Tim Geithner's Monumental Plan Is Not Encouraging

If Treasury Secretary Geithner’s plan to shore up the financial system isn’t as bad as the market’s reaction to it Wednesday implied—the BKX was off 14%—it’s only because the plan is so short on details, no one can be quite sure what exactly what the White House has in mind. Three weeks into office, and these people have already mastered the art of sending the financial markets into a nosedive--and during the worst financial crisis in memory, at that. How encouraging.

There’s so much wrong about Geithner’s presentation and the “details” of the plan he outlined, it would take days to cover. The administration hoped, I assume, to start the process of bolstering investor confidence and set the stage to attract new private capital into the banking system. In fact, it achieved the opposite.

Let’s start with the tone of Geithner’s presentation. It was as agitated and panic-stricken as every other recent White House pronouncement on the economy: “As costly as this effort may be,” Geithner said, “we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation.”

A possible “complete collapse of our financial system”? Helpful! Why is it that the Obama people feel compelled to describe the current economic situation in the absolute darkest possible terms, and predict the direst possible outcomes if their proposals aren’t enacted? The financial system, I shouldn’t have to remind anyone, depends at its core on trust and confidence. These people are supposed to be trying to save the financial system. The last thing they should be doing—the last thing—is running down trust and confidence.

Second, when President Obama was campaigning, he insisted he had a plan to strengthen the financial system and help homeowners facing foreclosure. He won the election. But now it’s clear he had no plan at all! Rather, three weeks in office, his Treasury Secretary lays out a “plan” that basically consists of “we are working on a plan.”

Where are the details? Certainly not in Geithner’s speech, nor in the accompanying six and a half pages of supporting “facts” provided by the Treasury. Voters and investors might want to know, for instance, the specifics of how the public/private investment fund will work. Geithner’s answer: We’ll get back to you. How is the $50 billion to $100 billion to help stop foreclosures (a favorite Obama campaign promise) going to work? We’ll get back to you. Have these people spent no time thinking about the problem? It’s not as if Barack Obama doesn’t have an abundance of political capital to spend to fix the problem.

The Administration keeps insisting that if its plan isn’t implemented, the result will be “incalculable”—then it turns out the administration basically doesn’t have a plan.

Perhaps most emblematic of the emptiness of the administration’s ideas is this notion of a “stress test” that the government is purportedly to apply to the big banks. “We’re going to require banking institutions go through a carefully designed, comprehensive stress test,” Geithner said Wednesday. ”We want their balance sheets cleaner and strong... To do this, we are going to bring together the government agencies with authority over our nation’s banks and initiate a more consistent, realistic, and forward-looking assessment about the risk or balance sheets.”

Why is this a dumb idea? First, it will be administered by the very same regulators who allowed the current crisis to happen in the first place. Second, it will, by its nature, be so broad that it won’t take into account meaningful differences among institutions. Different banks have different kinds of asset types, for instance, and underwriting expertise, and experience in general. They are located in various parts of the country—or throughout the country. They fund themselves in various ways. All these differences are meaningful, and have a big effect on bank’s risk parameters. But the Geithner stress test would take into account none of them.

If the Obama administration really thinks a 40,000-foot stress test is the best way to evaluate a bank’s risk, then why didn’t it simultaneously announce that it would fire all the examiners currently employed by the OCC, the FDIC and the Fed? Who needs them? Who needs an individual’s judgment and experience, applied following a detailed examination of a bank’s books and records and consideration of any unique circumstances it might have? Forget it. Better a one-size-fits-all Risk-o-Meter™, and hope for the best.

President Obama, meanwhile, seems bent on running down the very same industry his administration supposedly wants to attract to private investment to. He might somehow feel better insisting on pay caps at the banks, and forcing them to cut dividends, and banning share buybacks. But how do you suppose possible private sector investors view moves like that? What kind of partner will this government be, they must be wondering, in any kind of “public-private partnerships” that are conjured up?

