Geithner 5: A better solution Video Lecture | Geithner plan: How America revived from Financial crisis - Entrepreneurship

In the last couple of videos,
I've been dumping on the
Geithner Plan.
Arguably showing that if right
now the market is willing to
rationally pay $30 for a
security, even with the free
put option that the government's
willing to give,
at most a rational investor who
was willing to pay $30 is
now maybe willing to
pay $40 to $50.
And that still won't meet the
hurdle that the banks need in
order to clear these assets
off their books.
Because, we've done it in a
bunch of videos even when I
did the videos on the first
bailout, the TARP plan, that
if they sell them for less than
$60, that's the number
you hear in a lot of the popular
press, that the banks
will essentially be insolvent.
So they're not even willing
to sell for less than $60.
So if this is the case then
the plan won't work.
Right.
It just won't work.
It won't work.
Now, there's the other scenario
where, let's say we
do see a bunch of trades
where they are going
for $60, $70, $80.
And based on some of the
arguments I've given in the
previous video, I'd say well,
the only rational person
willing to pay $60-plus would
be the banks themselves by
creating some type of off
balance sheet investor.
There's tons of ways
they've done this.
I've gotten some letters where
people said how can a bank
sell to themselves?
Well, you can give a
non-recourse loan to a hedge
fund that you just created
and that hedge fund
then invests in them.
And to somehow have an audit
trail, almost every hedge fund
in the world has some
relationship with one of these
major banks.
So it would be almost impossible
to disassociate the
private investors from the major
banks that are trying to
offload these assets.
So I would argue that this
probably is the case.
But in this video I like to give
Geithner and maybe even
the plan a bit of a break, and
give some credence to one of
the arguments that they make.
Right now, because of all of
these assets going sour all at
once, you have all of these
forced sellers, right?
You have all of these banks and
they're all facing these
liquidity issues.
So you have this huge amount of
supply of these securities.
And right now since all of the
natural buyers are distressed,
all of these banks are forcing
to sell, all the hedge funds
who used to own these things,
they're all going bust. And
they're facing redemptions.
And their investors want
their money back.
So the actual demand for these
securities, the actual pool of
money going after
is very small.
So the demand is very small.
And they're saying this is the
reason why you have this
market disconnect.
This is the reason why people
are only willing to pay $30,
because you have this
illiquidity.
You have all of these forced
sellers and you have very few
buyers left in the market.
And the few buyers that are left
in the market are able to
get things at fire
sale prices.
That's the argument that we've
heard time and time again
about how $30 isn't
the real price.
That anyone who actually looked
at what's in these,
what have unfortunately been
called toxic securities,
probably because that's
what they are.
But anyone who looks at one of
these securities and really
looks inside of them will
realize that these are worth
way more than $30.
That they're yielding a lot.
That there will be some defaults
but maybe they're
really only worth $80 or $70
or $0.70 on the dollar.
My argument, if is really the
case, what the government
should do instead of giving
free put options to hedge
funds to essentially subsidize
the assets from banks.
Or, even worse, allowing the
banks to do kind of that
scheme that I talk about in the
second video where they
can buy things from themselves
and offload
things on the taxpayer.
What the government should
do is really increase the
transparency on these securities
so that this pool
of buyers becomes larger.
Right now these securities,
these are either
collateralized debt obligations
or mortgage backed
securities.
They're bonds of some kind.
And the pool of people who can
buy bonds is not a large one.
It's essentially a bunch of
professional investors, most
of whom have blown up in
this credit debacle.
Let me draw a little
balance sheet.
You take those toxic assets,
let's say this is a random
bank's balance sheet.
That's its assets, liabilities,
equity.
And it has one of these toxic
assets sitting on it.
Right.
This is a toxic asset.
What you do is you take the
toxic assets, stick them in a
company-- this is some
corporation-- so then the
toxic assets go there.
That's the assets.
And the corporation will just
have a bunch of shares.
If all the toxic assets came
from this bank, give these
shares back to the bank.
And notice this isn't any
sketchy accounting.
The banks still have the assets
on their balance sheet,
but instead of having the assets
directly they have the
shares in this company.
And the whole reason I'm doing
this is and you can then take
this company and float it on
a traditional exchange.
I mean we're talking about the
government, The U.S. Treasury.
They could force this thing to
be listed on the New York
Stock Exchange.
So just by doing that, that
significantly increases the
pool of investors who could
invest in it, right?
Right now the only people who
could invest in it are people
who are essentially
bond investors.
And it's not a trivial matter
to start investing in bonds.
You have to invest in $1,000
increments at minimum.
Usually it's much larger
block sizes.
