I'm guessing the banks were so shocked because it made no sense for Aurora to exercise the cleanup calls

TO BE NOTED: From The Economics Of Contempt:

"The Amherst Trade

The WSJ article about Texas brokerage Amherst Holdings duping the big Wall Street banks is a hot topic today. Based solely on the WSJ article, it appears that Amherst sold CDS on $335 million of subprime MBS to various Wall Street banks over the past year, including J.P. Morgan, RBS, and BofA. The mortgage-backed securities were about as toxic as they come (California, vintage 2005—so you know it's good):

Following a wave of refinancing and defaults, only $29 million of the loans were left outstanding by March 2009, half of which were delinquent or in default.
...
The banks had to pay up for the protection, similar to a person buying insurance on a beach house just before a hurricane. They paid as much as 80 to 90 cents for every dollar of insurance, the going rate last fall according to dealer quotes, expecting to receive a dollar back when the securities became worthless over the coming months.

In April, the servicer, Aurora Loan Services, surprised the banks by exercising its "cleanup call" provisions "at the behest of Amherst." Cleanup calls give a specified party (in this case, the servicer) the right to purchase all the remaining mortgages when the remaining pool balance falls below 10% of the original balance. When Aurora exercised its cleanup calls, it apparently made the noteholders whole, which made the banks' CDS worthless.

The banks are crying foul, and most people aren't inclined to feel sorry for them. However, it's possible that the banks have a valid complaint. It's impossible to say who's right without seeing any of the documents, so take this post with a grain of salt. I should note that it's possible that the banks' objections are based on the specific terms of the cleanup calls. For example, some cleanup call provisions prohibit the servicer from exercising the call unless the aggregate fair market value of the mortgage loans exceeds the stated principal balance of the mortgage loans. If that restriction were in place, then the banks would have every right to complain (more on this later).

I suspect the main issue is the arrangement between Aurora and Amherst. The Journal says that Aurora exercised the cleanup calls "at the behest of Amherst," and the key is what that means. Amherst refused to comment on its arrangement with Aurora, but "it doesn't deny that it took this approach" (whatever that means).

I'm guessing the banks were so shocked because it made no sense for Aurora to exercise the cleanup calls. It received a deeply discounted pool of subprime mortgages, half of which were deliquent or in default. And yet it made noteholders whole? Something doesn't add up. The banks' traders are apparently puzzled too:

Since the mortgage securities were valued at just $3 million or so in the market, well below the $27 million they were redeemed for, traders believe Amherst entered into an uneconomic transaction to profit from its swap positions.

The simplest explanation is that Amherst made up the difference, essentially paying Aurora to exercise its cleanup calls. If true, then Amherst was just artificially propping up the value of securities on which it sold CDS protection in order to prevent the protection buyers from collecting payouts. That could raise potential market manipulation issues. Moreover, if Amherst had already arranged for Aurora to exercise its cleanup calls before selling CDS on the mortgage-backed securities, then the banks might also have valid legal complaints (duty of good faith?).

Of course, this is pure speculation on my part. It's very possible that the banks have no legal argument, and are just whining about getting their asses handed to them by a Texas brokerage. Amherst may not be the biggest brokerage around, but they have some serious financial talent, including former UBS managing director (and well-known securitization analyst) Laurie Goodman.

All I'm saying is that based on the limited information in the WSJ article, Amherst's trade seems a little sketchy, and the banks may have a valid complaint.

Posted by Economics of Contempt "

Me:

Don said...

I actually waited to see what you were going to say about this, if anything. Thanks.

Don the libertarian Democrat

they were mostly used for pure "speculation" rather than hedging

From The Economics Of Contempt:

"Tuesday, May 12, 2009

2 + 2 = CDS Are Evil!

I love the logic of the anti-CDS crowd.

First, they claimed CDS were evil because protection buyers weren't required to own the underlying bond—they were mostly used for pure "speculation" rather than hedging. The anti-CDS crowd frequently cited Eric Dinallo's claim that 80% of CDS are held by investors who don't own the underlying bond ("naked CDS") as proof that CDS are evil.

Now that it's fashionable to blame CDS for pushing companies into bankruptcy, they look at the net notional CDS outstanding on a company attempting a restructuring, and assume that 100% of them are held by bondholders. What happened to all the anger about naked CDS?

If the problem is that you can buy CDS without owning the bond being protected (gambling vs. legitimate hedging), then CDS should be a non-factor in restructurings. After all, aren't 80% of CDS held by investors who don't own the underlying bond? And wasn't that supposedly the problem in the first place?

You can't have it both ways.

Posted by Economics of Contempt "

Me:

Don said...

It is not gambling. If I believe that a company is being poorly run, then I can invest accordingly. If I believe that a company is overvalued, then I can invest accordingly. The idea that you can only invest on success is preposterous. You want the market to reflect the best information available. Period. If you don't, then you're going to encourage the overvaluation of stocks and bonds, which works for a while, but ends badly.

Frankly, even gambling is fine with me. In sports gambling, a hell of a lot of knowledge and expertise goes into it. The main problem with it is fixing the event, which is illegal.

I can understand why people don't like gambling, but I think that it should be legal. I don't ever gamble. However, I would short stocks or buy CDSs because they are investing, if I had secured the majority of my portfolio. It's riskier investing, not necessarily stupid investing. For most investing, stick with Graham, but a little investing on such risky picks is sensible, if you do the research and know what you're talking about.

If I buy a CDS or CDO, then someone had to sell it to me. That means that they see the future differently. That's how prices and worth are determined.

As for bondholders, actual bondholders hedging their investments, that's to decrease the risk of their losing money. Their losing their own money. They've loaned money to the company, or purchased the bond from someone who did. There was a huge story yesterday about how high interest rates on bonds issued on companies are hurting the recovery. You can only make them more expensive if you make them riskier. You're losing the war to win a battle. Good luck going forward.

Don the libertarian Democrat

"The Resolution Authority for Systemically Significant Financial Companies Act of 2009."

