So what really happened Wednesday? Leave out the Obama tax plan, that’s a separate subject. Aside from that, the Treasury rolled out its plan for capital assistance to banks as well as some details on their stress test. And for the second straight day, Bernanke was saying over and over that they are not going to nationalize any of the large banks.
I think it’s time to take them at their word.
The administration is going to do what politicians always do — act incrementally. Revolutionary impulses are not part of their DNA. In fact they are positively allergic to anything other than incrementalism. Now it’s all about setting expectations, erecting defenses, and hope.
I’m sure that Ben Bernanke has ordered the word “nationalization” redacted from every dictionary at the Fed, so tired must he be from answering the same question over and over. He should have taped his stock reply to the question about nationalizing the banks and simply hit the play button every time a member of Congress asked him about it the past two days. I think that the message should be clear: No way, no how, never.
The Treasury published some details Wednesday about the stress test (see previous post). That’s about all we will see in writing, as the results are going to be kept under lock and key. We won’t be told if any of the banks examined are insolvent. So, what’s the point?
Call it the Madoff defense. The one thing they fear is one of these banks really turning turtle on them and getting hauled before the Congressional inquisitors to be pilloried. With a stress test in hand the Treasury can claim to have exercised all necessary due diligence. If the worst happens, you blame the bank for not coming clean during the examination.
Let’s face it, the idea that in a short period of time undermanned bank examiners who probably don’t have the requisite expertise are going to be able to conduct any sort of meaningful bank review is a pipe dream.
As for the Capital Assistance Plan, well, so what? All it seems to do is set out the rules of further federal assistance and let the banks know they have a commitment from the government to shore up their capital if needed. Supposedly if you score badly on the stress test you have the option of getting the capital you need from the government under this program. But it appears as if the government is not going to pass out any failing grades. Just below par and if that happens this is their version of a do-over. No nationalization, rather an assurance that ”we’ve got your back”.
So now we have just about all of the parts of the plan that Geithner couldn’t disclose. In case you forget the others, here is how it’s all coming together.
The Capital Assistance Program is a core element of the Financial Stability Plan announced on February 10, 2009. Additional components of the plan include: a Consumer Business Lending Initiative to unfreeze secondary credit markets, a Public Private Investment Fund to raise private capital to purchase legacy assets, and a Homeowner Affordability and Stability Plan to restructure or refinance mortgages to help as many as 7-9 million families stay in their homes.
All that’s left is this public private investment fund. I suppose we will see that presently and it won’t be any bolder than the rest of this. The only thing that the administration fears more than actually taking over a big bank is getting in the middle of valuing the assets. Any investment fund that actually does materialize isn’t going to even make a dent in the problem.
Obama and his team are buying time and hoping. They know they can nurse these dinosaurs along for probably an indefinite amount of time and that the rewards of any action other than muddling through don’t justify the political risks. It’s a timeless solution. Announce studies, pledge the resources of the government and hope things work out.
As a last thought, you might want to think about buying some bank stocks. These guys aren’t going to go away and the deepest pockets in the world are ready to see them through.