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The quiet death of Geithner's controversial loan plan

Remember U.S. Treasury Secretary Timothy Geithner's plan to ease the credit crunch, the byzantine "Legacy Loans" program released to much hand-wringing this winter? It was, perhaps, the most ambitious, most confusing, most surprising governmental response to the Great Recession.

The idea was to help price and start a market for mortgage-backed assets on the banks' books. The government would assess and tranch the assets to sell at auctions to public-private investment partnerships; the government would eat the losses if the assets went sour.

Remember hearing about it recently? No?

That's because it's dead in the water, the New York Times reports.

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay. 

The blogosphere's been all over sorting out what this means -- see Yves Smith and Ezra Klein, for examples.

Part of me thinks: goodness, isn't this the best of all worlds for everyone? The banks will be forced to mop up their own mess, and mark down the proper (low but existant) value of these assets at some point. (The i-banks' counterproductive and unethical desire to mismark and misprice concerns me a lot on this point, to be fair.) But if they want to wait for the assets to mature rather than moving them now, spreading their losses out over several years -- that's fine with me.

The government won't have to cajole hedge funds into participating, promising them some oversight concessions in return. That means hedge funds and the like can use their free capital, hopefully, on more productive investments. The government also won't have to subsidize the banks' losses on these assets, leaving those precious funds for other better purposes.

Plus, if the Geithner plan was always in part a confidence thing -- born of the perceived need to reassure banks that the government would not let them fail and would help ease the credit crunch -- this part of the plan seems to have worked. And without costing anything.

Here's looking forward to the other pieces, though.

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Gordon Brown on the ropes

The crisis facing Gordon Brown's premiership reached new levels this evening, as his work and pensions suddenly resigned, and called for Brown to step down:

James Purnell, the work and pensions secretary, tonight dealt a monumental blow to Gordon Brown's chances of holding onto office when he dramatically announced he was quitting the cabinet and asking Brown "to stand aside to give Labour a fighting chance of winning the next election".

His statement, effectively declaring Brown as unelectable, will further weaken the prime minister's waning authority and takes the challenge to his leadership to a new dangerous level. Purnell made his sensational move after polls closed in the local and European elections, informing Brown by phone tonight.

The prime minister had no inkling that Purnell was going to quit, since the work and pensions secretary shrouded his move in secrecy in order to prevent Number 10 mounting a pre-emptive strike against him, or seeking to challenge his motives.

A spokesperson for Purnell said: "He feels Gordon should now stand aside to give the party a fighting chance of winning the next election. He is not  seeking the leadership nor acting with anyone else. This is not about jobs or careers."

Brown, who has now lost three ministers in the last 24 hours, had been planning to announce a cabinet reshuffle on Monday, after what is sure to be a poor showing by Labour in today's European elections. The "devastating" blow, though, may force Brown to move the announcement to tomorrow, as a stopgap against his swiftly collapsing authority. Purnell's resignation is also likely to strengthen a Labour backbenchers' campaign to force out the Prime Minister. Even if Brown can hold onto his own party, it is hard to disagree with Purnell's accusation that ""[his] continued leadership makes a Conservative victory more not less likely."

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