Toxic Flaws In The Toxic Asset Plan

There are at least three serious flaws in the financial rescue plan that the Treasury Department has put forward for the banking system that financial expert and Institute for America’s Future board member Rob Johnson lays out in an interview with Jane Hamsher of FireDogLake.

Johnson, who was a fund manager for Soros Fund Management and a chief economist for the Senate Banking Committee, says that the Public-Private Investment Program, which Treasury Secretary Timothy Geithner has proposed to get so-called “toxic assets” off of bank balance sheets:

  • Gives the impression of favoring a subset of Wall Street cronies and political contributors over other financial institutions,
  • Does not fundamentally address the “too-big-to-fail” structure of the financial institutions themselves;
  • Is likely to cost up to $1 trillion, which sets the stage for Wall Streeters to cry for stifling the rest of President Obama’s agenda on health care, education and other needs in the name of “fiscal discipline”;

The plan is also raising concerns among the Chinese and other foreign nations about the country’s fiscal soundness. “Like it or not,” Johnson says, “America is a debtor nation, and our creditors are getting scared.”

The Geithner plan envisions having private financiers buy up “toxic assets” from banks and other financial institutions in partnership with the federal government, with the expectation that the assets will eventually increase in value and can be resold at a profit. If that proves true, taxpayers will benefit, but private investors stand to gain even more; if that proves untrue, federal guarantees will shift much of the risk from private investors to taxpayers.

The shortcomings of the toxic asset plan are likely to hit President Obama particularly hard as he meets this week with the G-20 nations in London, Johnson warns. As Obama tries to persuade hesitant nations to enact their own stimulus plans and take on more debt, Obama is going to hear demands that the United States clean up its own house first by enacting tougher regulations on its financial sector.

What’s most critical, both from a long-term economic standpoint and from a political standpoint, is for the administration to push for the power to restructure the financial system, not just patch and resuscitate the status quo. That is what the administration is demanding of the automobile industry—down to the point that GM lost its chief executive and workers are losing hard-won wage and benefit gains. If the administration sought the power to do to such financial institutions as AIG what it is asking General Motors to do, then “there is no excuse not to engage in restructuring,” Johnson says.


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