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Government offers to buy impaired 401k assets

Thursday, January 29, 2009, 8:53 AM

In a stunning move today, the government offered to buy any and all bad investments out of the 401k portfolios of private citizens in an effort to “make them whole.” The idea, apparently, is that these bad investments are dragging down the economy by making individuals feel poorer and thereby perpetuating the financial crisis. The government is exploring ways to create a “bad portfolio” and exchange freshly borrowed cash for these troubled assets.

While losses may run into the trillions, the government has strong bipartisan support for quickly passing the necessary legislation, bending rules along the way if necessary, to accomplish the goal of taking bad assets off of the hands of private citizens.

Wait...What’s that, you say? I have the story wrong?

Let me check here.

Oops. I do have it wrong. My bad. It turns out the government isn't going to buy your troubled 401k assets. 

Here’s the actual story.

Geithner says plan for banks is in the works

According to several Wall Street officials, senior administration members spent the weekend and the last few days reaching out to top bankers for their views on how a bad bank should be structured. Lawrence H. Summers, head of the White House’s National Economic Council; Sheila C. Bair, the Federal Insurance Deposit Corporation chairwoman; and Mr. Geithner have been involved in the talks, the Wall Street officials said.

Federal policy makers are discussing how to use the second $350 billion portion of bailout funds. About $50 billion to $100 billion is expected to be allocated to stave off home foreclosures. That would leave up to $250 billion available for the banks, with the bulk going to buying troubled assets.

I began this article today with satire because, frankly, the entire notion of taking “bad assets” off of the bank’s hands is farce of the highest order.

It sounded like a dumb idea when I framed it in terms of individual investors and it’s an equally shallow idea for large banks. It is just a terrible idea. It is theft plain and simple. The fact that it’s largely generational theft seems to have legitimized it for many people, especially those currently in power of course, but it is theft just the same.

How much will it cost to bail out all the bad decisions by all the large banks? Nobody really knows, but the price tag has now crept up to $3 trillion to $4 trillion, according to Senator Schumer.

Today, bank shares leapt joyously on the news of this new farce of a bailout, indicating that Wall Street is certain that shareholders will be preserved. Adding an ironic twist to this view was this statement by Timothy Geithner, “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

Um. Seems to me somebody has it wrong here. Either the financial system is private, in which case those private holders should eat the losses, with shareholders getting largely wiped out, or it is not privately owned and run. If they are to be publicly run with taxpayers eating the losses, then here, too, we should find current bank shareholders being either completely wiped out or seriously diluted.

But instead we saw the bank shares leap today, indicating that some big money is betting that the bank owners and shareholders will get to have their cake and eat it too. That is, they will get to offload their bad assets onto the public, keep all their past profits, and get a repaired institution as well.

This means that “business as usual” is on the menu down in DC.

The idea of taxpayer money being handed to the owners of large banks is now so commonplace that nobody even tries to hide it anymore, with the NYT article stating:

Shares in Citigroup and Bank of America, which both recently received a second taxpayer lifeline, surged 19 percent and 14 percent respectively as the stock market rose on optimism that the administration would relieve banks of money-losing assets.

Rose on optimism?” Why should it be phrased as “optimism”? From the perspective of hard-working people everywhere, that line should read, “…the stock market rose on the cynical view that the monied elite will once again manage to foist the impacts of their poor risk management skills off onto future generations.

But perhaps shares were actually rising on this news:

The Fed said Wednesday the economy remained gloomy, and vowed to use “all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

“All available tools” is code speak for “buying whatever we have to buy in order to keep the economy from dropping below stall speed.” Since the Fed has already driven the Fed Funds interest rate to zero, it’s entirely probable that “all available tools” referred to the purchase of equities (stocks). Recently, the Fed coyly suggested they could legally purchase equities because this action is not expressly forbidden by the Federal Reserve Act of 1913.

So on Wednesday the Fed was merely reiterating their willingness  to centrally manage the entire economy and all asset prices (including stock prices) “for the greater good.”

If this is all beginning to sound familiar, that’s because it has been tried before.

By the USSR.

What should we be doing? For one, we could start by recognizing that spending over a trillion dollars a year on military adventures is a bit beyond our reach at this point. All empires finally succumb to economic pressure brought about by overreach, and the US is certainly adhering to this pattern to a “T”.

For another, we could simply accept that a lot of people are going to lose their money because it has already been destroyed by foolish and/or greedy companies. Instead of assuring that these people are taxpayers (i.e. “everybody”), we should let the losses rest heavily upon those who unwisely invested in these foolish companies. This way it is at least possible that investors will be more careful in the future. Plus it would be fair.

