Sometimes it just pays to say nothing at all. Secretary Geithner’s comments in front of Congress and in his department’s most recent press release in regards to their Financial Stability Plan show that the Treasury Department under Geithner has absolutely no business communicating with the financial community unless they are absolutely prepared to do so.
In using a term like “stress test” and in failing to outline detailed steps that will be taken by the government to remedy the current crisis, Geithner leaves us wondering how he got such high marks as the President of the New York Fed. It is readily apparent that the markets need something big, in terms of government intervention, to get the credit market and the economy moving again. While the sheer size of the government’s program seems to fit the bill its effectiveness is far from certain.
When I first heard Secretary Geithner use the term “stress test” in reference to the need to thoroughly inspect the country’s largest banks in order to ensure their ability to lend, I assumed that the Obama administration had won out over the Treasury Department’s more market oriented philosophy. Fortunately, that appears to not have been the case, nevertheless, when someone uses the term “stress test” one can only assume that it will have significant consequences for our country’s banks. These consequences are surely closely related to nationalization and a general bleeding out of the poorly performing banks from our financial system.
While nationalization would be a quick yet painful solution, a very public examination of the banks by federal regulators would almost certainly be a long affair that would allow the markets to continue down their current path of destruction. The government already has capital ratio requirements and regulations that force banks to describe the composition of their assets, these data points and ones similar to them, should be enough for the government and the markets to judge a bank on its viability.
While the TALF program is certainly a bold action, the majority of the Treasury Department's resources should be devoted to restoring confidence in the banks. Once confidence is restored in the banks, the American people can surely begin to have renewed confidence in the American financial system, helping to power the economy forward. Below I will outline several of the steps and programs that I believe the Treasury Department should initiate during TARP II.
- Mandatory Capital Injections: To be “well-capitalized” banks must have tier 1 capital ratios of over 6%. In conversations with banks, the Federal Reserve and the FIDC have been trying to get banks to boost their capital ratios to over 8%. In order to restore confidence, the Treasury and the federal government should mandate that all banks with capital ratios of between 6-8% receive government investments. Banks with tier 1 capital ratios above 8% should receive incredibly attractive investments from the government to acquire banks with capital ratios below 6% and the weakest of the "well-capitalized" banks.
- Convertible Debt: As suggested by some, the Treasury Department should enter into convertible debt agreements with the nation's largest banks. These investments by the government should provide for the government's debt interest to be converted to equity to ensure that the respective bank’s tier 1 capital ratio remains above 8%.
- A New Resolution Trust Corporation [RTC]: Allow a new RTC to function like an old one but instead of taking over the assets of failed institutions, regulators should have it use the Federal Reserves balance sheet to purchase troubled assets currently held by viable banks. A return of the equity partnerships and multiple investor funds will help to bring private capital back into the credit market. Such an institution would supplement the expanded TALF program wonderfully.
- A National Moratorium on Foreclosures on Single Family Homes: This would be a bold and hope filled action, something that the Obama administration would be all too eager to go for, such an action would help to assure the American people that they have a little breathing room in case something goes wrong in their own lives. Such a plan would only be temporary but would hopefully get the American people spending again, helping to push the economy forward. While such a proposal is risky, the government could make it attractive for banks to delay foreclosures. It should be noted that investment, commercial and industrial foreclosures would still be allowed to go forward and that any national moratorium on residential foreclosures would only be temporary.
These are desperate times in America and it is time for a decisive and well thought out plan by the Obama Administration and Geithner’s Treasury Department to help prop up a failing American economy. With unemployment accelerating there is not much time for the government to act as the nation's banks are dangerously exposed to increasing unemployment rates. We need an effective stimulus, a supportive regulatory authority for the financial markets, a significant amount of government capital and a return of public confidence in the American economy. All of these are possible but we need leadership, something that has been surprisingly lacking in Washington over the last several weeks.
For Further Review: