Geithner's Complex Plan Won't Fix the Problem

Geithner failed to inspire confidence in the market because his plan will be too complex and not get to the core of the problem instead of tackling the problem - that the banks and credit markets are undercapitalized.

I fear two things. First, a massive transfer of wealth between taxpayers to troubled bank stockholders, and second, like the RTC, a massive transfer of wealth between the taxpayers and savvy financial investors who are able to exploit the cheap financing and taxpayer guarantee of the assets they buy.

I would much prefer a much more straightforward approach as follows. First, Treasury goes in and audits the banks' books and once and for all determines the amount of write down that still needs to occur in the balance sheets. This would quantify the amount of equity capital needed to recapitalize the banks. Then, we hold a rights offering to current bank stockholders to recapitalize their bank. I use the word "their bank" because they are the owners. To the extent the current owners refuse to provide the equity capital required in order to maintain their pro-rata ownership, the equity would be offered to the rest of the private sector including private equity firms, and to the extent that still fails to attract the requisite equity capital, Treasury would backstop the remainder.

To those who say that this might lead to the nationalization of some of our banks, I say, "so be it". If the banks are so worthless that they can't attract private capital, then they deserve to be nationalized at least for a period of time. This plan though would do what we need to do in a much more straightforward way to recapitalize our banks, encouraging private capital to come in and without risk of a massive transfer of wealth from the taxpayer.

Stock position: None.

Comments

[TTurk:]

I agree with your comment that a valuation of the assets, liabilities and equity fo the banks needs to be performed. But I doubt seriously anyone in the Fed or Treasury is capable. The CDO's represent 1000's of individual financial instruments that are in no way homogeneous. No 2 CDO's are alike. To make matters worse the valuation today is meaningless since foreclosures and real estate values will continue to worsen for at least the next 12 months. How do you factor in those potential losses today?

Then it is save to assume that probably 10 of the top 15 banks in America will have negative equity. Now what do you do? The only prudent thing to do, is take for the FDIC to take the bank over, remove the impaired assets, separate the commercial side of the business from the investment banking side of the business and then sell the two businesses. Is there enough private capital in the market willing to buy clean financial companies? Then the problem that remains is will the proceeds from the sale of the business be anywhere near the potential losses the goverment will face on the impaired assets they keep.

And where does it end. How many failed banks can the government process without injecting total fear into board rooms of every financial institution and their investors.

Feb 11 06:37 AM

[mikeg3:]

The alternative is to suspend the mark-to-fire-sale-mark... rule and treat the underlying loans as loans. On a present value basis, with reserves taken, the big banks are OK. Most borrowers do not default, even on upside down mortgages, unless they lose their jobs. We just need to wait for a job recovery and the banks will recover.

Feb 11 06:45 AM

[Fredrik:]

mikeg3
what you write here is why we are not progressing
you are promoting a world away from marking assets to market
we know now very well what the world you are promoting is like - frozen credit markets and global trade leading to mass redundancies and economic depression, the banks are essential to greasing the cogs of the economy and the lack of marking losses leads to immense distrust
you cannot just 'hide' the losses (like volcker did) and hope that economy will recover because the credit losses is the reason why we are here (unlike volcker)!! hence we will NOT recover until they are recognised and disclosed, the more people we have like you and seemingly the folks in DC who hope the problem will just go away the longer and more damaging this will be... so i've just explained the significant downside in not marking to market - where is the upside in what you advocate ??


On Feb 11 06:45 AM mikeg3 wrote:

> The alternative is to suspend the mark-to-fire-sale-mark... rule
> and treat the underlying loans as loans. On a present value basis,
> with reserves taken, the big banks are OK. Most borrowers do not
> default, even on upside down mortgages, unless they lose their jobs.
> We just need to wait for a job recovery and the banks will recover.

Feb 11 07:51 AM

[cash:]

Just let the weak banks die. New stronger ones without all messy baggage will replace them. Sure, the investors in these banks will take a bath & that includes me as I own S&P 500 in 401-K and such. But we will at least not reward crooked mortgage peddlers with tax payer money.

Feb 11 08:08 AM

[scfranklin94:]

Easy to say "let the weak banks die", that would mean Citi, BofA, Wells Fargo, Chase, basically all the major banks in the US. The gov't needs to take them over, wipe out the shareholders (politically unpopular), clean up the bad debt and resell them to private capital after a period of a few years. Easier said than done, but it should be done. The alternative is what we have now, banks on extended life support that no other instituition fully trusts.

Feb 11 10:21 AM

[monday1929:]

Boy, it's been a long fire, hasn't it? In case the free marketeers forgot, the "Market" is King, remember? The Banks are TOAST- the ones that sponsor golf matches, that is. The non-criminal smaller banks can perhaps scoop up the wreckage left in the money center banks wake. The Banks have assured that "jobs recovery" you wait for is a long ways off.


On Feb 11 06:45 AM mikeg3 wrote:

> The alternative is to suspend the mark-to-fire-sale-mark... rule
> and treat the underlying loans as loans. On a present value basis,
> with reserves taken, the big banks are OK. Most borrowers do not
> default, even on upside down mortgages, unless they lose their jobs.
> We just need to wait for a job recovery and the banks will recover.

Feb 11 11:47 AM

[Zyx007:]

Completely agree with this analysis and recommendations. This socialistic model of capitalism which distrubutes all the downside to taxpayers needs to perish, and if the banks are nationalized and the equity/preferred holders wiped out, then so be it.

Feb 12 08:58 AM