Questioning Geithner's NYT Op-Ed

Do you believe Secretary of Treasury Tim Geithner's explanation of what the Obama administration is trying to do with its stress tests of the nation's 19 largest banks?

He explains his attempts to save the financial system in this NY Times op-ed.

Questions:

1. Is it a good assumption that businesses and consumers will want to borrow if the recession worsens?
2. Is it a good assumption that if the recession worsens, businesses and consumers will be credit worthy and the kind of borrowers banks would want to lend to under any economic conditions?
3. Why should we believe that Obama is trying to ensure the ability of banks to lend rather than that he is trying to ensure that he will have the power to tell banks how and when to lend and to which of his political favorites they should lend to?
4. How can the dozens of supervisors who analyzed the banks' stress tests be expected to uniformly evaluate the banks?
5. Why should investors, bankers or anyone else think that the stress test results haven't been skewed to punish bankers who have been outspoken about the problems they have with TARP, Paulson, Geithner and Obama?
6. Given Obama's glee in demonizing bankers and Wall Street, why should we think that the administration is being fair and objective in evaluating banks and their stress tests?
7. How good are the economic assumptions, scenarios and forecasts that the regulators are using, given that most economists and market analysts say they have little idea about how the economy or markets will perform over the next three, six and 24 months?

Call me disbelieving. I don't have much confidence in either the bankers or regulators, and I'm very concerned about Obama's assumption of the role of banking CEO.

Disclosure: I have a covered call trade on U.S. Bancorp (USB)

Comments

[Tom Armistead:]

Geithner's approach to issues of bank solvency needs to be understood in the context of pro-cyclicality - the tendency of bank regulations to exacerbate or reinforce business cycles, rather than moderate them.

A defect of the current regulatory regime, publicly noted on multiple occasions by Ben Bernanke, is that it is pro-cyclical. The proper time to require banks to hold more capital is when the economy is booming and risk seems far away. That was not done. To require additional capital when the banks are already under pressure is bad timing and runs the risk of exacerbating the financial downturn.

Inheriting a very bad lie, Geithner has done the best he can: providing government capital to banks shut off from access to private capital, creating an environment where banking is profitable going forward, playing for time to permit earnings to rebuild capital, squeezing the cards on capital requirements.

The questions raised in this article are valid: however, most of them relate to human nature asserting itself at the intersection of the regulatory and political arenas. Answers will involve political acitvism by informed investors.

May 07 06:39 AM

[Alan von Al...:]

I disagree. Geithner is pumping up the market. Goldman Sachs makes money on the way up, and on the way down again. All they need is a trend. FASB mark-to-market would have been diagnostic, indicating what policy was needed. What we got instead was phony stress test cartoons to make Paulson/Bernanke sugar pills look like strong medicine.

May 07 08:03 AM

[The Aft Deck:]

A test not designed for anyone to fail, result over $60b in additional funds needed, no one failed. Seriously how is anyone taking some confidence from this?

May 07 09:30 AM

[MarkitWacha:]

'the use of debt is one of the great economic achievements in recent history'.

ok, where have YOU been? Debt was fixed at 8.33% for a hundred years during the Roman Empire.

Come on, Cetin, you can write better opinions than this.

To the author: If the ROI of a project is positive, it should be started. I don't care if we have a zooillion dollar deficit or no deficit, that rule prevails. The problem in Washington is that large concentrations of control lead to corruption in politics. This is part of a cycle that ends with Tea Parties (or German hordes in Rome). We may be dangerously close to watching the end stages of democracy in this country.

Also, Congressmen don't have the guts to put a price tag on people's lives publicly so that the value and ROI of social programs can be determined using dollars and cents.



On May 07 12:21 PM Cetin Hakimoglu wrote:

> The answer is yes. Paradoxically the economy thrives on deficit spending
> provided it is used to fund growth initiatives. The use of debt is
> one of the great economic achievements in recent history. Obviously,
> if consumers stop spending and banks stop taking risks by providing
> loans the economy will falter, even if there is the risk of defaulting.
>
>
> ----------------------...
> # Is it a good assumption that businesses and consumers will want
> to borrow if the recession worsens?
> # Is it a good assumption that if the recession worsens, businesses
> and consumers will be credit worthy and the kind of borrowers banks
> would want to lend to under any economic conditions?

May 08 01:33 AM