Geithner's Interview with Charlie Rose: Totally Unimpressive

by: Tom Brown

I just read the transcript of Tim Geithner’s Tuesday-night interview with Charlie Rose. Color me unimpressed. From what I can tell, Geithner is in over his head, and is not providing the president with enough independent thought. For that matter, he doesn’t seem to understand the nature of the economic problems the country is facing. Here’s a sample of what Geithner had to say, and my reaction:

Geithner: “The system now is burdened by a bunch of loans that probably should not have been made. These banks can’t sell those loans. They’re sort of sitting on the balance sheet of the system and they’re causing a lot of uncertainty and concern whether these institutions will be strong enough to be able to lend in the event we face a deeper recession.”

TKB: When you read something like this, it’s hard not to worry Geithner doesn’t understand how the banking business works. Here are the basics: Banks make loans and, most of the time, the borrowers pays the loans back. But there are times when a borrower doesn’t have sufficient cash flow; in that case, the bank works with the borrower to try to minimize the loss. Geithner can’t be surprised now that borrowers occasionally become delinquent and default--particularly when he and his boss keep calling this the greatest economic crisis since the Depression.

In particular, Geithner ought to know better than to say that banks’ bad loans are “sort of sitting” on their books. Banks usually work with troubled borrowers; they don’t typically dump their loans at distressed prices after defaults. Well-run banks manage bad their credits; they don’t reflexively wash their hands of them.

Most worrying is Geithner’s comment that banks need to be “strong enough to be able to lend in the event we face a deeper recession.” Mr. Secretary, if the economy faces a deeper recession, the last thing you want to do is encourage aggressive bank lending. That’s the sort of thing that gout us into this problem in the first place.

Geithner: “To get through this and try to resolve that uncertainty and restore basic confidence, you have to stand by doing a careful assessment of how large those losses may be as we go forward.”

TKB: Given Geithner’s lack of understanding of how banking works, I worry that that he’ll give too much credence to the results of the stress tests Treasury is now conducting. By necessity, those test are overly broad, and rely on too many hypothetical inputs. My advice to the Secretary: weigh the current data much more heavily than highly subjective future loss assumptions.

Geithner: [Discussing TALF] “ We want to use a market mechanism that leaves the taxpayer with less risk and better benefit in trying to fix the system so we get credit flowing again.”

TKB: I don’t know why the administration is so torn between coming up with a plan to “get the credit flowing again” and making sure the taxpayers gets an adequate return on their investment. If fixing the banking system is as important as Geithner and Obama say, they should stop worrying so much about minimizing risk to the taxpayer. The administration sure didn’t seem this concerned about not wasting taxpayer money when it was lobbying for its stimulus plan.

Geithner: “We’re going to try to make it compelling for [banks] to clean up their balance sheets and put themselves in the position where it’s going to be easier for them in the future to raise private capital.”

TKB: News flash! Private capital is not going to rush to invest in banking companies that do dumb things--such as sell their assets for a fraction of what they are worth. Which, as regards banks’ toxic assets now, is exactly what the government seems to want banks to do. That makes no sense. If Geithner wants to know what banks should be doing with their bad assets, he should talk to President Obama’s pal, Warren Buffett.

As to the return expectations of asset buyers, meanwhile, let’s just say they’re aggressive. Yesterday I was at a full-day seminar on the current and future conditions of U.S. banking. One of the presenters was a distressed-debt buyer who gave the usual harangue about banks not being willing to sell at the true market. He said his firm has analyzed over $100 billion of debt so far, but has been able to buy only a little over $1 billion worth, since selling banks won’t “get real.” When someone asked him what assumptions his firm makes in valuing the paper, he said they assume no leverage and a terrible future economic environment--and have a cash-on-cash hurdle rate of . . . 30% to 40%.

Are you kidding me? What bank would sell at such a ridiculous price if it didn’t have to?

Geithner’s perception of banks’ toxic assets reflects the bearish conventional wisdom. But that view is not supported by the economics; Geithner ought to know better.

Geithner: “When we get through this, we want to put in place a set of more conservative, better-designed constraints on leverage through capital requirements, so that a mess like this never happens again.”

TKB: Earth to Tim: You simply can’t raise capital requirements high enough to prevent individual institutions from failing. The capital requirements of U.S. banks can’t be completely out of line with those of non-U.S. banks. I just don’t see a Tier 1 capital ratio being raised by more than 2 percent points around the globe, and even that level would not be a cure-all.

Geithner: “Most private forecasts, particularly administration forecasts, show recovery starting in the second half of this year”.

TKB: Is the economy in the tank or isn't it? If recovery is really just a few months away as Geithner says, let's be careful not to overreact to the Treasury's "stress case" estimates of minus-3.3% GDP growth in 2009, and then just negligible growth in 2010. It would make no sense, in particular, to forcibly dilute current common shareholders based on an economic forecast the administration believes is highly unlikely. Nor would such a move help attract the private capital the administration says it's so eager to have flow into the banking business.

Geithner: “I spent almost every day from the first time I walked into the New York Fed about five years ago working with my colleague on ways to try to make the system stronger. Our system was not designed to sustain a shock, a crisis of this magnitude. It’s the tragic failure of financial regulations in this country.”

TKB: Let me see if I have this straight. Tim Geithner says that, as president of the New York Fed, he spent every day for five years trying to strengthen the financial system. Yet when the recession finally arrived, it wreaked the havoc that it did because the regulation of the system, which Geithner himself was one of the key people in charge of, wasn’t up to the task. Where did Obama come up with this guy?

Geithner: “This is not about ability; it’s about will. And it’s about the will of government to do what’s necessary to act to fix this. And I’m confident that the president of this country will have the will to do that, and if you look again at the experience of the other crises from history, the crises become deeper and longer-lasting because of failure of government to act effectively”

TKB: Please! It’s all about “will”? So I guess Japanese government officials in the 1990s lacked the necessary “will” to pull the country out of its decade-long slowdown? So simple! Geithner seems to think only government programs can fix the economy’s problems and that there’s nothing to be contributed by the private sector. That’s way too simpleminded.

I was leery of the new Treasury Secretary before I read the Charlie Rose interview. Now I’m downright worried. Put aside whether Geithner’s Treasury Department can come up with the right solutions; Geithner doesn’t even seem to understand the nature of the problem. For an administration trying to deal with as deep an economic crisis as this one—and trying to a whole lot of other things as well--that’s not an encouraging sign.