Public-Private Auctions and Toxic Perceptions

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RussB's picture
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Public-Private Auctions and Toxic Perceptions

 As information finally trickles out about the next big push in the bailout offensive (which really just looks like Geithner's confused attempt to cobble something together amid the wreckage), one detail which seems edifying is that they're apparently going to hold a regular auction among the putative "private" buyers for the toxic garbage these banks are holding, rather than the reverse auction among the sellers which idea was bandied about last fall.  

The plan is to buy up huge amounts of toxic waste paper from the banks, while cloaking it in the fig leaf of a "public-private" partnership. Some so-called private buyers will be given government money to take a small portion of the total buy. If that portion is ever profitable they'll get to keep the profits. If it loses money they'll be compensated by the taxpayer (even though these private investors didn't put up their own money in the first place). Just like every other aspect of the bailout plan, the goal is redistribution of wealth upward, from the non-rich and the public to rich insiders.   

The auction plan is interesting because it seems to fit so well with the general perception among all participants and observers that no insider is going to be required to take any losses if this administration can help it. That's why execs feel emboldened to continue to convey bonuses to themselves. That's why GM's bondholders refuse to take a haircut but instead demand that the workers, who have already made so many concessions, take on the rest of the losses. And that's why these banks dig in and demand model value for this paper garbage they hold.  

[That's why we've had this ridiculous controversy over mark-to-market. Needless to say, we should be more aggressive about enforcing reality-based accounting rather than fantasy-land arithmetic, (1-100=1000).  

Yet from the start we've heard from these banks and their flunkies in the think tanks and the media that mark-to-market, i.e. having to tell the truth that garbage has the value of garbage, is what really caused the crash by wrecking everyone's deluded confidence. That if we all just kept lying to one another everything would've been, and still can be, fine. We could've lived happily ever after, floating on a deception bubble.  

Thus we have the peculiar spectacle of the banks all claiming to be in good shape, and yet still lending among them is frozen. So each bank says it is fine, yet implicitly considers all the others to be lying.  

Evidently even with mark-to-market they still don't trust one another.  

Yet the right wing says if we could go back to fantasy accounting we could restore trust. Very strange. Why are all the market fundamentalists suddenly so critical of the market?]  

What's the difference between an auction and a reverse auction? Why does a reverse auction seem better from the point of view of the public good? We would have those who want to sell high having to bid down, rather than those wanting to buy low having to bid up. But what's our current situation? The buyers don't want to buy. That's why the administration feels the need to offer such lavish subsidies, in order to induce them. But the sellers do want to sell, and would be selling at whatever they could get if the administration wasn't promising to prop up the price. But because they do have complete faith in being completely bailed out, they're holding out for a complete bailout on this garbage paper.  

So that's why it's an auction. The Potemkin private buyers will have every incentive to bid up and up and up, since they have no risk, only an upside. The price will reach what the banks have been holding out for. And the administration, who will be using taxpayer money to pay for it all, will try to hide behind the lie that this price was market-certified.  

(What they should be doing, if we had a government working for and not against the people, would be to have a reverse auction, with only real private buyers. The government could offer these buyers the carrot of some moderate incentives to buy, while wielding over the banks the stick of threatening to withdraw all government support from anyone who refused to take part.)

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