The ''new'' Geithner plan

22 marzo 2009 sandro brusco

The new plan to rescue banks, as described by the New York Times, looks a lot like all the older plans. The basic idea seems to be always the same: overpay the toxic assets using taxpayers' money.

I don't really have much to add to what Paul Krugman has already said on the subject in a couple of posts in his blog. The approach is, quite simply, nonsensical. The relevant quote from the NYT article is the following:

Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.

The approach of this administration, and of the previous one as well, seems to be that the investors are unreasonably risk averse, or irrational, or whatever, and they should buy the toxic assets at a price closer to what the banks want. Otherwise, you see, the banks would have to ''book huge losses''. Why the market is not working is left unexplained. The solution is simply to fill the gap between the 30 and the 60 cents with a huge public subsidy.

We can only hope that this approach will fail, the same way that it failed when it was first proposed in the fall of 2008. Yes, of course, we do need some sort of intervention. The point has been made by many, and I find this exposition by fellow game theorist Sandeep Baliga very clear. But there are many different ways to intervene. In a previous post I have tried to explain how to set up a better mechanism for price discovery of the toxic assets. Other ideas have been floated. Bulow and Klemperer, for example, have suggested a clever variation on the good bank / bad bank approach. As a minimum, if the administration is really unwilling to consider new ideas (but why?), it should at least consider some variant of the Swedish approach: let the banks fail, take them over, recapitalize and then resell them.

The plan instead is to use public money to help the creditors (other than depositors, already covered by FDIC insurance) and the shareholders of the banks. No explanation is given of why private investors are so reluctant to buy the toxic assets. What if the investors are correct in their assessment and these assets are really worth no more than 30 cents on the dollar? Why should the taxpayers bear all the risk? And what if the money is not enough and we keep having zombie banks? The whole thing is almost too depressing to contemplate.

40 commenti (espandi tutti)

What if the investors are correct in their assessment and these assets are really worth no more than 30 cents on the dollar? Why should the taxpayers bear all the risk? And what if the money is not enough and we keep having zombie banks? The whole thing is almost too depressing to contemplate.

Which is why they (namely, Geithner and Bernanke) do not, and instead try to buy time hoping that an economic recovery will eventually raise the assets prices again to match the debt backed by them (this is what someone called "a three-pronged approach: delay, delay, delay"). The fly in the ointment is that this can't happen, at least in real terms, precisely because the economic growth in the past decade was supported by a bubble in the real estate (consumption was fuelled by rising debt under the name of "equity extraction") rather than genuine increases in productivity. At that time the FED seconded this state of affairs by keeping the interest rates artificially low, and now its people (Geithner is the former president of the FRB of NY) don't seem capable to face the consequences of that choice. Had they carefully read their Adam Smith, they might have had a few doubts:

A dwellinghouse, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it.

(An Inquiry into the Nature And Causes of the Wealth of Nations, Book II, Chapter I)

In other words, the fair value the real estate is determined endogenously by the level of economic activity, and trying to base economic growth on its increases is very similar in spirit, and in final outcome, to a Ponzi scheme where profits are paid to new investors out of new inflows of capital coming from other investors.

So where does this leave us? My personal opinion is that the strategy chosen in the end will be to unleash a bout of inflation sufficient to raise the nominal prices of the assets to the debt they back, thus healing the balance sheets of the banks (regardless of their ownership). And this explains the $1.15T of quantitative easing now in the pipeline (which may be just the beginning). Whether the inflation will be brought down quickly after doing its dirty work of wealth redistribution, or will keep lingering for many years, is anybody's guess.


Sandro, what if neither investors nor banks are, ex-ante, wrong in pricing toxic assets? What if, in fact, no one knows how to price them? That is, persistent ambiguity (some people believe such ambiguity was purposefully built into MBA's) makes prices indeterminate.

This is a possibility we discussed some time ago but you seem to rule it out here and in your previous post.

I'm not sure how you are using the term ''ambiguity''. The value of an assets is the present value of the expected cash flow discounted at a rate that depends on the risk of the cash flow and the risk aversion of investors. Of course, if different people have different expectations about the cash flow, or different risk aversion, then different people will assign different values to those assets. This needs not be a problem, it's like saying that different people have different culinary tastes and are prepared to pay different amount for a dish of sushi. There will still be a market price for sushi. Some people will be delighted to learn that the price is less than they are willing to pay, other people will find the price unacceptably high.

