"Beyond TARP
Geithner Does Little To Create Confidence
02.10.09, 3:09 PM ET
U.S. Treasury Secretary Timothy Geithner may have wanted to put an end to the never-ending credit crisis by announcing a comprehensive approach to saving the banking system, but all he succeeded in doing Tuesday was adding uncertainty.
The newly named Financial Stability Plan expands some of the lending and equity capital investing mandates under the Troubled Asset Relief Program (TARP), adds the creation of a "public-private partnership" to buy troubled assets from banks, and will put the 15 largest U.S. banks through a rigorous regulatory stress test before allowing them to tap additional federal bailout money.
The market reaction? Investors dumped bank stocks.
Geithner's plan provided few details, except to emphasize that he's serious about stopping the crisis. "The financial system is working against recovery," he said. "The recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it."
The Obama administration is scrambling to get a grip on the economy as it continues its descent, including rising unemployment, falling housing prices and mounting foreclosures. The government's solution is a one-two punch: $800 billion in economic stimulus and the financial system stability plan.
Geithner wants to reverse the damage done by the previous administration's ad-hoc reaction to the banking crisis, which he faulted Tuesday for being "inadequate" and slow.
He calls his new plan a comprehensive use of loans, guarantees and investments in the banking system, with conditions that protect taxpayers and with the transparency and disclosures lacking in the previous attempt. The Treasury created a Web site where people can track what banks are doing with federal bailout funds, financialstability.gov.
Bankers were generally positive about the program, but they wanted the Treasury to take an extra step and change the accounting rules that they believe have exacerbated the crisis, including the requirement that assets be marked to market.
"We would encourage immediate steps to address the failings of fair value accounting--both to minimize the overly pessimistic valuations today and to avoid the overly optimistic valuations that pumped up the housing bubble and will likely inflate values again in the future," said Edward Yingling, president of the American Bankers Association.
For the moment, Geithner is not going to Congress to ask for more money beyond the $350 billion remaining from the original program. His plan would commit $100 billion to an existing collateral-swapping program at the Federal Reserve, the Term Asset-Backed Securities Loan Facility (TALF); an estimated $50 billion to mortgage loan modification and other assistance for struggling homeowners; and additional government equity stakes in banks.
In a press briefing after Geithner's speech, a senior Treasury official said there were "more than enough funds to move forcefully on each and every element" of the plan. The reality is that President Obama and Geithner can't ask Congress for more money until they prove this program will be better managed.
One of the chief criticisms of the TARP was that it took $125 billion and bought preferred equity stakes in the largest eight banks, which sat on the money. Then it was revealed that some of the banks were paying big bonuses and continuing to sponsor employee junkets even as two banks,
Capital in the form of preferred equity investments will be given to banks after they go through regulatory exams. The 15 largest U.S. banks, those with $100 billion or more in assets, will be required to go through a regulatory stress test. Treasury officials were careful to point out that the stress test did not mean there were new capital standards for banks to meet, even though it's obvious that regulators have been encouraging banks to raise capital.
Many see equity investments in banks as the quickest and best way out of the crisis, especially since taxpayer money is on the line through the government's deposit insurance program.
David Beim, a Columbia Business School professor and former Wall Street banker, estimates the potential losses to banks from the credit crisis at between $1 trillion and $2 trillion, an enormous capital hole that the government needs to find a way to fill, since private investors don't appear willing to do so anymore.
"They're going to have to find a way to do that. Banks themselves don't know if they are insolvent because they don't know the value of their assets. It's a very odd situation," Beim said.
Clearly there is going to be a learning curve, with banks and investors reluctant to make the first move before they see how the programs will work.
The structure to buy the bad assets from banks is as vague as it was last year under the original program, mostly because the central question of how to value the assets for purchase has yet to be answered. The program also didn't address whether the government would include loss sharing or profit sharing arrangements in the deals.
Geithner is structuring the program, which will initially take on $500 billion of assets but could expand to $1 trillion, as a way to lure private investment firms with the promise of government financing of the asset purchases.
"Our sense in talking broadly to the private sector is that there's a good deal of capital on the sidelines," the senior Treasury official said at the press briefing. "Our challenge is to catalyze that capital."
The TALF program, designed to kick-start the secondary loan markets by taking asset-backed securities off bank balance sheets in exchange for Treasury securities, will be expanded to include a broader range of collateral backing those securities, including commercial real estate loans. But it did not expand to include private mortgages that don't conform to
"The crisis in the housing market cannot be resolved until we find a way to restart the securitization market for residential mortgage loans," says Ed Gainor, a partner at law firm McKee Nelson.
The financial crisis won't get resolved this month or perhaps even this year--that much is crystal clear. "This comprehensive strategy will cost money, involve risk and take time," Geithner said Tuesday. "We will have to adapt it as conditions change. We will have to try things we've never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted."
Me:
See, I'm ahead of the curve. The point is to shift as much of the losses from the banks to the taxpayers in as obscure a manner as possible. Maybe they're just hoping to wait us out.
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