Tim Geithner’s inaugural speech fell flatter than an egg in Kansas, but the problem lies in the audience, not in the speaker or the content.
The gripes were unanimous, if varied: Geithner was part of the problem and can’t be the solution — no details, no plan at all, no engagement with the crisis, the Obama administration is all dance and no delivery, the White House never should have allowed high expectations for the speech … on and on — and that was from the Democrats.
Enough. Step one in a one-step course in listening: Listen. Not for what you expect to hear, or want, or hope, but what the man says.
Details and decisions? Huge. Nuclear. Also a change in style: We will collect evidence, define problems, and then act. A refreshing reversal.
1. There will be no "aggregator bank," no nouveau RTC for toxic assets. Geithner said that government is not good at managing assets, which is even more true for fancy financial wreckage than the 80s’ condos and offices. Also, government cannot know what price to pay for toxics if extracted — too little will kill banks; too much will kill us.
2. Any bank nationalized will be so for as short a time as possible. Geithner said government is no better at managing banks than assets — hard to believe after watching existing management, but you haven’t seen Rep. Barney Frank, D-Mass., run a bank.
3. Banks will be "stress-tested" on a worst-case basis, and those that fail the test will face good-bank/bad-bank dismemberment. Geithner did not announce that the tests would begin at sunrise the next day, with hundreds of examiners landing like Normandy on the 18 largest banks, the tests to be complete in March. They are hard at it right now — and these actions have been lost on the media.
In October, Henry Paulson injected Troubled Asset Relief Program capital into the 10 biggest banks to conceal and protect from panic the few in immediate trouble. If Geithner’s first act in office has been to send in the examination Airborne Division, then I assume that previously someone senior to Geithner had prevented serious discovery. Thanks again, Hank.
4. When this toxic depth-sounding and triage is complete, we will know the viable (OK as-is, modest capital needs), the doomed (briefly nationalized, sold in pieces, hit taken; Citi for sure), and the middle group to be good-banked/bad-banked.
Geithner did not say — don’t alarm women, children or CNBC stock-pushers — that we will do it this way, opening the door to private capital to buy toxics and bank remains, because the hole is too deep for any other solution. Best estimate of capital deficiency now (by steady ex-Fed Vincent Reinhart at AEI): $1.4 trillion, plus about the same ahead from recession hits. Try to sell another $3 trillion in Treasurys … not good.
5. Nobody noticed Federal Reserve Chairman Ben Bernanke’s testimony the afternoon Geithner spoke. He can now retreat from public fire to his desk (under it, if he wants), the policy and political lead back at Treasury where it belongs. His speech included a two-page addendum listing all of the Fed’s new financing operations. That’s how we’re going to deal with the hole: The Fed’s going to finance it. Right past the catatonic banks.
The Fed will buy some good assets outright, mostly mortgages, to drive down the cost of financing assets in general. Above all else we must stop the asset-price spiral. The Fed will finance private purchases of toxics with an appropriate down payment, perhaps some loss-sharing, but no more pretending and avoiding value. The Fed will finance the bad banks in extended workouts, and the good ones will be retaken public, recapitalized by newly issued stock, perhaps recovering some loss. And the Fed will finance buyers of securitized consumer and corporate debt — the vaporized "Shadow Banking System" — until asset values stabilize and debt markets can stand on their own.
The Fed is already hard at it. Geithner said repeatedly, "Time is not on our side."
Looks like a plan to me. I confess it took me two days and news of the examiner-invasion to listen. It’s already working, too, with mortgages sliding sub-5 percent, corporate bond markets moving. Will it work big time, intercepting this freefall? I don’t know, but I do know it’s the first all-out effort in 20 months, and the first that can work.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.
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