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Government offers to buy impaired 401k assets

user profile picture Chris Martenson Jan 29, 2009
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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.