Paul Krugman has already eviscerated Geithner's toxic asset plan in the New York Times (see this and this). So have Yves Smith, Mish and many others.
But very few are taking a step back and addressing a more basic question: what are the toxic assets that Geithner is throwing taxpayer money at?
The answer is that the toxic assets include:
- Credit default swaps (CDS)
- Collateral debt obligations (CDOs)
- Mortgage backed securities
In fact, these different classes of toxic assets are related.
They did, and so the CDOs plummeted in value and became "toxic".
Other CDOs - called "structured finance CDOs" - are bundles of mortgage-backed securities and other asset backed securities.
Moreover, some CDOs - called "synthetic CDOs" - are bundles of CDS and other credit derivatives.
Similarly, there were huge CDS bets made that the companies buying or selling CDOs would stay solvent. When those companies started becoming insolvent, the CDS became toxic.
Can you see the relationship between all of the toxic assets?
What Should We Do With the Toxic Assets?
I obviously agree with Krugman, Smith, Mish and everyone else who is not directly making money off of this scam that it is a horrible plan which will probably fail and end up sticking it to the taxpayer.
But what people should be discussing is cancelling the toxic CDS and CDOs. As I have written repeatedly over many months in different ways, the American people should demand that the government rescind the CDS and CDOs.
The government has that power. Indeed, the same arguments which have been made for the government's authority to cancel AIG's bonus contracts can be used to cancel CDS and CDO contracts. In order to receive any more bailout money (or to keep the money they already received), the CDS counterparties and CDO holders need to cancel their contracts. And for foreign CDS counterparties and CDO holders, the government could simply say "we will not loan your central banks any more money unless you cancel the contracts".
Do you think this is extreme?
Well, this is a much better plan that throwing trillions upon trillions of taxpayer dollars at banks (foreign and domestic), hedge funds, etc. And unlike Geithner's plan, this could actually work.
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