As Gross explained it, he puts up $50 Million, the Treasury puts up $50 Million and the Fed loans the partnership $300 Million. Jon Taplin

Either Gross doesn't understand the program (unlikely), is misrepresenting it for the benefit of PIMCO (possible), or Taplin's misquoted him.

N.B. Gross wants to become an approved manager for which PIMCO will get 2% per year of the entire, 100% public-private investment. At that rate it won't take long to recover the investment.

As Bruce Krasting puts it, "The fees paid back to the investor will be the standard 2% per annum. These fees allow the investor to amortize it's investment in the fund over four years. This is an old Wall Street trick. You earn your equity position, you do not pay for it."

Never trust a Gross or a Buffet.*

* "Last fall, billionaire investor Warren E. Buffet, Goldman Sachs chief executive Lloyd Blankfein and William H. Gross, the managing director of PIMCO, the largest bond fund in the world, approached Treasury officials about an idea to create investment funds, using public and private money, to buy toxic assets from banks, according to former senior Treasury officials."

It amazes me to hear on day one of a plan questions as to whether the plan will work and IF NOT, what is plan B?

Nothing like giving a plan a CHANCE to survive.

Good article Jon.

I'd hate for Paul Krugman to look foolish three times in 12 months.

Wow! A human being looking foolish only thrice in a year?
Even though Krugman pisses me off with his opinion from time to time, I guess he's more deserving of canonization than I realized. If this is the genuine record, he's like Mary Poppins, practically perfect in every way.

Your opening paragraph is a classic example of "poisoning the well" - Krugman was wrong before, so we should infer that he's wrong (or probably wrong) now. The trouble is, everybody's been wrong before, and most people who've taken public positions on important future events have been wrong about some or most of those predictions. (Have you ever read the annual predictions offered by The Economist, and compared them to subsequent events? Their 2009 predictions issue offers an apology for getting pretty much everything wrong in their 2008 edition.)

Your third paragraph is an appeal to authority. If two people you present as authorities (one of whom, Bill Gross, was a co-inventor of this plan) like the plan, the plan must be correct. If the measure of listening to somebody on these issues is, "He must never before have made a mistake," what of PIMCO (i.e., Bill Gross) investing in the fund discussed here? No, of course, you would tell us to look at Gross's entire record - and you would be correct to do so.

Your fourth paragraph... Okay, I won't tease you about slippery slope arguments, because (along with "where you start"), "where does it end" is a valid question and concern.

So above and beyond the fact that Krugman (like everybody else) has been wrong before, what's your basis for asserting that he's wrong now? Or, if you prefer, what's the reasoning offered by Larry Fink and Bill Gross?

I'd hate for Paul Krugman to look foolish three times in 12 months.

But can we turn to the substance of his arguments? Wrong or not, Paul Krugman has devoted a lot of energy to explaining why he thinks he's right. I have heard from others (e.g., Brad DeLong) why they think (and in some cases hope) he's wrong. Now that we're done with the pleasantries, what meat are you bringing to the table?

Well if Bill Gross says so, that's good enough for me. If anyone is less interested in enriching himself and sacrificing for the public good, I'd like to know who that person is.

Does it really matter that Pimco runs the Federal Reserve 251 billion dollar commercial paper program or is one of 4 firms chosen by the government to run the government's 500 billion dollar program to purchase mortgage backed securities?

It's good, too, that Mr. Bill, "call me philanthropic" Gross in 2008 shifted from treasuries and corporate bonds into mortgaage debt backed by Freddie and Fannie because he knew that the government would have to own those bonds. The GMAC fiasco? Well, here is Gross's philosophy on that - "we try to purchase assets before we believe they [the government] will have to." He's pretty damned sure that the government is going to bailout these companies, isn't he? He isn't risking a damned dime.

Does anyone think they're working in concert in an attempt to make Obama's prescriptions appear more centrist & palatable to Wall Street? Since we don't have a strong Socialist Far Left anymore (much to my chagrin) to push hard against Obama, we have Krugman acting as a one man counterbalance with gravitas and a huge forum/following.