From The Economics Of Contempt:

"Treasury and "Least Cost Resolution"

It shouldn't surprise you to learn that I was not a fan of Gretchen Morgenson and Jo Becker's big profile of Tim Geithner in the NYT. As the late Tanta demonstrated time and again, Morgenson is an atrocious financial journalist. But I have neither the time nor the energy to highlight all of the errors and wildly misleading statements in the article.

I do, however, want to highlight one ridiculous and nonsensical argument that Morgenson and Becker made in the article. They desperately tried to make something of the fact that the original template for Treasury's proposed resolution authority was a draft bill from Davis Polk & Wardwell, a large law firm that often represents Wall Street institutions. But the only argument they came up with doesn't even make sense:

[Treasury officials] point to several significant changes to that draft that "better protect the taxpayer," in the words of Andrew Williams, a Treasury spokesman.

But others say important provisions in the original industry bill remain. Most significant, the bill does not require that any government rescue of a troubled firm be done at the lowest possible cost, as is required by the F.D.I.C. when it takes over a failed bank. Treasury officials said that is because they would use the rescue powers only in rare and extreme cases that might require flexibility. Karen Shaw Petrou, managing director of the Washington research firm Federal Financial Analytics, said it essentially gives Treasury "a blank check."

This is an absurd and incredibly ill-informed criticism. The "least cost resolution" provision (sec. 1823(c)(4)) requires the FDIC to use the resolution method that is least costly to the Deposit Insurance Fund. But there's a very famous exception to the least cost requirement known as the "systemic risk exception" (sec. 1823(c)(4)(G)), which, not surprisingly, provides that if there is a formal finding of "systemic risk," the FDIC doesn't have to use the least costly resolution method. A "systemic risk" finding requires written recommendations from the Fed and FDIC's boards of directors, as well as a determination of systemic risk by the Treasury Secretary after consultation with the President. (When the systemic risk exception was enacted in 1991, it was universally viewed as the formal adoption of a "too big to fail" policy.)

This is precisely the situation Treasury's proposed resolution authority is designed for. Treasury's resolution authority would only kick in when there's a formal finding of systemic risk—that's why the bill is called, "The Resolution Authority for Systemically Significant Financial Companies Act of 2009." So of course the bill doesn't include a "least cost resolution" requirement.

Right now the FDIC is bound by the least cost procedures when resolving a failed bank, except in cases of systemic risk. There is currently no equivalent to the systemic risk exception in the US Bankruptcy Code for nonbank financial institutions such as bank holding companies. The whole point of Treasury's proposed resolution authority is to extend the FDIC's systemic risk exception to the insolvency regime that governs large bank holding companies (e.g., Citigroup, BofA, JPMorgan, Wells Fargo). If there's no systemic risk finding, failed bank holding companies will still be handled by the bankruptcy courts. Treasury's proposal gives the government the same kind of discretion in cases of systemic risk that the FDIC has under the Federal Deposit Insurance Act.

Any attempt to paint Treasury's proposal as somehow more Wall Street-friendly than the FDIC's insolvency regime because it doesn't include a "least cost resolution" requirement is based on a fundamental misunderstanding of the US insolvency laws.

Posted by Economics of Contempt "

Me:

Don said...

"The whole point of Treasury's proposed resolution authority is to extend the FDIC's systemic risk exception to the insolvency regime that governs large bank holding companies (e.g., Citigroup, BofA, JPMorgan, Wells Fargo)."

Oddly, that's what I was for in Sept when I backed a Swedish Type Plan. I also backed a full govt guarantee like the Swedish Plan, because only that will stop Debt-Deflation. Geithner is being ridiculed for that belief. Count me as happy to be ridiculed then.

What exactly did people believe would happen when they backed the Swedish Plan? I know what I meant.

Also, I am for taking controlling interest in banks if we have to, but it will be a mess. For one thing, it will still be a hybrid, because the other shareholders will have a fiduciary claim on how the govt manages the bank. Maybe I'm mistaken. In any case, I'm more than happy to say what I'm for and why. I'll quote other people because they express the points better and I don't make a living commenting on blogs, but I'll at least present my views.

Don the libertarian Democrat

April 27, 2009 2:20 PM

The whole point of rescuing AIG was to keep it out of bankruptcy

TO BE NOTED: From The Economics Of Contempt:

"More AIG Counterparty Nonsense

ProPublica has ridiculous article titled, Does AIG Really Need to Pay Its Counterparties in Full?

Yes, AIG really has to pay its counterparties in full. The whole point of rescuing AIG was to keep it out of bankruptcy, and short of bankruptcy, there's no mechanism for forcing AIG's counterparties to take a haircut.

But the ProPublica article really goes off the deep end when it says:

Another option is to break the contracts and let the counterparties -- many of which are themselves beneficiaries of federal bailouts -- sue the federal government, if they dare.
...
Such a suit may not fare well in court because some legal questions swirl around whether the bulk of credit default swaps are legally enforceable.

Some of the swaps function like insurance policies on corporate bonds. Purchasers of such credit default swaps know that even if the bond issuer defaults, they will limit their losses. But many other swaps are more like bets (akin to buying "insurance" on another person's house), and it is unclear from a legal perspective if there is enough of an insurable interest to make the contracts enforceable.

Wow. First of all, it's simply not true that "legal questions swirl around whether the bulk of credit default swaps are legally enforceable." Standard credit default swaps are enforceable. The credit default swaps that AIG wrote are enforceable. If the government breaches the contracts and refuses to pay, the counterparties will sue, and the government will lose.

The author clearly shows that she has no idea what she's talking about when she says that it's "unclear from a legal perspective if there is enough of an insurable interest to make the contracts enforceable." Credit default swaps are not insurance contracts, so there doesn't need to be an insurable interest! CDS are like insurance contracts, but there are key differences. Just because a CDS contract doesn't fit the statutory definition of an "insurance contract," doesn't mean that it's not enforceable.

Honestly, the complaints about AIG paying its counterparties get more idiotic by the day.

Posted by Economics of Contempt "

The 5 buy-side Committee members are supposedly "selected at random" — you know, to ensure fairness.