Of course in financial markets things are more complicated because the value that I assign to the assets may depend on information that you have. This is the standard adverse selection problem, and I don't see any reason to call it ''ambiguity''. When you say that ''no one knows how to price them'', what do you mean? Up to know what is happening is that bank managers are offering a certain estimate, based on what they claim to know about the assets,  and potential buyers are prepared to pay much less because, clearly, they don't trust the estimates provided by the managers. It is this asymmetry of information which should be adressed if we are to reactivate the market for these assets. Asking teh bank managers to put their money where their mouth is would be a good way to find out whether they truly have better information about the return on the assets or are just trying to take advantage of the public.

By ambiguity I mean a situation in which people have a hard time assessing the relative likelihood of alternative events -- in this case probability of repayment and so expected returns of various types of MBA's. In other words, toxic assets may be like the incompletely specified urn in Ellsberg paradox, for investors and bankers alike. This is what I mean by "no one knows how to price them".

Yes, I know there is controversy among theorists about whether such a situation in the end makes sense or is just another behavioral twist, yet it is worth asking whether the revelation mechanism you suggest (which I'm very sympathetic with) is robust to this possibility.

I think it is robust in the following sense: if bank managers have no clue, they will not put any money anywhere thus revealing that in fact they have no clue.

 

 

 

Forse Giulio si riferiva a cose come questa?

Econometrica, January 2005 - Volume 73 Issue 1 Page 203 - 243

p.203

Uncertainty and Risk in Financial Markets

Luca Rigotti
Chris Shannon

<em>Abstract<em>

This paper considers a general equilibrium model in which the distinction between uncertainty and risk is formalized by assuming agents have incomplete preferences over state-contingent consumption bundles, as in Bewley (1986). Without completeness, individual decision making depends on a set of probability distributions over the state space. A bundle is preferred to another if and only if it has larger expected utility for all probabilities in this set. When preferences are complete this set is a singleton, and the model reduces to standard expected utility. In this setting, we characterize Pareto optima and equilibria, and show that the presence of uncertainty generates robust indeterminacies in equilibrium prices and allocations for any specification of initial endowments. We derive comparative statics results linking the degree of uncertainty with changes in equilibria. Despite the presence of robust indeterminacies, we show that equilibrium prices and allocations vary continuously with underlying fundamentals. Equilibria in a standard risk economy are thus robust to adding small degrees of uncertainty. Finally, we give conditions under which some assets are not traded due to uncertainty aversion.

Thanks Valter, this is in fact a very interesting reference. I think Giulio summarized the matter well. If the lack of trade is due to the fact that bank managers have no idea of what the toxic assets are worth then we want at least to know that. Right now they are not saying that they have no idea, or they have multiple priors or any other fancy decision-theoretic statement. They are claiming that the assets are really, really worth more, much more, than what the market is willing to pay, because the mortgagors are mostly going to pay their debts. But there is no reason why we should believe those statements. Quite simply, they are not incentive compatible.

Asking them to put their money where their mouth is the elementary thing to do in these cases. If they really believe what they claim they should have no problem in betting their own money, as opposed to taxpayers' money. It is true that if they refuse we may not learn the true reason: it may be because they have pessimistic information or because they have no information and are simply confused. But, at the end of the day, this is not really important. We would still learn that they do not have any optimistic information, and that's what really matters.

This is close to home, so I feel I have to say something. The post mentions (in different words) willingness to sell and willigness to buy (or what is sometimes called a bid-ask spread). The fact that bank managers are willing to sell at 60, does not necessarily imply they know what the asset is worth. In fact, they may think the asset is worth anywhere between 30 and 60, and yet not be willing to sell for less than 60. In an enviroment like the one we described in the paper, when the range of probabilities used to evaluate the assets is very large no-trade results exactly because sellers ask for too high a price relative to what buyers are willing to pay for. I am not sure this is exactly what is happening with the toxic assets (I'm a poor micro theorist), but I suspect (Knightian) uncertainty could be one of the explanations.

