emergency conditions may merit this end run, but as a precedent it’s a bit scary.

Meanwhile, whatever happened to the ‘stress tests’? They were supposed to tell us which of the wounded elephants were completely moribund and which could be carried on Geithner’s trillion-dollar pallets into the veterinary ICU. Is all the ‘stress’ now relieved by the quickie profits earned off the Dow in the last two weeks?

The problem with continuing to throw cash at ‘toxic assets’ under the assumption that they are temporarily priced below their true worth is that there are fewer and fewer fall-back options if Geithner—make that Obama—turns out to be wrong.