TO BE NOTED: From The Economics Of Contempt:

"PIMCO: Just lucky, I guess

One of the most important aspects of the ISDA's recent overhaul of the credit default swaps (CDS) market — known in the market as the "Big Bang" — is the creation of a Credit Derivatives Determinations Committee. Starting tomorrow, the Determinations Committee will make binding decisions on a range of issues, the most important of which include whether a "credit event" has occurred, and which obligations will constitute "deliverable obligations" in a settlement auction.

Representation on the Determinations Committee is obviously important, and to combat the fact perception that it's heavily biased toward the major dealer banks, the ISDA agreed to give the buy-side a voice on the Determinations Committee. The 5 buy-side Committee members are supposedly "selected at random" — you know, to ensure fairness.

In what I'm sure was a tightly controlled, double blind-like random selection, do you know who the ISDA just so happened to pick as a buy-side Committee member? That's right, the biggest bond player in the world, PIMCO!

I'm sure PIMCO's selection had nothing to do with the fact that it's one of the new ISDA board members, or that it's the 800-pound gorilla in the bond markets. Nope, it was just the luck of the draw.

Posted by Economics of Contempt"

In other words, investment grade corporate bonds aren't considered "toxic assets."

TO BE NOTED: From The Economics Of Contempt:

"Non-Toxic Assets Priced Properly. Therefore, Toxic Assets Priced Properly

That seems to be the argument in this paper by Harvard's Joshua Coval and Erik Stafford and Princeton's Jakub Jurek, which is being touted as evidence that Treasury is wrong to believe that the toxic assets are underpriced.

The introduction states:

On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products. The government's view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals. ... The main objective of this paper is to determine whether …fire sales are required to explain prices currently observed in credit markets.

Sounds like the paper is going to examine the prices of the toxic assets that the Treasury is planning to buy, right?

Wrong. Instead, the authors examine investment grade corporate credit risk, using the CDX.NA.IG index. But ABS and CDOs backed by investment grade corporate bonds are not eligible for either the TALF or the PPIP. In other words, investment grade corporate bonds aren't considered "toxic assets."

The authors conclude that market prices of investment grade corporate credit risk are accurate—which isn't surprising, seeing as the CDX.NA.IG is the most liquid contract in the CDS market. Amazingly, however, the authors use this to conclude that the Treasury's plan to buy up the banks' toxic assets is misguided:

Policymakers are rapidly moving towards using TARP money to purchase toxic assets—primarily tranches of collateralized debt obligations (CDOs)—from banks, with the aim of supporting secondary markets and increasing bank lending. The key premise of current policies is that the prices for these assets have become arti…cially depressed by banks and other investors trying to unload their holdings in an illiquid market, such that they no longer refect their true hold-to-maturity value. By purchasing or insuring a large quantity of bank assets, the government can restore liquidity to credit markets and solvency to the banking sector.

The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals.

Are they serious? The Treasury is arguing that the prices for mortgage-related securities are artificially depressed because of illiquidity and fire sales. No one is arguing that investment grade corporates are underpriced due to illiquidity and fire sales. That's why ABS and CDOs backed by investment grade corporates aren't eligible for the TALF or the PPIP. The fact that prices for tranches of CDOs backed by investment grade corporates are accurate is completely irrelevant to whether prices for mortgage-related securities are accurate.

To repeat: the fact that the prices for non-toxic assets are accurate does not mean that the prices for toxic assets are accurate.

What's the deal with ivory tower recently? Did everyone decide to take extra-strength stupid pills?

Posted by Economics of Contempt"

All the hoopla over the banks possibly "gaming" the PPIP is overblown.

TO BE NOTED: From The Economics Of Contempt:

"Gaming" the PPIP

Paul Krugman says that Jeff Sachs's worries "need to be taken seriously." I think people need to stop taking academics seriously on the bank rescue.

Sachs claims that banks like Citi can game the PPIP by partnering with the government to buy their own toxic securities at inflated prices.

No, professor, they can't. The terms of the PPIP explicitly prohibit this:

A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund or any private investor that has committed 10% or more of the aggregate private capital raised by the Fund.

All the hoopla over the banks possibly "gaming" the PPIP is overblown. It's true that some of the investment banks (e.g., Morgan Stanley, Goldman) have explored the possibility of buying toxic securities under the PPIP, and repackaging them for sale to new investors—in effect creating a new CDO market. But this will never happen. If it ever got that far, Treasury would kill the idea.

Regulators have repeatedly stated that "healthy banks" will be able to buy toxic assets in the PPIP program. That obviously doesn't include Citi or BofA, and there's no way regulators would let either of them participate on the investment side. The reason Treasury hasn't ruled out TARP recipients en masse is that hundreds upon hundreds of banks have received TARP money, and their degree of health varies considerably. Some regional banks that received TARP money are no doubt healthy enough at this point to participate in the PPIP. These determinations are best made on a case-by-case basis, which is why Treasury hasn't issued a blanket prohibition on TARP recipients participating in the PPIP on the investment side.

Posted by Economics of Contempt "

He argues that there's "a big hole" in the Obama administration's proposals to reform financial regulation

TO BE NOTED: From The Economics Of Contempt:

"Tyler Cowen Is Very Wrong

Tyler Cowen has a truly bizarre column in this morning's New York Times. He argues that there's "a big hole" in the Obama administration's proposals to reform financial regulation: "the new proposals immunize the creditors and counterparties of [firms like AIG] by protecting them from their own lending and trading mistakes." He goes on at length about how the administration's proposals "neutraliz[e] creditors," and thus risk "creating a class of institutions whose borrowing is, in effect, guaranteed by the government."

This is 100% untrue.

The Treasury's proposals specifically included a proposed resolution authority for systematically significant finanancial companies like AIG, modelled on the FDIC's resolution authority. And like the FDIC's resolution authority for insured banks and thrifts, the Treasury's proposal gives the FDIC the power to impose pain on creditors—which is exactly what Cowen criticizes the Obama administration for failing to propose! Specifically, the FDIC would have its traditional powers of avoidance, as well as the power to repudiate "burdensome" contracts.

This undercuts Cowen's entire column. I honestly don't know how he could have missed this—the proposed resolution authority was the most talked about aspect of Treasury's proposed financial regulations. What's even more amazing is that the NYT's editors let Cowen's column go to press. I guess they don't read their own paper.

