Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan
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Nouriel Roubini, a/k/a “Dr. Doom,” is giving the Obama administration’s new plan to buy toxic assets the thumbs up.
That may be surprising given how critical Mr. Roubini, the bearish economics professor at New York University, has been in the past regarding various government plans to fix the economy. But Mr. Roubini seems to have seen something he likes for a change.
It’s tough to get people to invest in something called “Toxic Assets”… So we’re now announcing the “Adopt a Cute, Sad Little Orphan Asset Program” .
“My take is generally positive, with a couple of caveats,” Mr. Roubini told DealBook about the new plan. He said he liked that the government was finally stepping up to clear the toxic assets off the bank’s balance sheet and that private capital would come in to make a market for it.
“Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay,” Mr. Roubini said in a telephone interview. “People say, ‘the government is putting in 95 cents on the dollar, so why not put 100,’ to do it all by itself. It’s because private-sector participants have the incentive to get the best price.”
It wasn’t all positive: Mr. Roubini said he did not like that banks have the option not to sell an asset after the auction concluded, as this would create confusion and frustration on the part of the buyers. He also said he believed the government should use its leverage over the banks to force them to participate, whether they wanted to or not.
In an opinion piece scheduled to be published Wednesday in The Daily News of New York, Mr. Roubini and a fellow N.Y.U. professor, Matthew Richardson, argued that financial institutions should be pressured into participating because “they are the cause of the financial crisis.”
“They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place,” the two professors wrote.
But unlike many critics of the plan, like Paul Krugman, a Princeton economic professor and columnist for The New York Times, who prefers full nationalization of the banks now, Mr. Roubini says he believes that the Treasury’s plan does not preclude nationalization. Rather, he said, it will help to clear the way to full government takeover of some troubled institutions.
“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.
In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.
Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.
He cited Tuesday’s Congressional testimony by the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner.
“The most important thing is what Bernanke and Geithner said today about the need for an insolvency regime for systemically important institutions,” Mr. Roubini said. “You are going to need that not just for the A.I.G.’s of the world, but also the bank holding companies as they go into Chapter 11.”
He added, “You are going to need that in shutting down, potentially, a bank like Citigroup.”
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March 26, 2009 pm31 3:54 pm
OH NO MR. BILL – NOT THE “N” WORD!
GOODSTUFFs last blog post..THE CONCEPT OF A NOBLE LIE
March 27, 2009 pm31 9:23 am
Take note that there are some high profile Reps who believe that nationalization of some banks might be the way to go. Until the banking crisis is taken care of, there is no hope for an economic recovery. One of the keys is to get the banks back into a position where they’re lending as well as getting back the peoples confidence in the system. If it’s going to take nationalization of some banks, so be it.