Krugman did hint in January(?) that he had talked to the administration, but "that was all he was going to say about it." So I've always kinda thought he was advising behind the scenes. Still, it's unlikely that he would use the dire word "despair" if they were quietly working together -- especially considering the self-fulfilling tendencies of political economics...

Anyway, there does seem to be a concerted effort to raise a ruckus coming from the White House: Rahm 2-3 weeks ago engaged with PK in the Sunday NYTimes, then Goolsbee 3 days ago got all snippy, and now Larry Summers is sparring. Seems coordinated to me.

Why highlight what Krugman's saying if it wasn't advantageous to them? Then again, why run the risk of everyone buying Krugman's argument?

Either way, something to consider...

Krugman says that the Geithner "scheme would offer a one way bet..." Maybe I'm going far afield here, but a one way bet is exactly what got AIG in boiling water so perhaps one way bets are dangerous?

A lot of banks were buying CDS protection on the one hand, but they were also selling CDS protection to someone else. So when a bond defaulted, the banks paid out money, but they also were getting money back in so there was little or no net loss.

AIG, on the other hand was only selling CDS so when bonds defaulted they had to pay out at the same time, of course, nobody was paying them. (They ending up having CDS covering more than $440 billion in bonds.)

Let's be clear what we would be dealing with if we nationalized the banks. There hasn't been an in-depth discussion of how nationalization or receivership would effect the economy and perhaps it's time someone stepped up to the platform with an explanation.

As I've posted on TPM before, I have a personal interest in it. If bank shareholders are wiped out it will very definitely affect me and thousand of others who have mutual funds that are holding bank stocks.

*Invester* is a dirty word on liberal blog sites, a little like *liberal* on a conservative site. But *invester* can mean little scraping-by grannies like me, mutual funds like the ones in millions of 401ks as well as the evil Madoffs etc.

"Why should I care?"

Let's see. Your very selective choice of past Krugman's positions was very misleading. Here are a few things Krugman was also against:

1. Iraq War
2. Bush tax cuts
3. Bush Social Security reform
4. Housing bubble
5. Obama as Democratic nominee

Note that on all those things (except #3), he was in the minority, sometimes a very small and vilified minority.

And his opposition to Obama as candidate was primarily over health care: Obama seemed all too eager to follow the advice of insurance industry hacks such as Tom Daschle, instead of really trying to come up with a plan insuring all Americans.

Similarly, in this economic crisis Obama has sold out to Wall Street hacks representing a failed industry that is now demanding hundreds of billions of taxpayer money. And Obama nods and respects people like Summers or Rahm. Why should Krugman applaud? He was right in the past, he is right today.

"So maybe he should explain why Larry Fink of Blackrock and Bill Gross of PIMCO both are willing to put hundreds of millions of their own dollars at risk alongside the government to buy these assets?"

I found this explanation fairly convincing:

http://interfluidity.powerblogs.com/posts/1237877649.shtml

But, just buying the crap off the "banks" doesn't do anything about their corporate culture and I'm not comfortable with that, even if Bill Gross is (and I'm not sure he should be).

So, color me deeply unsatisfied.

Why is this all about character? On and on and on. I must admit that I am at times guilty of it myself and it's absurd. It's lowest common denominator People Magazine style discussion.

And shouldn't all this be about what will work? Since nothing has been tried -- neither Geithner's jumpstart auction nor Krugman's Swedish plan -- shouldn't we seriously try to look at both sides of the coin instead of all this miserable one-sidedness and calls for resignations? It really is a bit premature for that kind of stuff.

I mean, I was originally for nationalization one hundred percent but -- pace Alan Greenspan -- it's not going to fly right now and it's not a sure thing anyway. Never was.

In the meantime, we have Geithner's plan, which possibly does have a chance of generating some fluidity and if it doesn't, there's nothing in it that says last stop, everybody off the train after this. I do think it's fair to say that Krugman has been rather shrill in this particular regard and way too alarmist. It's way way too early to be hanging crepe.