Luca: serious question. In what sense "ambiguity" fits the observations better than the plain idea that those who have the info believes this stuff is worth nothing? I understand that under ambiguity if someone follows, say, a α-MEU rule (as in Ghirardato, Maccheroni, Marinacci) one tends to invest less (in fact, see Paolo&Co on this).

My issue is: is there a way to tell the two things apart? That one knows better than the other versus both being in an "ambiguous" situation?

Molto interessante, Valter.

Lungi da me fare il filologo, ma credo che 'ambiguity' abbia prevalso su 'uncertainty' perche' la distinzione tra quest'ultima e 'risk' e' pian piano svanita.

Ecco qui una sintesi "enciclopedica": formalizzare uncertainty come incompletezza delle preferenze o, diciamo cosi', incompletezza delle aspettative e' equivalente.

Non c'e' dubbio che il meccanismo suggerito da Sandro e' in grado, quantomeno, di rivelare se questo e' il caso.

Io credo tu abbia ragione, Giulio. La maggioranza degli economisti hanno sempre usato "risk" e "uncertainty" come sinonimi ed e' difficile cambiare abitudine. Ambiguity, termine usato originariamente da Ellsberg, e' un vocabolo relativamente nuovo per la professione ed ha vita piu' facile. Questo con buona pace di Knight che, nel 1921, fu il primo a distinguere tra uncertainty e risk.

Qui un articolo che rende esplicita la connessione tra il modello mio e di Chris e il problema della valutazione dei toxic assets.

Have you read

http://www.ft.com/cms/s/0/2970532c-0421-11de-845b-000077b07658.html?ncli...

?

The recovery rate for the mezzanine tranche rated AAA is about 5% and 32% for senior one.

So 30 cents per dollar is a fair price....

 

Yes, I cited that piece from FT in my previous post. As explained in that article, maybe the worst of the pack was liquidated first, so those rates may be too pessimistic. But it is clear that there is no reason to trust the claims from the banks either. This is why I proposed an incentive-compatible mechanism which forces managers to bear at least some responsibility for the prices that they claim. The Geithner plan has none of those components.

Hypothetically, yes. If I know something is worth x, I am always be willing to sell it at any price larger than x. If I do not know what something is worth, for example I think it may be worth anything between x and y (y>x) than I am always willing to sell it at prices larger than y, but at prices between x and y my behavior is "unpredictable' since I do not know how to evaluate selling versus not selling. What makes things tricky for the observer who does not know what I think is that I may sometimes be willing to sell it and sometimes not.

Notice that the reasoning above follows what we do, and does not assume ambiguity aversion which is what all other models of ambiguity do (including α-MEU). If you were ambiguity averse, than there would be no indecision region since your preference are complete.

Does this help?

It does but it confirms that, by looking at what banks do I cannot tell if the reason is ambiguity or, purely, waiting for Geithner lifesaving jacket under normal risk aversion ... right?

In other words: I know it is worth 30, which is what the market is offering, but given that Geithner will be soon offering 60, I wait. That's exactly what the Japanese banks did ten-fifteen years ago.

I am not sure I understand your point well. Let me rephrase (what I believe is) the question.

There is a lot of people out there willing to buy toxic assets for 30 cents on a dollar. I observe that the owners of the asset (it is actually agents of the owners and this matters a big deal, but let's forget about this) claim that they are really worth 60, so they refuse to sell. Now the question is: How do I tell whether the refusal to sell is due to the fact that the onwers are standard EU maximizers with complete preferences or instead are just plain confused and they have no way to tell what the assets are worth? Is there any observation that would help us in saying it is one or the other? For what I understand from your argument, it looks like that the following experiment might work. Suppose that I ask repeatedly, in a number of independent trials, the bank managers to sell the toxic assets at 30. If they have superior info then they will always say no. If they are confused then sometimes they will say yes. Is that correct?

A more fundamental question is: even if we think that the bank managers are confused and don't know the true value of the assets, shouldn't we push for transparency? Shouldn't it be made clear that the unwillingness to sell at 30 is not due to some superior knowledge but only to inability to find the correct value? The mechanism that I proposed does exactly that.

Let me admit my ignorance upfront and ask: where is the source of imperfect and/or asymmetric information exactly?