Bottom line: I am dead-set against these reckless bailouts, as they represent a failure to lay the losses with those who made the mistakes and they represent looting from the future.

Also, they won't work.

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24 Comments

csstudent's picture
csstudent
Status: Bronze Member (Offline)
Joined: Dec 22 2008
Posts: 48
Re: Government offers to buy impaired 401k assets

What's scary is that a year ago I would have seen the title of this article and my first thought would have been for you to put a tin foil hat on.  When I saw it this morning, it didn't even surprise me.  I also think the comparison you make is a great way to show why this "bad bank" idea is horrible.

Woodman's picture
Woodman
Status: Diamond Member (Offline)
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Posts: 1028
Re: Government offers to buy impaired 401k assets

What value will the government pay for these "assets"?  If they pay what they're worth today, the banks aren't helped much.  If they pay what banks say the assets are worth, we the taxpayers and our children get ripped off again. 

Remember a couple months ago some folks were talking like the Government might make money back later on the assets they take over.  I wouldn't count on it!

The only bright side to these really bad ideas would be if it gets people finally get angry enough to act.

mpelchat's picture
mpelchat
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Joined: Sep 10 2008
Posts: 214
Re: Government offers to buy impaired 401k assets
cmartenson wrote:

Bottom line: I am dead-set against these reckless bailouts, as they represent a failure to lay the losses with those who made the mistakes and they represent looting from the future.

Also, they won't work.

Chris, the bailouts are working, in the true intent of the people that are issuing them.  To make the rich richer and the poor poorer.

The simple way I see it.

Before bailout

Bankers have $100,000 in buying power

Mainstreet has $100 in buying power

After Bailout

Bankers have $200,000 in buying power

Mainstreet has $100 in buying power

After inflation hits hard (in 6months to one year)

Bankers have $100,000 in buying power

Mainstreet has $50 in buying power

The Bankers maintains lifestyle, Mainstreet consumes less resources ((making resources last longer for Bankers)). 

cmartenson's picture
cmartenson
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Posts: 5727
Re: Government offers to buy impaired 401k assets

Good catch MPelchat.  What I guess I should have said was, "The bailouts won't work as advertised."

As always, Barry Ritholtz does a better job capturing the essence of this problem than I did:

I’ve noticed something I find a bit disturbing about our new Treasury Secretary: He has not yet fully come to terms with his new job, role — and boss. Granted, he’s been in the job for only two days. But given the extraordinary circumstances the financial sector and the economy is in, it is important for the Treasury Secretary to get up to speed as soon as possible.

Consider this statement from Geithner, who said that Treasury is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system. “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!

Yesterday’s 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this “bad bank” plan is — its free money for the firms that caused the problems, many of whom still have the same incompetent management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future. Its moral hazard writ large.

barrt's picture
barrt
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Joined: Aug 25 2008
Posts: 171
Re: Government offers to buy impaired 401k assets

Isnt all this planned? there is plenty of eveidence out there. The bankers must have projected the figures on their debt based system that must grow forever when the first set it up, they knew about the limits of the system many many years ago surely?

Once the dollar has lost around 95% of its value they ramp things up, all that subprime stuff, all those crazy CDO's wern't they just the instruments to push this system into the end stages? They have had since at least 1971 to plan this, probaly longer.

To say that they are being dumb and acting crazy seems to me, well, a dumb and crazy thing to say. These people know what they are doing. Our job is to work out their plan and try to get out of the way!

I'm not smart enough to do that though, but you guys are

What do you think? am i way off target here? to me there are so many pointers that suggest that these very smart people are not stupid and that they planned all of this and are planning the next stages right now

bearing01's picture
bearing01
Status: Silver Member (Offline)
Joined: Sep 8 2008
Posts: 153
Re: Government offers to buy impaired 401k assets

So, the gov't will print money to deliberately inflate equity prices or bad asset prices.  Just like the Freddie/Fannie securities, the prices will be inflated an no private investor will know the true underlying value of the security.  This will only force smart investors out of the market.  They may at first speculate and buy up the stocks until it tops out.  Then everyone will sell and these securities will tank again.  If the Fed just prints more money and keeps it inflated then that's just out right inflation.

These interventions are completely ruining our economy.  All that will be left of value will be investments in hard commodities themselves.... that is... unless the gov't applies price fixing and/or tarrifs on those too.