And some of these are
collateralized debt
obligations.
They're just hard to invest
in even if you wanted to.
Now, the second problem.
That would solve just the pool
of people who could invest. So
that'll make it a
little larger.
But the second problem, this is
frankly the bigger problem
with these assets, is that
there's no transparency.
No-one knows what's in
these toxic assets.
Right?
The problem that happened over
this last real estate boom is,
not only did they give loans to
people that they shouldn't
have given loans to, but they
sliced and diced them.
And I've done this in a bunch
of the videos in the past.
They'll take a bunch of
mortgages, they'll take
millions of mortgages, put them
in a corporate structure.
And then they slice and dice
them into different tranches.
And I explained this in the
collateralized debt
obligations.
Where this tranche gets paid off
first, this tranche gets
paid off second, and this
tranche gets paid off last. So
any losses on this, this group
takes it first. And for the
most part these are the
toxic securities.
But some of these have
also gone toxic.
The problem with these things is
that the way that they sold
them is that they went to
Moody's or S&P and they said,
hey, Moody's, give us
a rating on these
securities right here.
And Moody's would say oh that's
a AAA-- and, well they
wouldn't call that AAA,
but they would
say that's a B security.
And we just took Moody's
word for it
that that's a B security.
Or that this right here
is a AAA security.
And everyone now knows that the
only reason why Moody's
gave the rubber stamp on it is
because the same people who
were structuring these things
and making all the money off
of these things were
the same people
who were paying Moody's.
So what we need to do is
disintermediate the rating agencies.
So the government, not only
should it create these
corporations so that you could
essentially buy these assets
without being a bond trader, you
can just buy them on any
exchange, what the government
should do is hire a big team.
And we're talking about billions
or trillions of
dollars here, so to hire a team
that essentially puts up
a website and lets us know
what's in each of these
securities.
So let's say that this company
that I just created, its
sticker symbol is ABCD.
So what we can do is we can go
to a website, type in ABCD,
and it'll tell me exactly what
is in that toxic security.
I know a lot of people who are
professional investors who are
in a position, if they wanted
to, to pull the trigger and
even buy them in their
current form.
And they're afraid to because
they don't know what's in
these toxic securities.
They don't know whether they're
completely fraudulent,
only somewhat fraudulent.
To some degree it's even hard
to tell where a lot of the
assets are sitting, in which
of the tranches.
So what the government should
do is just make these as
transparent as possible.
They should have a map of the
United States and they should
say this security is for houses
that are in upstate New
York and in Florida,
and its 30% upstate
New York and X% Florida.
It should have charts that tell
me what percentage is
defaulting.
So I as an investor maybe
I can extrapolate
things, I can do models.
But the crux of the issue here
is that instead of having some
opaque 800-page document that
only a few people have access
to and once they decide to parse
through that thing they
have to go to their local bond
trader and invest in it that
way, what you do is you put it
into a company, list that
company on the NYSE, and then
make it completely transparent
what's in that toxic security so
that anybody watching this
video can say, you know what, I
think this thing is actually
worth $0.40 on the dollar,
not $0.30 on the dollar.
And you won't have to commit
millions of dollars.
You could just go buy 1,000
shares for $400.
It wouldn't be a major
up-front investment.
And if they did this,
this would solve
the liquidity problem.
This would solve the
liquidity problem.
This pool of buyers would then
become much, much larger.
And then the government wouldn't
be able to make this
argument, and the banks wouldn't
be able to make this
argument that somehow that these
are distressed sales.
That these $30 sales are way
below the actual value.
Because you would have a
lot of people with real
information, with real access
to actually trading them,
being able to price
these securities.
And then when you're forced to
do a mark to market -- First
of all since each of these
shares in this security will
be trading on the New York Stock
Exchange, you'll much
more volume of the
transactions.
You'll have continuous
trading.
And then the mark to market that
you'll be forced to do on
these, essentially shares now,
but it's the same thing right?
It's shares in your
toxic asset.
But the mark to market on
those will be much more
accurate because you'll have
much more volumne.
You'll have much better market
information as far as what
they're worth.
And then frankly if it turns out
that these things really
are worth $30, then we can let
the banks fail and move on
with our lives.
And I've argued you could
arguably start new banks or do
something else.
But we won't be kind of playing
this charade of what
are these assets worth?
Wait, maybe we should
subsidize the banks.
Maybe we should be writing
free put options to hedge
funds and making
it all opaque.
The solution is just expose
everything to sunshine.
And then let the market price
really reflect a true reality.
And if that reality is that
these banks are bankrupt, well
then, you let them
go bankrupt.