CommunityFDL Main Blog

The Geithner Plan: Outsource the Clean-Up to Hedge Funds

The Geithner Plan for cleaning up bank balance sheets is based on the idea that we need private capital to unwind the problem .

Treasury Secretary Timothy Geithner said the only way to resolve the financial crisis is to work with the private sector to remove troubled assets clogging banks’ balance sheets, even at a time when Wall Street moneymakers are being vilified by the public and politicians.

The Treasury Secretary doesn’t explain why private money so important, and no one asks the question. It is the current conventional wisdom, and as usual, the conventional wisdom is empty.

The problem is to evaluate pools of mortgages, and then to value the securities based on the pools. How do you do that? It isn’t magic. It requires access to data about each mortgage in each pool. The data is available. Each mortgage in each pool is serviced by a mortgage servicing company. They know the payment history. They have the address of the property. They know a fair amount about the homeowner, and can get more from the commercial sources, and they can compile it all loan by loan in electronic form.

That makes the problem one of aggregating the data mortgage by mortgage, then compiling into a usable form for evaluation by experienced professionals. It doesn’t require some Harvard B-School master of the universe. Just a professional banker with a background in regular lending to set up the valuation procedures. Once that data is in place, and preliminary valuations are done, several of the funds have software to evaluate the securities, and it shouldn’t be that hard to acquire that software. It’s a big problem because there are lots of mortgages, but it is manageable, and it is perfectly suited to standard management practices.

If we want to sell the stuff, people can value it. If we want to calculate the capital situation of the owner, we have real numbers. At the end of the day, if the bank is insolvent, we know it, and we deal with it.

Why hasn’t this been done? Why does Geithner, or anyone responsible to taxpayers, think it makes sense to pay hedge funds to do this routine data-gathering task? We’re not being asked to pay by the hour. No. We’re being asked to pay gigantic returns. One fund says it wants a return in the range of 25%. If there are a couple of trillion out there in bad assets, and the private crowd is investing billions, and the government is investing billions, 25% is, well, a lot of money. I bet it’s more than the AIG bonuses by a long shot.

It’s like hiring Blackwater do things the Army used to do, only much more expensive.

Previous post

Brad DeLong Defends the Obama/Geithner Plan

Next post

Parallel Lines



I read a lot of books.