This really makes life difficult for those of us with investments.  It turns the investor into a speculator.  You can't have a real economy like this.  This is the road to ruin. This will ruin all confidence in our economy.

cannotaffordit's picture
cannotaffordit
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Posts: 273
Re: Government offers to buy impaired 401k assets

Is there any way to stop this insanity?   Or is it just that so many people, who don't really understand the consequences of these actions, are the fed gov's justification for these bailouts continuing? Or, is it that the gov just doesn't care what anybody but the bankers think, and want?

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 479
Re: Government offers to buy impaired 401k assets

Barrt,

You commented:

"Isnt all this planned? there is plenty of eveidence out there. The
bankers must have projected the figures on their debt based system that
must grow forever when the first set it up, they knew about the limits
of the system many many years ago surely?"

I share your thoughts and concerns. Certainly if the Jekyll Island Club could mastermind the Fed they can work out the methods to control the current scene. But, on the other hand I also have contrary ideas about it. These are simply greedy individuals who most likely have been born into wealth and power and assumed the position held by their forefathers.  We don't really know who the owners of the Fed are, only their "strawmen" are visible. They could be completely inept in their ability to forsee the folly of their actions.

No doubt there are plans being made by the big power brokers. Likely a lot of dangerous stuff that is a much larger problem than losing your life savings and house!  The most difficult issue we face is in dealing with our changes in awareness that are the inevitable result of learning more of the truth. The solutions will come once we arrive at the simple acceptance of where we are and what we are. Then comes the what to do.

Our biggest failure can only be complacency and an unwillingness to look and act.  We will have to survive on a planet with a much reduced inventory of resources. How fast will it change? We have the rate of change and the amount of change to try to anticipate. Undershooting either will cause more difficulty. I use the Titanic as an interesting comparison.  Not all perished and many knew the outcome long before it was apparent.

I think the issue is less what those in power are planning but rather what the rest of us need to plan for.

Coop 

jkrimer's picture
jkrimer
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Posts: 7
Re: Government offers to buy impaired 401k assets

Honestly...There is going to be mutiny, civil unrest and alot more than financial pain if this continues. Scary.

cat233's picture
cat233
Status: Platinum Member (Offline)
Joined: Aug 20 2008
Posts: 575
Re: Government offers to buy impaired 401k assets

Next the government will be taking over 401 plans and offer to manage them for
us.  Then when we retire they would promise to pay us 4%-5% a year return from
our 401k's.  Won't that be nice, the government deeper in our pockets and
mismanaging what you thought you might have for retirement.... History does
repeat itself.  That is if there are any funds left. It will be all we would
have, since Social Security will cease to exist.

Cat

 

Davos's picture
Davos
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Posts: 3620
Re: Government offers to buy impaired 401k assets

Tooooo funny:

Saturday I went to the post office, something apperently I won't be doing after they cancel mail delivery on the 6th day so they can save money, and I got an assessment for the house my wife and I built in 2007.

A 27% increase in value?!?!? It was assessed last in 2007.

On the 5th I have an "Appeal" hearing. I can't wait to ask the county supervisor how in God's name property values could have gone up 27% after the [real estate] bubble popped.

Everyday I see new acts of desperation - of which all straddle us, our kids and our grandkids with "solutions" that are anything but solutions.

And I thought buying toxic debt, at market price, with taxpayers money was stupid....

Absolute insane asylum. 

 

 

RussB's picture
RussB
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Posts: 101
Re: Government offers to buy impaired 401k assets

"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

That's amazing. Even Bush officials weren't so brazen in publicly stating their anti-public loyalties.

If only we still had those who would not only say, "We'd like to do our best for the American people", but who actually meant it.

straight's picture
straight
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Posts: 103
Re: Government offers to buy impaired 401k assets

WTF!!

To the Americans on this forum, WHY ARE YOU NOT IN THE STREETS WITH PITCH-FORKS ???

This, as CM says, is out-right THEFT!  From you and your childrens children.

The US Govnt has NO intention of ever paying off the debt, they simply cant. You know it, I know it.

Your Government is corrupt and out of control.  It is time to take your country back before it sinks us all!!!

Get a bloody spine. 

 

Bimonics's picture
Bimonics
Status: Member (Offline)
Joined: Dec 30 2008
Posts: 2
Re: Government offers to buy impaired 401k assets

"Yesterday’s 13% surge in bank stocks is a clue as to what an obscene
taxpayer giveaway this “bad bank” plan is — its free money for the
firms that caused the problems, many of whom still have the same
incompetent management in place that caused the problem. Purging toxic
assets from bank balance sheets, without punishing the management,
shareholders and creditors of these institutions for their horrific
judgment will only encourage more of the same in the future. Its moral
hazard writ large."