Is it a matter of what is inside any given security? This sounds strange to me, as I would guess that those contracts were written in a very detailed way, listing who has to pay whom in each one of many fairly well-specified contingencies (that's what they paid lawyers for!). Anyway, there shouldn't be too much asymmetric information here: why (after a possibly more careful than usual due diligence process) would a potential buyer of those securities know much less than its current holder?

Or (non-exclusive) is it a matter of how future macroeconomic variables will affect the payoffs of those securities? This seems to me the more likely case, but then adverse selection stories would not have much bite. A priori, potential buyers would not have better information than potential sellers. They may have different beliefs (at least if you don't take agree-to-disagree impossibility theorems too seriously) and you can have no-trade results because of ambiguity aversion (as in Luca and Chris's paper) or because of hopes in a "Geithner put" (er no, wait, isn't that a future macroeconomic variable, too?).(*) But the incentive scheme that Sandro proposed would not be of much help in this case, would it?

(*) Edit: another explanation would be that the banks are toast at the expected values of their books, so each banker adopts a strategy of "hold and pray". I don't see how Sandro's plan helps here either.

To evaluate a CDO with copulae you need:

1) the cumulative marginal distribution of default of the members of the pool;

2) the correlation among the members.

In theory you should know 1) but in practice I do not think you really know because they misclassified people on purpose to give them a mortgage....

The correlation of point 2) depends on both the future macrovariables and the classification of the people pooled into CDO.

So I think they really do not know.

 

where is the source of imperfect and/or asymmetric information exactly?

Rody Manuelli and I were just discussing this issue ten minutes ago. It is not an asymmetry of principle, but of fact. Had the Fed/Treasury started to do its job many years ago, or even two years ago, the problem would be much more attenuated as they would have collected all the micro information that come with each MBS and built up a data base and a set of pricing models comparable, hopefully better, to those that the banks have. But they did not.

So, de facto, right know they know the following about the content and potential market value of these securities: shit. Bird shit, not even cow shit. Which is why they are desperately hiring people from the private banking sector (last one: CITI's Chief Economist is now at the Treasury)! In fact, not only they do not have the data sets, but they do not even have the in house expertise: people in the research departments of the various Feds are good at many things, but not at pricing securities! As for the Treasury, I do not know the internal composition, but I doubt they have the human capital. In other words, the info is de facto asymmetric between Treasury and the private sector. Instead it is NOT asymmetric between two private parties that have been in this business for a while. Which is way the stuff in question does not trade, i.e. the reason you put under (*), as we have been arguing for a while.

This observation prompts two considerations:

- Do you want to know how the "capturing" takes place? It takes a place this way, with Fed and Treasury being filled by Wall Street executives in "temporary mission behind enemy's lines".

- If a highly paid private bank executives is willing to go work for the Treasury, how much do you think he is giving up in salary and bonuses? Which implies: EITHER he is, as above, in a secret mission OR the market for these guys is, finally, drying up. Hence, the retention bonuses are even more unjustified as they are being retained only from moving into ... well earned unemployment.

P.S. Sandro's method should help with the asymmetric info described above. It should also help with the "hold and pray" (or "japanese") strategy as one should then announce that the Fed will start to do its supervisory job and sample assets on the book of banks to compare them with the market values of the assets that are now trading. And, if they are on the books for values statistically unjustifiable given observed trading, well ... you know what I mean. But the Fed stopped doing its job, i.e. the one just described, many years ago and has no intention to resume it at all.

P.P.S. Its Chairman, though, has every intention of continuing treating us like idiots. Embarassing!

 

Do you want to know how the "capturing" takes place? It takes a place this way, with Fed and Treasury being filled by Wall Street executives in "temporary mission behind enemy's lines".

If a highly paid private bank executives is willing to go work for the Treasury, how much do you think he is giving up in salary and bonuses? Which implies: EITHER he is, as above, in a secret mission OR the market for these guys is, finally, drying up. Hence, the retention bonuses are even more unjustified as they are being retained only from moving into ... well earned unemployment.

Maybe a few additional words on the once praised US lobbying system could help. US companies have always been keen to hire (or re-hire) people coming from FED/Government/Public Agencies. IMHO what has happened in the last years does not support the view of those who used to approve the apparent transparency of effectivness (for whom ?) of such system...and is not only a matter of regulator capture.

Sandro's method should help with the asymmetric info described above.

