This post first appeared on February 10, 2009
I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling. Paulson demanded $700 billion, nearly $200 billion bigger than the Department of Defense, via a three page draft bill, nothing more that a doodle on a napkin, save that it did bother to put the Treasury secretary above the law. But high-handedness was the hallmark of the Bush Administration; it was only the scale and audacity of the TARP that was the stunner.
And the TARP initially did have some supporters (perhaps most important, among the media, who trumpeted the “Something must be done” case). Fans are much harder to find for the latest iteration of the seemingly neverending “let’s throw more money at the banks” saga.
As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street’s interests as the Bushies were. The differences increasingly look stylistic, not substantive.
Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the “oh he has to work on the stimulus bill” is as close to “the dog ate my homework” as I have ever seen in adult life). What he served up as an initiative is weeks to months, depending on the item, away from being operational (if even then; the public-private asset purchase program will either not see the light of day, or be far narrower and smaller than what is needed).
And in case you think I am being unfair, yesterday I got an e-mail from a political consultant who got a report on the Senate Banking Committee briefing by the Treasury the night before the announcement. No briefing books, no documents. He deemed it to be no plan. That assessment was confirmed today by a participant at the session, who said that the details were so thin that one staffer asked, “So what, exactly, is the plan?” and repeated questions from one persistent Senator got “absolutely no answers”.
Thus Geither’s belief that government can’t manage assets is sheer projection of his own inability to deliver. The FDIC winds up banks all the time. During the S&L crisis, as William Black reminds us, FSLIC appointed receivership managers that later research determined did reduce losses. Sweden, Norway, and Chile all nationalized (and relatively quickly reprivatized) dud banks during their financial crises. This isn’t like trying to go the moon (which was a government initiative, lest we forget). There are plenty of models and lots of good proposals. What is lacking is will. History says that an aggressive, take-out-the-dead-banks program is the fastest and all-in cheapest way out of a financial crisis. But if you believe that something will not work, as Geithner does, it isn’t at all hard to produce that outcome.
For sake of completeness, let’s recap the four items Geithner presented.
First was the idea that they’d get to the bottom of the bank’s books, “stress testing” them, with an unspecified program of “capital support” for those that need it. What about putting them in receivership, as regulators normally do with dud banks?
The part that got me worried was the “stress test” bit. Geithner mentioned that he was using a medical analogy, but stress testing was what the big investment banks claimed to be doing to manage risk. The results showed that their approaches were not up to snuff.
The FDIC and OCC, with enough staffing (no acknowledgment that this will take a major ramp up in personnel and that takes time) can assess loan portfolios and various not-too-complicated asset backed securities.
But they do not have the ability to have much of an independent view of the risks in derivatives exposures, CDS, CDOs. These take a lot of specialized skills within the product area. People like that are now available, thanks to the downturn, but how long will it take to screen, hire them, design templates for consistent analysis and reporting?
And the investment bank models do not (to my knowledge) allow for the fact that in bad markets, previously uncorrelated assets move together, This is a massive source of risk, and if the bankers were behind the eight ball here, pray tell how is the Treasury going to contend with this one? (Separately, we have said, repeatedly, that the big investment banks should have been subject to this sort of scrutiny as soon as Bear went under. It was obvious others were at risk, but everyone in authority, including Geithner, adopted a “see no evil, hear no evil, speak no evil” stance.)
Second was the public private investment fund to buy bad assets. This is largely sui generis, with the intent of bringing a variety of investors in (by type, mind, you, for instance, hedge fund and private equity) and buy a lot of different types of bad assets. Presumably, the entity will need to hire (therefore select, negotiate with, and compensate) an asset manager to handle the day-to-day operations.
There are a ton of details to sort out, and Treasury appears only to have had a few high concept chats with a few folks. That is far short of designing a vehicle and figuring out what the gives and the gets are.
I can’t see this taking any less than months, and that even assumes there is a solution for the problem I keep harping on: the banks do not want to sell assets at anything like market price. Now the intent may simply be to obscure a very very large subsidy from the chump taxpayer. But if not, this component, if it ever sees the light of day, is likely to wind up buying only those assets where the gap between the bank’s offer and the market bid isn’t too great. That in turn is likely to be the best of the dreck. So a huge amount of effort, and a considerable amount of taxpayer money, could well be expended with the problem largely unresolved.
The third item is providing more financial firepower than initially planned, a trillion dollars, to the Term Asset Backed Securities Loan Facility, the program intended to help free up the markets for consumer, student, and auto loans. The SBA will also get larger guarantees on its loans and faster approval process.
Fourth is a promise to come back in a few weeks with a housing program.
Aside from the impressive thumb’s down from the stock market, the comments from economists and financial commentators are withering. From the Financial Times’ Martin Wolf:
Has Barack Obama’s presidency already failed?
From bank expert Chris Whalen of Institutional Risk Analytics (via e-mail):
Real disaster. I am very concerned that the Obama Admin is going pear shaped before the snow even melts.
Kevin Logan, senior US economist at Kleinwort Benson:
They have a plan for a plan but they don’t really have a plan. The whole proposal is so vague as to create new uncertainty, and maybe the problem is really so bad that they haven’t worked out how to solve it.
But on the day when the big news was finally expected to hit, Treasury Secretary Geithner’s release of his “comprehensive plan,” he said absolutely nothing. Weeks of planning. A day’s delay in making sure he was ready, really ready for his coming out party. Only problem was, those that came to the party left. Immediately and rapidly. Today’s market news was no better or worse than any other over the past week, but somehow equity traders proceeded to lop almost 5% off its value. Do you think investors, like the Treasury, might be just a little jittery, placing a little too much hope on the impact of a plan that few thinking rationally consider a panacea?
…so long as you’re dealing with the old management and so long as you’re dealing with the old practices and so long as you don’t have a clean audit of the books, the chances are that the bank is going to behave in ways which are not constructive, which do not contribute to the growth of the economy, and which leave all kinds of suspicions present in the system about the integrity of the institution and of the regulatory process. And that’s the problem the Treasury Department seems to be determined not to face.
Jim Hamilton likes to stay measured, so on his disapproval scale, this is pretty serious:
We obviously don’t have clear details of the plan, only the concept, but it sounds to me like the wrong concept
Tony Crescenzi, an analyst at Miller Tabak:
It remains extremely uncertain how the Treasury will entice investors to do something they have been avoiding since the start of the crisis.
Paul Brodsky of QB Asset Management (via e-mail):
Is anyone else as stunned as I am?
The New York Times summed it up:
But the initial assessment of the plan from the markets, lawmakers and economists was brutally negative, in large part because they expected more details.
Paul Krugman hopes this Potemkin plan is actually a Trojan horse. If so, a lot of dollars are being deployed to mask the real aim, If Geithner weren’t so attached to the world view of the industry, I could see this as an effort to show, “Gee, we really did try a whole bunch of stuff, which by the way you bankster types said you liked, they didn’t work, so now we have no recourse but to take you over.”
As I too often say, it would be better if I were wrong, but this sure isn’t looking good.