Is not this just a clear example of 'flow of capital'  or wealth that is common in any usury system? It is amazing how efficient the system is in keeping itself in good working order. From the perspective of the hidden entities, is it not more like a consolidation effort?

Your input will be appreciated.  

straight's picture
straight
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Posts: 103
Re: Government offers to buy impaired 401k assets

"Chinese Premier Blames Recession on U.S. Actions" http://online.wsj.com/article/SB123318934318826787.html

A link I got from Schiff's site.

The article talks of American irresponsibility leading to this crisis, it talks to the money China has lost and mentions the impact of the currency 'manipulation' comment by your worthless new head of Treasury.... it ends with,

"If the U.S. is treating us this way, eventually that will be enough cause for concern in the stability of the [U.S.] system," the official said.

America is the enemy of the free world.  Its aggression, politically, economically and militarily have caused death and misery for billions.  It is time for America to take its rightful place at the head of the list of 'Evil' empires.  It is time for the good people of America to actually leave their studies and TV rooms and revolt.  It is time to actually ACT, to DO SOMETHING. 

Regime change happens from within! 

It hasn't happened at the ballot box... where will it happen?

 

 

memorrison's picture
memorrison
Status: Bronze Member (Offline)
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Posts: 90
Re: Government offers to buy impaired 401k assets

Chris-

As always your comments are thought provoking.  It seems like this administration is an extension of the last several administrations.  No one wants the financial system to correct or worse, collapse while they are in office.  A correction of the whole financial system has started several times over the past twenty years.  But the Government has always put patches on the wound to fix it for awhile.

The whole reason AIG and all of the TARP funds are being used to "prop up" failing institutions is to buy time to figure out how to unwind all of the derivatives that are outstanding.  That to me is the simplist explanation, might not be wholly accurate but I think the core of the problem.  The current outstanding derivatives are so massive that if AIG or any of these large financial institutions fail, no one knows what other institutions would collapse as a result.  The derivatives are like a room full of mouse traps and you throw a golf ball in the room and a company like Lehman Bros. goes under - in an of itself not that dramatic.  But the mouse traps jumps up and sets off another and then another and know one knows how it will stop.  The Government puts out a bank derivative report every quarter (Chris has reported and quoted these figures several times and was in the last Martenson report) and to no surprise the top three are JP Morgan, Citigroup, Bank of America.... JP alone has over 90 trillion of nomial derivatives outstanding!!! If you add up all of the stock and bond markets of the world - they use to add up to 100 trillion!  We are sunk, and the Government knows it.  My guess is that they are trying everything to hold it up until something better comes along to fix it...They just do not know what that is right now so they continue doing what they have always done.

As you have stated all along, you are just trying to get the word out to the situation and wake people up.  Not to many options, but this whole thing will end in the near future, we are just not sure of how or when.  It is not a question of IF.  People should prepare for a financial collapse the Government is running out of fingers to plug the dike and the new adminsitration is approaching  it just like the Paulson adminstration did..... scarry!

Thanks Chris for all you continue to do..... it is nice to know there are a lot of us that are paying attention and do care!

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
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Posts: 488
Re: Government offers to buy impaired 401k assets
straight wrote:

WTF!!

To the Americans on this forum, WHY ARE YOU NOT IN THE STREETS WITH PITCH-FORKS ???

Cheap, bad beer.

The lottery.

Cable TV.

Hyper-individualism: If it's not happening to me it's not happening to anyone.

There's also a dirty little secret here in America. The Wall Street complex has long understood that if they gave the lower classes some crumbs they'd feel that they were "in on it" too (the orgy of false wealth) and be less likely to be up in arms about the transfer of wealth that's occurred in this country over the last twenty-five years and the destruction of our infrastructure on all fronts. Enter the 401(k). Now Americans of very modest means felt that somehow they were getting rich off the stock market when in reality they were surrendering their money to corporations who used it to enrich themselves (taking instant profits even though your profits weren't available for decades) through the exploitation of foreign markets via casino capitalism/globalization (which isn't capitalism at all). Well, the gig's up -- take a look at your 401(k) Joe and Jane America. As Gerald Celente said, '08 was an economic 9-11.