Moreover, what Bernanke and Geithner seem to be suggesting today is that the fallback will be takeover of the banks -- and when and if it becomes time for that, it may not be the political impossibility it is now. Which it is. Ideological purity is nice, but in a country where we can't even get national healthcare we're not going to get nationalized banks, not until there's absolutely no other option left at all.

Or in other words: not possible now. Grow up and get over it.

some problems maybe mentioned by other commenters...

Shorting a bank stock doesn't force nationalization. Market capitalization is not working capital is not stockholder equity.

As for the Plan, Think bigger. If I have $100M to invest, I buy into the plan ten times at $10M each. That gives me 10 separate bets. Assuming half the bets fail and half pay off, that is that the deal is priced correctly, I have a built-in net upside bias because the government covers both half the losses on each buy-in up to $20M and then all of any additional losses. On the upside I do great. So how can I lose?

But the price cannot be set because the whole premise here is that the values are unknown.

Also, it's really just another way to funnel government cash to investors and profits to new speculators, some of whom might already own some of the assets of interest!!

Robbing Peter to pay Paul is one thing, but giving money to Peter so Peter can buy Peter out, that's crazy.

The investor class needs to take a big haircut, not be given a big safety net called Moral Hazard & Giveway.

why make this complicated?

argue all you want.

the simple point is , this is a total give away and transfer of wealth on a scale never seen before to a group of people that created the problem.

obama has failed here and everyone should rethink their support of him.

this will not work because it changes absolutly nothing as far as helping the average person.

i predict not only will another plan be needed 6 months. or less from now, but the people are going to get so pissed off the dems will be running for cover and obama will not get any "change" legislation passed at all.
nothing for labor.
no health care bill.
etc, etc...
just watch.

Paul Krugman has become, as Andrew Sullivan so aptly put it, too emotional to be a reliable source of analysis on this question.

Worse he's become more than a little disingenous. While he rails against the Geithner Plan, he fails to tell his readers what his preferred "Swedish" strategy will cost or what risks it might entail

Worse, he assumes that it is politically viable.

Again, I am no economist, and I would have preferred NO bailouts at all (like I said, NOT an economist) or at least not as was done last year under threat of economic armageddon from Wall St. Failing that I would prefer to recapitalize the damned banks and rid ourselves of their incompetent managers and their big shareholders

But I am not king of the Universe and - I know this is heresy - neither is Paul Krugman

Lack of political will aside, there are significant downsides to nationalization which Krugman, perhaps because he is so overwrought, Krugman largely ignores -

wholesale nationalization would likely require a bigger outlay of taxpayer funds, at least initially, while putting the government in the uncomfortable position of managing large and complex businesses with 535 members of Congress suddenly sitting on their boards of directors. Now that would be something to fill any columnist with a sense of despair

Me too Steven Pearlstein
Me2
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032302800.html

FYI, the US is not experiencing a recession like the one that hit Argentina.

In other words, Dr Krugman was very accurate in his statement.

It's not hard to see where the incentive to rip off the taxpayer falls.

Bank X has "toxic assets" on the book to the tune of $500 million book cost, say, but now worth nothing because there is no market.

Corporation Z borrows $35 million (7%) from Bank X and bids the CDOs, etc. to 67% of cost (or higher?), restoring Bank X's balance sheet, removing the toxicity, and, with the rest financed by the taxpayer and government backed loans, and, standing at worst to lose the whole $35 mill, what's the worst or best that can happen?

The Bank is more than $300 million better off than it was, even if the whole $35 million dollar loan is written off as a bad bet, and their executives award themselves a fat bonus for saving what was once a valueless shell, while the taxpayer eats shit.

Or, the taxpayer actually still makes some money but it is far less than if there had been an honest, unsubsidized, undistorted market. Bank X gets their $35 mill back plus interest, and award themselves an even bigger bonus for making such a smart bet on Corp Z's "judgement".

T-H-I-s I-S A B-A-D P-L-A-N !

Get with the program. Follow the money.

Made by Wall St. for Wall St.

Krugman is right to despair...
Is this Wall Street's silver lining? You betcha!...now we know why the market is up...the Geithner's Plan means that the government owns the downside risks and investor's (wall street) own the upside profits...more champagne thank you.