Posted by Economics of Contempt"

otherwise, the policy suggestion is of theoretical but not practical interest

TO BE NOTED: From The Economics Of Contempt:

"A behind-the-scenes account of the financial crisis

This behind-the-scenes account of the financial crisis by Phillip Swagel, the former Assistant Secretary for Economic Policy at Treasury, makes for absolutely fascinating reading.

Swagel takes academic economists to task for their failure to understand the very real legal constraints on policymaking. This is something I've emphasized with regard to the ridiculous debate over "nationalization" or "managed receivership" of money center banks. As Swagel writes:

A lesson for academics is that any time the word "force" is used as a verb ("the policy should be to force banks to do X or Y"), the next sentence should set forth the section of the U.S. legal code that allows such a course of action—otherwise, the policy suggestion is of theoretical but not practical interest.

Preach it, brother. Similarly, Swagel shoots down Luigi Zingales's widely-cited (but comically impractical) proposal to force banks' bondholders into a debt-for-equity swap:

As Zingales (2008) notes, debt-for-equity swaps could "immediately make banks solid, by providing a large equity buffer." All that would be required, according to Zingales, would be a change in the bankruptcy code. A major change to the bankruptcy law was enacted (for better or for worse depending on one’s point of view) with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, but this was the culmination of years of legislative debate. The idea of a further instantaneous change in the bankruptcy code was unrealistic. Indeed, efforts to make such changes in the middle of the crisis would have re-opened the debate over the 2005 Act along with controversial provisions such as the mortgage cram down. The simple truth is that it was not feasible to force a debt for equity swap or to rapidly enact the laws necessary to make this feasible. ... [T]he idea … that there should be a forcible capital injection [is] pure ivory tower, unfettered by the practicalities of legality, enactment, or implementation.

This same critique applies to Simon Johnson's absurdly unrealistic suggestion that the Treasury could use its proposed resolution authority for large financial institutions to deal with the current financial crisis. Most nationalization/receivership proponents seem to think that major changes to the U.S. legal code occur instantaneously, which betrays a stunning ignorance of the legislative process.

Swagel also pushes back against the criticism—advanced most prominently by TARP watchdog Elizabeth Warren—that Treasury overpaid for its equity stakes in the banks:

An important consideration with regard to the terms of the capital injections was that there is no authority in the United States to force a private institution to accept government capital. This is a hard legal constraint. ... In order to ensure that the capital injection was widely and rapidly accepted, its terms had to be attractive, not punitive. ... The terms of the CPP were later to lead to reports that the Treasury had "overpaid" for its stakes in banks, which of course is the case relative to the terms received by Warren Buffett. But this was for a policy purpose: to ensure broad and rapid take-up.

Read the entire essay. It's well worth the time.

Posted by Economics of Contempt "

With no buyers, the government would either be stuck operating Citi for several years

From The Economics Of Contempt:

"Nationalization Again

Responding to my earlier post on the insurmountable obstacles to nationalization, one of the bloggers at The Economist's Free Exchange writes:

Given the fragility of the current global economy and the real economy impact of financial market spasms (remember, remember that week last September), it's difficult to imagine the Obama administration contemplating nationalisation in the absence of a very clear, legally sound, internationally accepted procedure for taking control of the banks.

Economics of Contempt says that this means nationalisation is therefore now and forever off the table. I disagree. The American government has created mechanisms for taking control of financial institutions before, and it can do it again.

I certainly didn't mean to suggest that nationalization is forever off the table. At some point in the future, I suspect we'll have a formal resolution regime specifically for bank holding companies—especially now that Treasury is asking for the authority to develop such a regime.

But developing a resolution regime for too-big-to-fail banks will be a very long, multi-year process, and it may not ever produce a mechanism that allows a Citi or a JPMorgan to fail without bringing the entire financial system down with it. The Bankruptcy Code and the FDIC's resolution regime didn't just magically appear and gain the trust of the financial markets. They developed over decades, slowly winning the trust of the financial markets as gaps in their procedures were fixed, and bankruptcy courts and the FDIC proved themselves to be compentent authorities who would apply their respective rules in a consistent and fair-minded manner.

Even with the FDIC's resolution procedure as a blueprint, there's no way a workable resolution regime for too-big-to-fail financial institutions could possibly be developed before this recession is over (or at least before financial markets, which always lead the real economy, start to recover). It's just not possible. Developing this kind of resolution regime is an enormously complex undertaking.

Remember, a quirk in the way a single clause in the initial merger agreement between Bear Stearns and JPMorgan was drafted caused havoc in the financial markets for a week. The initial merger agreement provided that JPMorgan would guarantee all of Bear's trades until either (a) the deal closed, or (b) the merger agreement was terminated, whichever occurred earlier. But the way the guarantee was drafted, if Bear's shareholders voted down the deal, the merger agreement technically wouldn't terminate for another 12 months, during which time JPMorgan would still be guaranteeing all of Bear's trades. Essentially, the agreement gave Bear a one-year option to use JPMorgan's balance sheet, regardless of whether Bear's shareholders approved the deal.

Does anyone think the government could develop a resolution regime for major financial institutions relatively quickly without making this kind of minor but extremely consequential mistake? The consequences of even legal uncertainty could throw the financial markets into chaos, because the specific treatment of an institution's assets and debts in the event of insolvency significantly influences pricing in the market.

Treasury would have to specify how the new resolution regime would interact with hundreds (if not thousands) of state and federal laws, as well as hundreds of bilateral and multilateral treaties. Major financial institutions—Citi, BofA, JPMorgan, Wells Fargo, Goldman, and Morgan Stanley—are involved in so many different markets around the globe, and have so many counterparties with such diverse businesses, that successfully winding down any one of them would require clear rules on each and every counterparty's rights under all possible contingencies, the likely timing of each stage of the resolution process, etc., etc. Eventually, all these details will get worked out, and over time the market may come to trust the resolution regime.

In this financial crisis, however, nationalization is off the table. It's literally not possible, no matter how many commentators stomp their feet and demand that the government nationalize. The sooner people realize this, the better off we'll all be.