Yes, Sandro's mechanism would help against the asymmetry of information between the Treasury and the banks if the former wants to buy assets from the latter. But if the problem is that the banks do not want to sell at the expected values of the assets (which would be more or less revealed by an incentive-compatible mechanism), then there would (and should) be no such sale.

It should also help with the "hold and pray" (or "japanese") strategy as one should then announce that the Fed will start to do its supervisory job and sample assets on the book of banks to compare them with the market values of the assets that are now trading. And, if they are on the books for values statistically unjustifiable given observed trading, well ... you know what I mean.

Ah, that's another story. Yes, the Fed should do that ... and I think I know what you mean. But wouldn't that take a lot of time? Meanwhile, instead of (or in addition to) arranging a toxic misunderstood asset purchase program, wouldn't it be quicker and cheaper to force distressed banks into a Bulow-style bankruptcy procedure? (yes, I remember you scolded me already for bringing up the Bulow proposal, but since Sandro also seems to like it ... I try again!)

to force distressed banks into a Bulow-style bankruptcy procedure? (yes, I remember you scolded me already for bringing up the Bulow proposal, but since Sandro also seems to like it ... I try again!)

I think I should concede on that one. My mistake: by reading the presentation in the press and in the Hall&Woodward's blog I had the, incorrect, impression, that it was another crazy proposal aiming at making miracles (i.e. getting rid of the bad assets by some magic trick). Instead, they have essentially in mind taking over the banks and suggest purely a procedure to keep the bank active and functioning while going through the bankrupcy procedure.

In any case, it seems that unfortunately we will not do that, no? Contracts are sacred, if signed by bank's employees, less sacred if signed by anyone else ...

Scusate l'italiano, mi sembra che Sorana abbia studiato bene il piano "good bank-bad bank". Sto leggendo l'articolo da un paio di giorni e l'unica cosa che credo di avere capito è questa

Much thinking about bank policy takes an old-fashioned point of view by assuming that a bank finances all of its assets through deposits. The good-bank/bad-bank separation has no advantage in that traditional setting. But for a bank that is mostly financed by non-deposit borrowing, moving the non-deposit liabilities to the bad bank has an advantage in dealing with insolvency.

Ma è vero o è wishful thinking? Voglio dire c'è qualche probabilità che il piano così congegnato funzioni veramente?

Temo di non avere affatto `studiato bene il piano "good bank-bad bank"'.

Ho solo letto gli articoli di Hall-Woodward e Bulow-Klemperer e l'idea (carve out a good bank from the existing bank and give the equity of the good bank to the bad bank) mi sembra buona: ottieni una banca "buona" e funzionante in tempi brevi senza preoccuparsi di valutare securities che sono difficili da valutare e senza trasferire ricchezza tra nessuno (poi ci si puo' occupare della banca "cattiva" con calma).

Pero' non sono un esperto di finanza e non so se, per esempio, le banche in crisi hanno uno stato patrimoniale buono abbastanza da tirar fuori una "good bank" (come nell'esempio di Citibank citato negli articoli di cui sopra) o se sia facile determinare quali sono le "good securities" da trasferire alla "good bank".

E' per questo che chiedevo l'opinione degli esperti di nFA.

Mi pare che il piano adesso piaccia sia a Michele che a Sandro, ma purtroppo non a Tim e Barack.

Grazie,

non so se, per esempio, le banche in crisi hanno uno stato patrimoniale buono abbastanza da tirar fuori una "good bank" (come nell'esempio di Citibank citato negli articoli di cui sopra)

era proprio questo che mi lasciava perplesso. Facendo riferimento all'esempio, mi domandavo come facesse la "band bank" a tirare fuori 427 billion dollars di equity. E poi c'è sempre il problema di distinguere gli asset "buoni" da quelli "cattivi".

Facendo riferimento all'esempio, mi domandavo come facesse la "band bank" a tirare fuori 427 billion dollars di equity. E poi c'è sempre il problema di distinguere gli asset "buoni" da quelli "cattivi".

In principio, ma anche in pratica, non è poi così difficile distinguere le cose "buone" dalle "cattive". La cosa difficile è capire quanto valgano le cattive. Il mio mutuo è buono, e si vede facilmente, così come la linea di credito a Google. Questa parte è facile.

