Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Assessing Krugman’s Take on Toxic Asset Plan

March 23, 2009
2 Comments

Regardless whether one agrees or disagrees with Paul Krugman’s op ed in today’s New York Times, it is hard to disagree with his agrgument that the the plan is largely a subsidization of banks and/or a low risk option for investors. What he fails to point out is that, because of his points, that it is a huge subsidy, banks ought to rush to sell as much as they can of their toxic paper. Without the low interest rate, non-recourse government loan (means that the government can’t go after the new investors for any more than the underlying assets), the assets would almost certainly sell at lower price levels. Krugman argues that this is a failure to recognize the loss. He probably is correct but such recognition won’t get capital flowing or move the process forward. This government/private investor investment is effectively another capital injection into the banks. What Krugman also fails to note is that the subsidy should help facilitate trading in the aftermarket for these assets, if for no other reasons than the fact that there will be an auction to determine value. If nothing else, and maybe only for today, the market seems to like the plan. This evidenced by a huge rally led by the financial sector. I am sure that even Prof Krugman agrees that it is hard to ‘fight the tape”.

http://www.nytimes.com/2009/03/23/opinion/23krugman.html?ref=opinion

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/”>

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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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