Posted by Economics of Contempt "

Economics of Contempt said...

I'm not sure what facts you're referring to, since I didn't mention Krugman at all in this post.

If you were referring to Krugman's attack on securitization, the "facts" would have to have changed since February, when Krugman was all for the TALF. In any event, nothing about the securitization market has changed in the past year, so that's not a credible defense for Krugman.

March 27, 2009 7:04 PM

Economics of Contempt said...

George,

In theory, it's possible to argue that nationalization is the best solution. But in practice, there's a 100% chance that, even if we had a legal mechanism for winding down major banks, nationalization would still be a disaster. The complexities are too great, the opportunities for mistakes too numerous, and the stakes too high for anyone to seriously believe that the government could pull the whole process off without causing substantial collateral damage.

I don't think nationalization is the "only viable recovery plan." Pro-nationalizers generally argue that nationalization is the best solution, but not the only solution. And it's true that, if we assume a well-developed and credible resolution regime for major banks and perfect execution by the government, nationalization would probably be the quickest and least expensive solution. But that's not the world we live in. Not even close. So the relative attractiveness of nationalization falls way, way below other solutions, like the Geithner plan (i.e., toxic asset purchases + government recapitalizations). The Geithner plan, while not as good as a theoretical perfect nationalization, is nonetheless a "viable recovery plan," and quite possibly the most viable recovery plan.

Also, the analogy between emerging market banking crises and the current banking crisis in the US doesn't really withstand scrutiny. The emerging market banks that the IMF has dealt with are nothing at all like a Citi or a BofA, in terms of sheer size, complexity, role in the international financial system, etc. When an emerging market government nationalizes one of its banks, it knows that there are bigger financial institutions who can either buy the bank from the government once it's cleaned up, or provide financing for other other buyers like private equity firms.

If the government nationalizes Citi, there's no one who will be able to buy it back once the government has cleaned up Citi's balance sheet. Citi has about $2 trillion of assets; the size of the entire hedge fund industry is only about $1.3 trillion. Even if the government breaks Citi up into smaller pieces, there's no way private buyers would be able to get the financing required to pay remotely reasonable prices for the pieces of Citi. Who would provide the financing? The other major banks who would then undoubtedly be terrified of being nationalized themselves?

With no buyers, the government would either be stuck operating Citi for several years, or taking a huge loss for the taxpayers on the re-sale. It took 7 years for the FDIC to sell off Continental Illinois, and that was during a boom market. If the government nationlized Citi, there's a decent chance it could end up operating Citi for something like 10 years. And it's difficult to imagine that 10 years of government control -- no matter how "independent" -- would do much to strengthen Citi.

So while there's precedent for successfully nationalizing much smaller and much simpler banks, there's absolutely no precedent for nationalizing a bank anywhere near the size of Citi or BofA.

March 27, 2009 7:56 PM

Don said...

"Even if the government breaks Citi up into smaller pieces, there's no way private buyers would be able to get the financing required to pay remotely reasonable prices for the pieces of Citi."

You've convinced me, but that leaves us with the ugly question that I posed earlier: Can Citi get itself out of this mess?

Take Banamex: It could be sold for $10 - $12 Billion, I've read. When you add up the other holdings, they don't seem to amount to much. Now, going forward, they might be worth more. But don't forget, Citi is having to finance keeping them for now. If you sell these assets now, Inca Kola points out that they disappear into a black hole of debt.

I'm simply wondering if people accept that Citi has a viable plan to get out of this, without much more financing from the government, to the point where we own the vast majority of their stock. I don't know the answer to this, but that's my worry. I'm simply advocating that, if Citi couldn't pull itself out of this, it might be cheaper and cleaner for the US to seize it and run it. I suppose that one option would be to simply own it and put in our own managers.

Don the libertarian Democrat

March 28, 2009 11:48 AM

In this financial crisis, however, nationalization is off the table

TO BE NOTED: From The Economics Of Contempt:

"Nationalization Again

Responding to my earlier post on the insurmountable obstacles to nationalization, one of the bloggers at The Economist's Free Exchange writes:

Given the fragility of the current global economy and the real economy impact of financial market spasms (remember, remember that week last September), it's difficult to imagine the Obama administration contemplating nationalisation in the absence of a very clear, legally sound, internationally accepted procedure for taking control of the banks.

Economics of Contempt says that this means nationalisation is therefore now and forever off the table. I disagree. The American government has created mechanisms for taking control of financial institutions before, and it can do it again.

I certainly didn't mean to suggest that nationalization is forever off the table. At some point in the future, I suspect we'll have a formal resolution regime specifically for bank holding companies—especially now that Treasury is asking for the authority to develop such a regime.

But developing a resolution regime for too-big-to-fail banks will be a very long, multi-year process, and it may not ever produce a mechanism that allows a Citi or a JPMorgan to fail without bringing the entire financial system down with it. The Bankruptcy Code and the FDIC's resolution regime didn't just magically appear and gain the trust of the financial markets. They developed over decades, slowly winning the trust of the financial markets as gaps in their procedures were fixed, and bankruptcy courts and the FDIC proved themselves to be compentent authorities who would apply their respective rules in a consistent and fair-minded manner.

Even with the FDIC's resolution procedure as a blueprint, there's no way a workable resolution regime for too-big-to-fail financial institutions could possibly be developed before this recession is over (or at least before financial markets, which always lead the real economy, start to recover). It's just not possible. Developing this kind of resolution regime is an enormously complex undertaking.

Remember, a quirk in the way a single clause in the initial merger agreement between Bear Stearns and JPMorgan was drafted caused havoc in the financial markets for a week. The initial merger agreement provided that JPMorgan would guarantee all of Bear's trades until either (a) the deal closed, or (b) the merger agreement was terminated, whichever occurred earlier. But the way the guarantee was drafted, if Bear's shareholders voted down the deal, the merger agreement technically wouldn't terminate for another 12 months, during which time JPMorgan would still be guaranteeing all of Bear's trades. Essentially, the agreement gave Bear a one-year option to use JPMorgan's balance sheet, regardless of whether Bear's shareholders approved the deal.