Quanto ci sia è irrilevante: quello che c'è c'è, non è che ci si possa far nulla al momento. Se è TUTTO cattivo, allora quella banca è proprio morta totalmente, ma non è così in generale.

Le cose complicate sono altre. Se ho un attimo poi continuo, ora devo scappare. Scusa.

My two cents on the matter. As I explained in a previous post we face two problems: first, we have to determine who is bankrupt and who is not; second, we have to make sure that bankruptcies occur at the lowest possible social cost.

The Bulow-Klemperer plan is, I think, very good for solving the second problem. The social cost of bankruptcy comes from the (temporary) disruption in the credit system. By insulating the ''good bank'' from the rest of the assets, making sure that it remains whole and operating, the BK plan effectively solves this problem. At that point the issue is how much the creditors of the original bank will be compensated, an issue which can and should be solved independently. The existing plans mix up these two aspect, wrongly linking the capacity of the banks to do their business to their capacity to compensate existing creditors. 

The BK plan doesn't solve the problem of determining who is bankrupt and who is not, in fact this is not the goal of the plan. Determining who is insolvent is equivalent to assigning a realistic price to the toxic assets. I guess that one could take two positions about the matter: a) the bankruptcy decision can be postponed; we first separate the good bank from the bad bank [''bad bank'' is a somewhat misleading term, since this would not be a bank; it would be a company owning a good bank and a bunch of toxic assets]. b) we first make an effort to assign realistic prices to the toxic assets. If it turns out that the bank is not bankrupt then no further action is needed. If it is insolvent then we can proceed with the BK plan, carving out the good bank and liquidating the bad bank.

Which approach is best depends, it seems to me, on the value of the good assets in the balance sheet of the banks. If there are enough good assets to create immediately a good bank then probably postponing the bankruptcy decision is a good idea. Otherwise, putting a price on the toxic assets becomes necessary.

The problem with the Bulow-Klemperer suggestion for bankrupcy procedure is that one has to figure out which debt-holders hold claims against the good stuff and which against the bad stuff. Right now they hold claim (in order of seniority) against a mixture of the two. If you do the splitting, what do you put in the balance sheet of the good bank, under liabilities? All the liabilities? Well, no otherwise the good bank is already broke. The most senior ones? That's not what seniority entitles you to, according to most bond covenants and exisiting regulations ... and so on.

In other words, the problem is always the same: who get's screwed? Who picks winners and loosers in this game? Until now, clearly, the government has been deciding who takes home the money and who pays for it, not the market or not even the law. Just the discretion of two different administrations. Not good.

No, I don't think this is a big problem. The liabilities are essentially of two types, deposits and non-deposits. Only deposits go into the good bank and they are therefore safe. But they are safe anyway since (mostly) they are already insured. The good bank also receives the good assets.

Currently, the other liability holders have claims against a mixture of bad assets and good assets but their claims are junior to deposits. Thus, effectively,  they have claims against bad assets and good assets minus deposits, assuming the difference is positive (which is the only case in which the BK operation makes sense). After the BK operation, they have claims against the bad bank, which means a mixture of bad assets and the equity of the good bank, which is owned by the bad bank. Since the value of the good bank is equal to the value of the good assets minus the deposits, they lose nothing. It only becomes clearer that they cannot hope for total reimbursement of their credit if the value of the bad assets is low.

Of course they lose with respect to a situation a la Paulson-Geithner plan, in which the bad assets are overpaid courtesy of taxpayers and the money is used to reimburse creditors. To make the point once again, this is exactly what I like of the BK plan. It separates the issue of how we treat creditors from the issue of keeping the banks running.

...ho fatto un piccolo sforzo e credo di avere trovato l'articolo originale di Bulow e Klemperer. Me lo leggo e spero di capirci qualcosa.

You understand correctly, Sandro. If someone says "I am not willing to sell for less than x" (this seemed to be the original quote), it could be due to Knightian uncertainty as others above suggested. This is because there is a difference between "I know the asset is worth x" versus "I am not willing to sell it for less than y". In the first case, I will always accept prices larger than x. A manager who knows the value to be 30, should take 35 or 40 or 30+ε for that matters. If they know the value is 60 they will instead reject all these offers. The paper Valter cited above (this is Bewley's idea, by the way) is based on the premise that behavior cannot be predicted if they feel ambiguity and all they know is that the value is between 30 and 60.