The truth is that No Company or Country is 'to big to fail' (history is full of the 'bones' of both)...here's the problem...
The same people who got us in this mess are now tying to get us out...this is humanly impossible of course...they will, and have instead spent most of the time & money trying to cover-up the industry's underlining behavior. (normal human behavior).

That's why we need an elaborate system of rules & regulations with absolute 'transparency' throughout. Remember President Reagan's slogan re the Russians...'trust but verify'...that's means a system of verifications, checks & balances, and a whole lot of transparency.

What we've witnessed here and around the world in the financial sector (and most other sectors) is a complete collapse of most proper 'rules & regulations' and a surge of 'systemic corruption'.

Above all else, we the people need to be absolutely involved in the solutions...and for the first time in history we have the media/information tools to participate.

So lets start finally Restructuring (nationalize, fix, resell) these financial institutions, the FDIC does it all the time. Only 'Restructuring' can give us the necessary 'Transparency' to get out of this crises.

When some of us were writing about the coming recession 14 months ago, Krugman was oblivious, saying "it's unlikely that America will experience a recession as severe as that in, say, Argentina."

paul krugman was oblivious?? and that quote is your evidence?? what a complete pile of bullshit. are we experiencing a recession as severe as what happened to argentina (and other third world countries in the late '90s to early '00s)??? is that really your contention??? and was krugman wrong on the currency effects that are preventing us from careening into the collapse that argentina experienced??? even IF krugman had been wrong on these points, he was making them in the context of explaining what a rough ride we were actually in for. hardly a point that would be made by someone who was 'oblivious'.

thank you jonathan taplin for this atrocious bit of obtuse dishonesty. i will now take eveything you say with a healthy dose of ignore.

I haven't read all 99 comments, but it seems clear that no one I did read understands why Krugman, Stiglitz, Roubini and so many others don't like the Geithner solution.

It basically comes down to unsecured creditors versus the taxpayer. The Good Bank receivership solution gives bondholders and other unsecured creditors a haircut. It also cancels what amounts to open ended option contracts held by shareholders.

The zombie banks are destitute, worth less than nothing and stockholders are the equivalent of option holders. Their present holdings are known to be worthless, but they have the chance to make a huge profit if (helped out by taxpayer subsidization) things turn around and the crisis is overcome. In a Good Bank style restructuring the option holders and creditors are forced to take a hit.

What irritates the nationalization advocates the most is that non-recourse financing leaves the taxpayer on the hook for most of the loss (Jon is right in saying not all--the investors will lose their small stake), while treating unsecured creditors as some sort of untouchable entity and allowing the option holders to play their call option game.

Why do we taxpayers have to take 84%-97% of the risk. Wouldn't it be better to force shareholders and unsecured creditors take a haircut before we step in.

Jon is right about one comment he made. We should all be hoping Geithner's plan works. His plan would appear to benefit healthy banks the most. Allowing the strong (non-zombie) local and regional banks to clear their bad holding may lead to an opening of credit markets which may lead to a recovering business climate which may lead to a healthy economy and make the toxic assets pay off enough (say 40 cents on the dollar) to keep us (the taxpayer) from losing out.

The other alternative is that we're back in several months saying maybe we should nationalize the banks after all.

Dr. Doom takes on Dr. Despair

Roubini likes the Geithner plan and throws down the gauntlet to Krugman

He won't answer me but he'll answer Dr. Doom

Those who dont like the Geithner plan on the basis that they prefer nationalization are right - as i agree - that the insolvent banks should be nationalized. But they usually dont give an explanation of how they would dispose of the toxic assets of solvent banks. They seem not to like the Geithner plan because it would provide a subsidy to the investors. But ensuring participation of private investors in the risk and in the price revelation is worth that subsidy. Otherwise those who criticize the Geithner plan as a solution to the toxic assets of solvent banks should come up with an alternative that works and that is less costly to the government than the Geithner plan.

Or will he continue to play dodge ball?

http://www.rgemonitor.com/roubini-monitor/256157/new_york_times_deal_book_dr_doom_finds_promise_in_obamas_toxic-asset_plan