By Bruce Krasting, a foreign exchange and derivatives veteran who comments regularly on the financial scene.
In my piece “What’s in Store for 2010” my number one prediction was:
-Tim Geithner will resign as Treasury Secretary. Sheila Bair will replace him.
The odds of getting any of these types of predictions correct are probably 20 to 1. Given what has happened in the past few days I would now say that the ‘swap’ of Sheila for Tim is an even money bet.
Mr. Geithner has outlived his usefulness. He is too connected to the bailouts of 08. Bear, Lehman, AIG, TARP and even QE are all part of his legacy. That makes Tim a lightening rod. Too many Americans hate that part of our history.
I don’t think the current flap relating to the deliberate ‘non-disclosure’ of information relating to AIG is that big a deal. When the full history of this period is finally told (it will take awhile yet) this particular transgression of Mr. Geitner will look small by comparison. The things that we do not yet know about that we ‘agreed to’ during the ‘crisis period’ are going to cause us to roll our eyes and bow our heads when all is said and done.
Those that had their hands on the tiller were firmly of the belief that the western world financial system was shutting down. They left no stone unturned in trying to save the patient. They committed future generations for Trillions in additional debt. Every step available to calm market fears was taken. Even withholding information. When you are at war, and you think you are losing, you do what you have to do. If you later win the war and someone criticizes you for using WMD so be it.
I will take a stab at writing the President’s statement on this:
“I have today accepted the resignation of my Treasury Secretary Tim Geithner. One year ago the global economy was facing the biggest challenge in history. Tim and a small handful of dedicated individuals took the steps that were considered necessary at the time to first stabilize a collapsing system and second put the economy of the US and the globe on a path that would lead to recovery.”
“For this, the American people owe Tim our thanks. He worked tirelessly during one of the darkest periods of our history. And he succeeded. Today the economic crisis of one year ago has receded. Our economy has stabilized and growth has resumed. Our financial institutions have also returned to health. The financial support provided them through the TARP program has worked. We see the evidence of this as those banks who took assistance a year ago are now paying it back with interest.”
“Our country continues to face serious economic challenges. Unemployment remains stubbornly high; we face a protracted period of large fiscal imbalances. A critical weakness continues to be with homeowners who are unable to meet their financial obligations.”
“I have appointed Sheila Bear to replace Tim Geithner. Sheila will bring to the Treasury Department her proven leadership and administrative skills. She has both the knowledge of the core issues and the compassion that is required to address the problems that are at hand.”
“Sheila has set the standards and seen to the implementation of the Nations efforts in restructuring home mortgages. The guidelines for refinancing troubled homeowners that she established have been accepted by virtually every public and private sector lender. Much more work needs to be done in this area. Many homeowners are still facing default. This reality causes human suffering and is adding to our economic problems. I am looking forward to working with Ms. Bair in this critical area as well as all of the other challenges we face.”
Okay, so that was BS. But if it does go this way, the Boss will say words to this effect. He will just do it better.
My sense is that this would be a very significant development. I believe that Ms. Bair will introduce a very large program of PRICIPAL debt relief for borrowers. This program will start with the D.C. mortgage lenders Fannie, Freddie and FHA. It will be forcibly extended to the private sector lenders. (They already have significant reserves on a lot of this.)
I hate this development. But I think it is the ‘right thing to do’. The inequity of it will cause great divides. The cost will be astronomical. The total could go as high as $800 billion. A significant portion of that would be born by the Government lenders. My guess for the taxpayer tab is $500 billion. I do not see any realistic alternative however. If we let the problem fester it will cause us to lose a decade of growth. Better we deal with it now.
A muse of all of this is that the money to accomplish a half trillion dollars of debt relief has already been made available to the D.C. mortgage lenders. Mr. Geithner saw to that on Christmas Eve when he did the ‘Sneaky Pete’ announcement of a virtual blank check for the Agencies. For me, that was a much more serious offense than the disclosure issues with AIG. That was then, this is now. I thought that this, by itself, would have proved to be a significant enough gaff to take him down. As it turns out, that straw on the camels back may well prove to be the critical step that insures that the next Treasury Secretary will have the ‘Bazooka’ that is necessary to address the problem. Funny how things work. It almost looks like it was planned.
-I do think that Sheila Bair would make an excellent T. Secretary. She has the skills and experience. She also has a vision that we desperately need. She is no lightweight. She will fight very hard and she has a lot of ‘chips’ in her pocket. The fact that she is a woman is helpful. In my opinion it is high time that a woman took this job. Lets face it. The ‘Guys’ have screwed this up for decades.
-If all this happens and Tim G. ends up at PIMCO or with Wilbur Ross structuring investments in “Distressed Debt” as Neel Kashkari and James Lockhart have, I am just going to puke.