As history demonstrates quite convincingly the middle class' role is as a buffer between lower class disenfranchisement and anger and upper class corruption and exploitation. The process underway in the US right now is called "third-worldization" by many people and is about to enter overdrive as the topic of this thread indicates. With each passing month the middle class is shrinking.

Give it time.

Linda K's picture
Linda K
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Posts: 56
Re: Government offers to buy impaired 401k assets

Right on Main.

capesurvivor's picture
capesurvivor
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Posts: 963
Re: Government offers to buy impaired 401k assets

How about the Superbowl, biggest of the circuses.

 I guess the "$1200 stimulus" check I got was the bread.

 

SG

Mike Pilat's picture
Mike Pilat
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Posts: 929
Re: Government offers to buy impaired 401k assets

Mainecooncat: If I could follow up with something that's hit me lately.

I don't want to get overly political, but we are now constantly subjected to hearing Obama and Biden discuss the middle class. As if we should trust the government to get even more involved. Apparently now Biden might be something of a "middle class czar" - wonderful.

But I haven't quite heard what they mean by "middle class" since they don't ever seem to speak of lower or working class. If you don't have a working class, you can't have a middle class. Does that mean the new "middle" class is already assumed to be the people working in jobs that traditionally have been considered "lower" class jobs. Just throwing around the middle class word without really defining it has me squirming to think where I fit in.

Perhaps we're redefining everyone who does not have elite status to be the middle class. That is straight up communism and is completely flattening out chances for economic advancement and freedom. Oh wait, but that's what we're seeing with our own eyes anyway. I feel shafted.

dickey45's picture
dickey45
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Posts: 77
Re: Government offers to buy impaired 401k assets

Good point Mike.  I've been also wondering for a while if blue collar workers are now our middle class.  Those in minimum wage jobs are the working poor.

I was hoping this article was true but alas...no bailout for my 403b plan which has lost 39%.

idoctor's picture
idoctor
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Posts: 1731
Re: Government offers to buy impaired 401k assets

I feel much safer & can sleep much better knowing we have a new middle class czar LOLSmile. What will these cartoon characters come up with next to try keep us settled down?? What a joke these clowns really are. Car Zar..Bank Zar.....they sure know how to Zar around & get'er done LOL.

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 479
Re: Government offers to buy impaired 401k assets
straight wrote:

<snip>

America is the enemy of the free world.  Its aggression, politically, economically and militarily have caused death and misery for billions.  It is time for America to take its rightful place at the head of the list of 'Evil' empires.  It is time for the good people of America to actually leave their studies and TV rooms and revolt.  It is time to actually ACT, to DO SOMETHING. 

Regime change happens from within! 

It hasn't happened at the ballot box... where will it happen?

Straight,

Thomas Jefferson, Andrew Jackson, Aberham Lincoln, and John Kennedy all fought the establishment of a central bank in the United States. The American public did not educate themselves on the truth and ultimately have allowed this to happen.  We have failed to retain our freedom from the moneyhandlers and America, along with just about every other nation on the planet is being manipulated by central banking. (In the US it is the FED and in the rest of the countries it is the WORLD BANK) If yours is not then take a win. Otherwise I suggest you get out your own pitchfork and do some revolting of your own.

If we want to rid ourselves of this collective "evil" then we all need to start playing a different game. Banking rules the day so long as we can be enticed into ever increasing debt. So get out of debt and stop consuming all of the SH## being produced.

Getting out of debt, reversing the consumption paradigm and changing our value system will bring down the banking house. Use open revolt and you will play into the hand that you claim to despise.

Coop

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 479
Re: Government offers to buy impaired 401k assets
Mike Pilat wrote:

<snip>

Perhaps we're redefining everyone who does not have elite status to be the middle class. That is straight up communism and is completely flattening out chances for economic advancement and freedom. Oh wait, but that's what we're seeing with our own eyes anyway. I feel shafted.

Mike,

You have been shafted. And your generation is coming into the end of a long slow slide where the banking cartels that were established  in the mid 18th century have succeeded in taking control of the wealth of the planet. This has occurred in front of the collective eyes of the world. We have been stupid. What else can be said.

But I think that which couldn't be done by the will of the people will be done by the inherent failure of a system driven by greed and avarice. The exponential growth paradigm is simply not sustainable and it will now come down. We will have to create a new system of "economic advancement and freedom" in it's place.

I am encouraged by intelligent young persons like yourself and others that have posted on this site. I think that we will make a difference. (not that I consider I am any longer a "young" person, but I am willing to help get-er-done! )

Coop

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