Does anyone think the government could develop a resolution regime for major financial institutions relatively quickly without making this kind of minor but extremely consequential mistake? The consequences of even legal uncertainty could throw the financial markets into chaos, because the specific treatment of an institution's assets and debts in the event of insolvency significantly influences pricing in the market.

Treasury would have to specify how the new resolution regime would interact with hundreds (if not thousands) of state and federal laws, as well as hundreds of bilateral and multilateral treaties. Major financial institutions—Citi, BofA, JPMorgan, Wells Fargo, Goldman, and Morgan Stanley—are involved in so many different markets around the globe, and have so many counterparties with such diverse businesses, that successfully winding down any one of them would require clear rules on each and every counterparty's rights under all possible contingencies, the likely timing of each stage of the resolution process, etc., etc. Eventually, all these details will get worked out, and over time the market may come to trust the resolution regime.

In this financial crisis, however, nationalization is off the table. It's literally not possible, no matter how many commentators stomp their feet and demand that the government nationalize. The sooner people realize this, the better off we'll all be."

What the blogosphere doesn't seem to realize is that nationalization is simply not a viable option.

From The Economics of Contempt:

"Nationalization is Not a Viable Option

Kevin Drum asks:

What would it take to nationalize an outfit like Citigroup? What are the likely legal, financial, diplomatic, and operational issues that would have to be resolved? It would be a real public service if someone with a credible background in this stuff could lay out the details in a way that's understandable for all the rest of us.

I don't have nearly enough time to lay out all the legal obstacles to nationalizing a bank like Citigroup, which would require several weeks, if not months, of legal work.

But here's one major legal issue: investment rights under Bilateral Investment Treaties (BITs) and some multilateral treaties such as NAFTA. For example, Article 1110 of NAFTA (which is representative) provides:

1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except:

(a) for a public purpose;

(b) on a non-discriminatory basis;

(c) in accordance with due process of law and Article 1105(1); and

(d) on payment of compensation in accordance with paragraphs 2 through 6.

2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ("date of expropriation"), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.

3. Compensation shall be paid without delay and be fully realizable.

The disputes over valuations of Citi's equity and debt securities would be endless, fraught with uncertainty, and potentially very expensive for the government. What's more, claims under Article 1110 of NAFTA (and similar claims under some BITs) can be brought directly by private investors.

This is just one of the seemingly endless legal obstacles to nationalizing an international financial institution like Citigroup, which has operations in over 100 countries. The legal issues alone would immediately create so much uncertainty that international financial markets would be thrown into chaos.

What the blogosphere doesn't seem to realize is that nationalization is simply not a viable option. It's literally not on the table.

Posted by Economics of Contempt"

Me:

Don said...

I need to find out more about this. Consider the following:
1) Banamex, Monex. Nikko Cordial, etc., run themselves, as far as I know.
2) Citi's plan is to sell most of these assets going forward anyway. They're simply waiting for a better market to unload them. They certainly want to keep Banamex, which could be sold.
3) Notice what Mexico did. From Inca Kola:

http://incakolanews.blogspot.com/2009/03/citigroup-c-mexico-moves-goalposts.html

"And so Citigroup can likely keep Banamex, according to Mexican gov't politicos that have just earned themselves a "one large favour owed to me" card (and will surely know how to use it). Reuters translates the moneyline which is being used....

"The law does not cover emergencies derived from the global crisis"

.....which is, of course, a total affront to logic and commonsense. Y'see according to Mexican lawmakers the clear legal statute that does not allow any foreign government to hold more than 10% of a bank doing trade in Mexico suddenly doesn't count because......because....because the US gov't didn't WANT to buy 36% of Citigroup ....and that makes it different. Cos they said so. And that national laws go out the window and Mexican pants are dropped to US pressures isn't really news. After all, it's greedy human beings we're dealing with here so logic obviously has to take a back seat. I'll just shrug my shoulders and scrunch my brow a bit and go "waddya expect?".

Bloomberg does a good job of explaining the outcome of the Mexican mental and legal gymnastics that lawmakers have gone through to get to this point. Here's the link worth reading. The only thing lacking from both Reuters and Bloomie's reports are meaningful opposition quotes and positions."

I'm sure that it could be a hornet's nest in Mexican politics, but they moved pretty fast to change that law which we were already violating.

In other words, I don't see why am FDIC type organization can't do what Citi is trying to do. After all, they might do a better job.

Don the libertarian Democart

March 25, 2009 2:08 PM

Does anyone honestly think it's possible to properly assess the Legacy Securities program without knowing these terms?

From The Economics Of Contempt:

"Geithner Plan: Still not enough information

We still don't have nearly enough information about the various aspects of the Geithner plan for anyone to offer an informed analysis.

This isn't just obsessive lawyering on my part. Material terms relating to the financing, fund structure, asset eligibility, etc., are still unknown. For example, regarding the Legacy Securities program (i.e., TALF 2.0), the Treasury's fact sheet states:

Borrowers will need to meet eligibility criteria. Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. These and other terms of the programs will be informed by discussions with market participants. However, the Federal Reserve is working to ensure that the duration of these loans takes into account the duration of the underlying assets.

Does anyone honestly think it's possible to properly assess the Legacy Securities program without knowing these terms? I didn't think so.

Most of the terms of the programs announced today haven't been finalized yet, and since a Treasury official told me earlier that they want to get these programs up and running by the end of April, all these terms have to be hammered out in negotiations between the Treasury, the banks, and the buy-side in a very short window of time.

Posted by Economics of Contempt "

Me:

Don said...

I'm actually following your advice and waiting. There are blog posts that I disagree with, but what's the point if the plan isn't clear. I am puzzled by the idea that the owners of the TAs won't sell idea. From my point of view, they were waiting for government involvement. I guess I will either be proven right or wrong on that one, as on the subsidy issue. I should add I believe that the pricing of the TAs isn't a huge puzzle. They have been selling all along. On this too, we'll soon find out.

Don the libertarian Democrat

March 24, 2009 3:09 PM

The Geithner plan gets rave reviews from the CDS market, with serious spread tightening across the board.

