Does your head spin, acronym upon acronym, non-recourse, warranties, and covenants? Well, unspin it. The New York Fed is telling us, in plain and simple legalese, that it is planning to make a very generous gift to investors that participate in this program (and indirectly to the banks that sell assets to them). A non-recourse loan bundles an ordinary loan with an option to "put" the collateral back to the lender instead of paying off the loan. Sometimes this is not much of a gift: When a pawnbroker lends you half of what your Fender Stratocaster is worth, and the fact that you can surrender the guitar rather than pay off the loan is cold comfort. But if someone fronts you substantially all of what an asset is worth, and the value of that asset is uncertain and volatile, then the put option bundled into the "loan" becomes extraordinarily valuable. If the asset appreciates, you take the profits and "ka-ching!". If the asset falls in value, the lender takes the trash and eats the loss.
A near-the-money option is itself a valuable asset. Offering non-recourse loans to participants in the PPIF would directly contradict the program's goal of "allow[ing] private sector buyers to determine the price for... troubled... assets." Private sector buyers would not be pricing the assets themselves: they would be pricing a portfolio containing a troubled asset and a free, three-year put option, courtesy of the Fed. Depending on how much of the transaction the government is willing to finance, the value of the put option could represent a substantial fraction of the value of the asset being priced. This is a subsidy, that would be incorporated in the sales price of the asset and split by banks and private investors. It amounts to the government bribing investors to certify banks as more solvent than they are, by overvaluing bank assets in subsidized purchases.
We are all tired of the lies, Mr. Geithner. By all means, let nationalization be a last resort, and do all you can to offer liquidity to private parties willing to take both the upside and downside of speculating in questionable paper. But if you keep nationalizing the downside and privatizing the upside, it will not be very long at all before the public concludes that stress tests and market prices are just a sleight-of-hand for Davos man while he picks our pockets, again. Act fairly, and you may end up nationalizing the worst few of the larger banks. Keep up the games, and we will insist that you nationalize them all. It is getting hard to believe that there is a banker in the land who has not already robbed us. Eventually we will tire of drawing fine distinctions.
With every day that passes, it becomes more difficult to draw the "fine distinctions" Geithner et. al. want us to pretend exist between saving financial systems, which we need and is our proper concern, and saving their rich buddies' asses for their bad investments, which is not our concern even as their idiocy has become our problem. The dire warnings over the "moral hazard" of simply devaluing home loans made during the bubble no longer sound so convincing when we watch the deliberate moral hazard of protecting the prerogatives of Wall Street in lieu of enacting anything approaching a rational fix to the financial system.
Steve's formulation of nationalizing the downside and privitizing the upside captures the rotten heart of the various attempts to "fix" the financial implosion, from Paulson right through to Little Timmy. The intent is to protect the people who caused the implosion in the first place. This is the distinction that Little Timmy wants us to overlook by believing the lie that we are rescuing a system.
Leaving the details of the financial analysis to the excellent people in the field, what strikes me most in this mess is the lack of political distinctions, or, more to the point, an unwillingness to draw them. What you do not hear from the White House is a political vision, policy or standard that sets the ground rules for the enaction of an economic plan. It is all piecemeal, deal with the uproar of the day, reactive rather than programmatic. This also fits the way taxes, housing, the auto industry, etc., is being treated. The continued fluffing of the Republicans in the name of bipartisanship is another example of the deeper problem, which is a lack of an over arching political goal for the sake of which you act.
This is not so much ideology, though to be most effective it should be grounded in one. Example: The Movement Conservative obsession with killing Social Security (political goal) is grounded in their faith (ideology) that the New Deal was bad for the nation and must be dismantled. The goals of a political actor are what allows that actor to take advantage of political opportunities in creative ways, and acting on those opportunities are what change institutions and systems in fundamental ways. What has become clear in just one month, however, is that the Obama administration's sole political goal was getting him elected and that there is nothing more he really wishes to accomplish.
Thus, we are left with the economic policy (such as it is) being handed over to the crooks and liars who got us into this mess in the first place because there is no reason not to. There's nothing The Precious wants to do with the economy or the financial system (like expand the New Deal), so whatever Little Timmy and Gucci Gang want to do is fine by him. The political opportunity presented by the economic crisis, well documented by people like Krugman and Roubini, is being frittered away for lack of political vision.
Fine distinctions matter when political opportunities are at hand.