Then there is his second-guessing of the banks’ accounting. In Florida this week, the president said, “Essentially what you’ve got are a set of banks that have not been as transparent as we need to be in terms of what their books look like.” What is that supposed to mean? Apparently, our new president knows how to apply GAAP better than our leading public accounting firms, or believes the Big Four are complicit in helping the banks cook their books. If that’s the case, let’s get Attorney General Eric Holder to investigate them and bring charges.

As I said at the beginning, the market yesterday overreacted to Geithner’s terrible, confidence-sapping presentation. It’s hard to believe the press reports that this plan reflects a “win” for Geithner over political strategist David Axelrod. If that’s so (and I believe it is) the country has a very weak Treasury Secretary, just at a time when we need a strong one.

In the end, all the Geithner plan amounts to is some overheated, misguided rhetoric, and some big white spaces. Sure, the market overreacted—but it certainly had no reason to be inspired.

Comments

[User 356373:]

To Tom Brown:

I am sorry but you are really too stupd and idealogical. You say "the financial system depends on financial and trust". Well, it is not a rocket science to know or even guess that. But what you dont get it that one can NOT, literally, trust the wall street and the financial system because of their self interest. You speak as if these financial systems care for you or me. The best example to make it easier for you to see it that the reason why banks do not lend money to other banks is very simple. And that is because, a theft/burglar would not lend money to other theft/burglar since they know each other that both of them are thefts. And they know exactly how both they operate, on what principles and values....GOT it know??.

So, before you simplify the financial system with two words "confidence" and "trust", you need to solve many other much more important and serious problems.

Feb 13 08:32 AM

[pacman1947:]

Tom,
If Geithner and Co. were a contractor, as most of the government's talented brainpower is hired, it would be fired for the incompetence and sheer raw hubris of making claims that have no foundation. The underlying cause of the collapse is greed. It is uncontrolled investment by unregulated hedge funds with no transparency. It is far worse than any of the causes dished out by talking heads in our controlled media. Giving money to the CEOs to fix these problems is a horribly spiced conceptual meatball in a conceptual plate of spaghetti. Tom, you have just begun to see the truth of the matter. Our government is in the hands of blind men walking over a cliff. Restoring confidence in objective observers may become an impossible task. You are correct, my friend.

Feb 13 09:16 AM

[waf76:]

They are invoking economic fear tactics just like Bush invoked terrorism fear tactics. Get the American people herded like a bunch of cattle. Have us expecting the worst so when they fail they can say that it would've been worse but there's no way to measure their actions. Geitner can't even take care of his own taxes. He has the same ideas as Paulson. There's nothing new here.

Feb 13 02:15 PM

[Stone Fox C...:]

its funny how everybody thought Obama was going to be a great leader and instead we're finding out he is just a great campaigner. He of course wants to blame this current economy on Bush, but his negative remarks are going to bite him in the end. He needs to lead this country, but at this point all hes doing is dividing everybody. What a waste! Sure hope he wakes up before its too late.

Feb 13 03:43 PM

[rm:]

[Why is it that the Obama people feel compelled to describe the current economic situation in the absolute darkest possible terms]

They're managing expectations. The more dire the characterization of the situation, the easier it is to excuse themselves when their plan fails.

Any change to their proposals, no matter how small, gives them an "out."

Feb 14 07:58 AM

[rdr4:]

Obama-nation!

Feb 14 09:27 AM

[toobad41:]

The government allowed financial institutions to get into this crises and now they will attempt to get us out. With a $516 Trillion credit bubble how do they think $1 Trillion will help? Give me a break.

Feb 14 09:28 AM

[merv.:]

1950`s when kids in the neighborhood chose up sides for a game everyone knew eachothers talent it didn`t matter if you really liked him. I, wanted to win. obama can`t pick a good team. example- hillary is going to give the north koreans aid- this is an example of what happens when they elected a president who is a orator and not a leader.

Feb 14 05:46 PM

[a. palmer jr.:]

I realized we were in trouble when Obama started choosing his "team" from the same old bunch of Washington insiders. How does he expect change from the ones that were there when the trouble started? I understand that Obama is an educated man but he should have been told that change means something different.

Feb 15 01:06 AM