Michele's argument is impeccable: if I know someone will pay 60, then I should just take their offer. This, as far as I can tell, has nothing to do with ambiguity, risk, or anything else. Let me be clear that I have nothing against Sandro's proposed mechanism, and I agree that transparency can only be good. In fact, the questions is: why is the Treasury willing to pay 60? A sucker is born every minute is one theory, I guess. Another theory could be that they are trying to set up an incentive compatible mechanism with agents who perceive ambiguity about the environment, but I do not believe that's the motive, so I will not bore you with that.

Tra parentesi, questa voleva essere una rispota al commento precedente di Sandro, ma sono molto impedito e quindi e' finito come commento a parte. Sorry about that.

Some links with ideas describing possible plan's loopholes: one two three

 

Per quello che vale (e visto che costa poco) credo che invierò la mia bustina di black tea a 1600 Penn Ave ...


There's a storm abrewin'. What happens when good, responsible people keep quiet? Washington has forgotten they work for us. We don't work for them. Throwing good money after bad is NOT the answer. I am sick of the midnight, closed door sessions to come up with a plan. I am sick of Congress raking CEO's over the coals while they, themselves, have defaulted on their taxes. I am sick of the bailed out companies having lavish vacations and retreats on my dollar. I am sick of being told it is MY responsibility to rescue people that, knowingly, bought more house than they could afford. I am sick of being made to feel it is my patriotic duty to pay MORE taxes. I, like all of you, am a responsible citizen. I pay my taxes. I live on a budget and I don't ask someone else to carry the burden for poor decisions I may make. I have emailed my congressmen and senators asking them to NOT vote for the stimulus package as it was written without reading it first. No one listened. They voted for it, pork and all. O.K. Folks, here it is. You may think you are just one voice and what you think won't make a difference. Well, yes it will and YES, WE CAN!! If you are disgusted and angry with the way Washington is handling our taxes. If you are fearful of the fallout from the reckless spending of TRILLIONS to bailout and "stimulate" without accountability and responsibility then we need to become ONE, LOUD VOICE THAT CAN BE HEARD FROM EVERY CITY, TOWN, SUBURB AND HOME IN AMERICA. There is a growing protest to demand that Congress, the President and his cabinet LISTEN to us, the American Citizens. What is being done in Washington is NOT the way to handle the economic free fall. So, here's the plan. On April 1, 2009, all Americans are asked to send a TEABAG to Washington , D.C. You do not have to enclose a note or any other information unless you so desire. Just a TEABAG. Why, April 1?? We want them to reach Washington by April 15. Will you do it? I will. Send it to; 1600 Pennsylvania Ave. Washington , D.C. 20500 ..  

Naked Capitalism, di solito, è reliable ... che lo sia anche questa volta? If so, sell baby, sell!

Se si guarda a Deutsche Bank e come si é riusciti a ridurre il leverage negli ultimi mesi (incredibile?), credo si possa dire che i primi mesi siano andati bene perché si é "incassato". Anche Deutsche Bank si era recentemente espressa positivamente.  Le banche cercano di convincerci che si sta migliorando per innescare la self-fulfilling prophecy e vedere se il valore dei toxic assets si riprende. Più che un selfulfilling expectation credo trattasi di un wishful thinking. Io rimango con la mia proposta di "good banks" e considero il piano Geithner una fregatura per il "mercato dei limoni"...

http://www.ritholtz.com/blog/2009/04/aig-before-cds-there-was-reinsurance/

 

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are “valid legal contracts” is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.

...

Several observers believe that at some point in the 2002-2004 period, Cassano and his colleagues at AIG began to realize that state insurance regulators and the FBI where on to the reinsurance/side letter scam. A number of experts had been speaking and writing about the issue within the accounting and fraud communities, and this attention apparently made AIG move most of its shell game into the world of CDS. By no coincidence, at around this time side letters began to disappear in the insurance industry, suggesting to many observers that the industry finally realized that the jig was up.

It appears to us that, seeing the heightened attention from regulators and federal law enforcement agencies such as the FBI on side letters, AIG began to move its shell game to the CDS markets, where it could continue to falsify the balance sheets and income statements of non-insurers all over the world, including banks and other financial institutions.

...

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.

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