From The Economics Of Contempt:

"CDS Market Reaction to Geithner Plan

The Geithner plan gets rave reviews from the CDS market, with serious spread tightening across the board. The CDX IG12 index closed 14bps lower, at 185bps.

Here are today's CDS spread changes for the major U.S. banks:

BofA: 21 bps tighter
Citi: 27 bps tighter
Goldman: 16 bps tighter
JPMorgan: 5 bps tighter
Merrill: 18 bps tighter
Morgan Stanley: 16 bps tighter
Wachovia: 13 bps tighter
Wells Fargo: 10 bps tighter

Other U.S. financials:

Berkshire Hathaway: 28 bps tighter
AMEX: 13 bps tighter
Capital One: 16 bps tighter

Clearly the CDS market thinks the banks will be willing to sell their troubled assets under the Geithner plan. I probably agree.

Posted by Economics of Contempt "

Me:

Don said...

The TAs will be become liquid, priced, and sold, now that the government has entered the TA business.

Going forward, the problems will be:
1) Large losses to taxpayers
2) A GAO report of some kind saying that the government's actions caused the price of the TAs to rise
3) The subsidies turning out to be very large ( even if some of it is recovered )
4) Pimco et al making good money, but taxpayers not so much
5) The appearance of collusion or favoritism of some kind
6) Complaints that congress was circumvented ( whether fair or not )

I hope it works.

Don the libertarian Democrat

March 23, 2009 10:55 PM

let's not forget that the FSA deserves a hefty share of the blame as well.

From The Economics Of Contempt:

"The FSA Deserves Some Blame for Lehman Too

ECB official Lorenzo Bini Smaghi responded to Paul Krugman's recent contention that Europe's response to the financial crisis has been inadequate. One of Smaghi's arguments, though, unfairly places all the blame for allowing Lehman to fail on the US:

[Krugman's argument] doesn’t explain how the most fateful decision of all – the decision to allow a systemically important bank to fail in the midst of a financial crisis – was taken by a single decision-maker, while the 16 euro area governments have managed to avoid making such a large mistake.

Whoa, let's remember what actually happened. The Fed and the Treasury successfully brokered a private-sector rescue for Lehman, in which Barclays would buy all of Lehman except for $40 billion of commercial real estate assets, which would be acquired by a consortium of major banks. Since Barclays is a British bank, the deal required approval from the UK's Financial Services Authority (FSA). On Sunday morning, though, the FSA unexpectedly rejected the deal. As William Cohan recounted:

The Barclays deal required the blessing of the Financial Services Authority, in London - the UK equivalent of the SEC. So Paulson spoke with his UK counterpart, Alistair Darling, the Chancellor of the Exchequer, and to the FSA. He then summoned McDade, Lehman's president, to the New York Fed and told him at around 9:45 a.m., "Deal's off. The FSA has turned it down." At roughly 10 o'clock, Paulson and Geithner briefed the bankers at the Fed.

So while the Fed and the Treasury undoubtedly made a mistake in letting Lehman fail, let's not forget that the FSA deserves a hefty share of the blame as well.

Posted by Economics of Contempt"

Me:

Don said...

Here's a little more on that from Bloomberg on Nov. 10th:

http://www.bloomberg.com/apps/news?pid=20601109&sid=aMQJV3iJ5M8c&refer=home

"Barclays Deal

One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.

That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.

Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.

No Lifeline

Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.

``The only reason it didn't happen,'' Leigh Bruce, a Barclays spokesman said today, ``is that there was no guarantee from the U.S. government, and a technical stock-exchange rule required prior shareholder approval for us to make a similar guarantee ourselves. We didn't have that approval, so it wasn't possible for us to do the deal. No U.K. bank could have done it. It was a technical rule that could not be overcome.''

Don the libertarian Democrat

March 20, 2009 8:38 PM

the majority owner of a public company (in this case, the government) can't just abrogate enforceable contracts.

TO BE NOTED: From the Economics Of Contempt:

"The Government and AIG

Josh Marshall unleashes a very strange rant against AIG:

The problem is what appears to be the president's mortifying impotence in the face of bankers and financiers who created the problem. The president speaks and acts for the federal government, which is to say, the American people, who have mobilized more than a trillion dollars and all powers of the state to repair the damage emerging out of the financial sector. And with all that, he's jacked up on a employment agreement between a company the government now owns and derivatives traders who sank the world economy and may quite likely be looking at criminal charges for their activities in the not too distant future?

Anyone can look at that and see that the equation of power and accountability is all screwed up.
...
[F]undamentally, Obama needs to start showing that he's in charge, that he's operating as the American people's advocate and that he has the power to do it -- which these stories of getting jacked up by some Gordon Gecko wannabes in London just terribly undermines.

What's shocking is that Marshall finds any of this shocking. The government is in control. When the government took an 80% stake in AIG last September, it fired then-CEO Robert Willumstad, and hand-picked Ed Liddy to be the new CEO. The president doesn't have time to run AIG, so the government essentially hired Liddy to do it instead.

Liddy is, for all practical purposes, acting as "the American people's advocate." When confronted with the bonus contracts, Liddy consulted outside counsel, who informed him that AIG was, in fact, contractually obligated to pay the bonuses. Liddy determined that refusing to pay the bonuses would ultimately cost the taxpayers more than simply paying the bonuses—which is undoubtedly true, seeing as failure to pay the bonuses would have triggered the "cross-default" provisions in AIG's derivatives contracts. As CEO, that's Liddy's decision to make. Marshall just doesn't like Liddy's decision.

Now, some might argue that the bonus contracts wouldn't be enforceable if AIG was in bankruptcy, and that the only reason AIG isn't in bankruptcy is because the government bailed them out at the last minute. That's true, but the fact of the matter is that AIG isn't in bankruptcy. Marshall and others might wish that AIG was in bankruptcy, but it isn't, and so the bonus contracts are enforceable. Marshall seems to be appalled that the majority owner of a public company (in this case, the government) can't just abrogate enforceable contracts.

