Geithner’s Bank Rehab, Still More Questions Than Answers

Treasury Secretary Tim Geithner is out with his banking and financial rescue plan.  This will not go without criticism and not all methodologies look set in stone, mainly because this package still raises plenty of questions.

Geithner says this will start with new governance so taxpayers whether or not boards are responsible and how they are compensating their executives.  There are also going to be “strong conditions” on executive compensation.

Banks will have to go through a comprehensive stress test. This will help balance sheets and improve disclosure.  The funds will come with conditions that will provide  greater lending than would have been there.  It sounds as though the ones that need to fail are going to fail.

The Fed, FDIC, and other agencies will work alongside industry in a new public-private partnership that will focus on legacy loans and assets.  Treasury and private investors are both still exploring options for how to value the toxic and distressed assets.  The initial package is $500 billion, but can be expanded to $1 trillion.

This will be for business and consumer lending, and no program will work without the securitization markets working.  This will target commercial mortgages, autos, small businesses, and other areas.  The plan assumes up to $1 trillion for purchasing the securitizations of those assets.

Geithner also stressed that this will cost money, will involve risk, and will take time. It also will include a comprehensive housing program that will be available in a the next few weeks.  Geithner will also work with Congress on sufficient resources for the package.

We hate to be pessimistic, but what this  plan really  is a promise to  work details out.  This does sound as though the institutions that can’t really be saved will not be.

Stocks slid sharply since there was no formal detail on each part of the plan.  And Treasury note prices rallied sharply as this still leaves uncertainty for debt issuers and borrowers alike.

The market might accept a “less good” plan right now if it feels that it at least has certainty and becomes policy.  Unfortunately, today was more of a promise of a promise rather than a promise with a set of goals on how to get there.

Jon C. Ogg
February 10, 2009