TPM is one of my favorite sites on the internet, but its coverage of the AIG bonus controversy has been sub-par. TPM is way out of its depth on matters of finance, so they've allowed pure emotion to replace thoughtful analysis.

Posted by Economics of Contempt "

as the banks scrambled to raise capital to meet their minimum capital requirements

From The Economics Of Contempt:

"Why AIG Was Rescued

Felix Salmon argues that AIG was rescued because if it had failed, no one would have known who was ultimately bearing the losses, which would have caused financial markets to freeze virtually overnight:

[T]he web of connections between the thousands of counterparties in the CDS market is so complex that no one really has a clue who would have ended up holding the multi-billion-dollar bag.
...
But no one would have had a clue where in the financial system, exactly, those losses would have ultimately come to rest. And given the magnitude of the losses, you can be sure that no one would have wanted to have any kind of dealings with the poor schmucks who ended up on the hook for all those billions of dollars. And since those pooor schumcks could be pretty much anybody, no one would do any kind of business with anybody else: you'd get settlement risk run amok. The entire global financial system could grind to a halt overnight, due to the inability of any given institution to persuade any other institution that it was actually solvent.

I tend to disagree. Incidentally, I think this is more or less the explanation for why Bear Stearns was rescued, but not for why AIG was rescued.

The reason AIG was rescued was much simpler: regulatory capital relief. AIG's massive CDS portfolio was providing an enormous amount of regulatory capital relief at the time, primarily to the major U.S. and European banks. Had AIG failed, all the major banks—which were already engaged in mass deleveraging due to Lehman—would have suddenly lost most, if not all, of the regulatory capital relief that AIG's CDS contracts had been providing. This would have put the banks well under their regulatory capital requirements, and thus would have sparked a fresh wave of forced liquidations, depressed asset prices, writedowns, and yet more forced liquidations, as the banks scrambled to raise capital to meet their minimum capital requirements.

With the markets already convulsing wildly due to Lehman's failure, this would have been a devastating body blow, and I don't think the markets could have taken it.

From what I understand, this is the doomsday scenario that ultimately led Geithner to rescue AIG.

Posted by Economics of Contempt "

Me:

Don said...

I think you're both correct. There was a literal Calling Run that would have directly followed from AIG, but there was also a larger Flight To Safety that began in which investors only tangentially involved or uncertain whether or not they were involved starting moving into cash. It is this larger Calling Run which led to a real fear of Debt-Deflation coming out of this crisis.

Don the libertarian Democrat

March 19, 2009 3:05 PM

it's people who think that the spread is going to widen out

From Felix Salmon:

"Chart of the Day: US Sovereign Weirdness

This chart comes from A Credit Trader, who has a long and very useful blog entry on the subject of US sovereign CDS. He basically gives the simple answer to my question of "who on earth is buying protection at these levels": it's people who think that the spread is going to widen out. So far, people making that trade have made a lot of money, so there's a good chance that the simple answer is here the right one.

He provides this chart as an example that there are all manner of weirdnesses in the capital markets right now. It shows the yield of 30-year swaps (the blue line) and 30-year Treasuries (the red line); right now, Treasuries (which are risk-free AAA securities) are yielding more than swaps (which carry a double-A credit risk). Now one way of looking at this chart is to say that the market now reckons that Treasuries are not risk-free, and that in fact they carry more credit risk than swaps. But as ACT explains, that's basically an incorrect explanation: the correct explanation is something much more boring and technical to do with the flattening of the swap curve.

Similarly, ACT is convinced that technical factors probably underlie the widening out in US sovereign CDS spreads: they're illiquid at the best of times, and they're really only following the rest of the CDS market in gapping out.

But there's no doubt that if you want a single datapoint demonstrating how weird the markets are right now, the US CDS spreads in triple digits are a very good one to use. It doesn't say much about the safety or otherwise of Treasury bonds, but it does say a lot about the usefulness of looking to the CDS markets as an indicator of anything much."

Me:

The Economics Of Contempt also had a post on this issue:

"Oh my god, repeat after me: CDS on U.S. government debt are spread products. Protection buyers aren't hedging default risk, they're hedging spread risk."

http://economicsofcontempt.blogspot.com/2009/03/default-risk-vs-spread-risk.html

By DonthelibertarianDemocrat Posted: Mar 14 2009 5:06pm ET

"So why has this proposal been largely absent from the public debate? I have no clue. "

From The Economics Of Contempt, we have another sales tax decrease supporter:

"Suspend State Sales Taxes!

The main point of a fiscal stimulus package is to offset the decline in consumer spending, which accounts for over 70% of GDP. We need to avoid the Paradox of Thrift, and all that. As Paul Krugman put it:

[W]hat the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus.

The argument against tax cuts as fiscal stimulus is that consumers won't spend the extra money, but rather will increase savings or pay down debt. We want people to spend, and spend now.

So why oh why aren't people talking about temporarily suspending state sales taxes as a way to quickly increase consumer spending? Suspending state sales taxes would encourage consumers to spend more by lowering the price of spending, and making the suspension of sales taxes temporary would encourage consumers to spend before the sales tax holiday is over—that is, to spend right now.( CORRECT )

Laurence Kotlikoff and Ed Leamer have offered a very nice sketch of how such a policy would work. The proposal has been endorsed by Stanford's Robert Hall and Susan Woodward, and was evidently quite a hit at the annual American Economics Association meetings, winning converts like Alan Blinder of Princeton. Here's Kotlikoff and Leamer's overview of their proposal:

A better way to spur consumer spending is for Uncle Sam to run a six-month national sale by having a) state governments suspend their sales taxes and b) the federal government make up the lost state sales revenues. The national sale could be implemented immediately.

Here’s how it would work. Uncle Sam would pay each state a fixed percentage — say 5 per cent — of the 2007 consumption of its residents. States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they’ll receive from Uncle Sam.

For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, ie subsidising purchases. Shoppers would see a negative tax on their sales receipts, lowering their outlays. State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.

States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems. To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.
...
[This plan] will apply economic medicine where it’s most needed – on consumer spending, giving everyone an incentive to spend now and begin again to trust our economy and its institutions.

So why has this proposal been largely absent from the public debate? I have no clue. "