"The Geithner Asset Play".
The Geithner Asset Play
At least it's an attempt to clean up bank balance sheets.
The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to "partner" with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn't keep falling lest taxpayers lose big on their new loan guarantees.
Other than that, General, how was the siege of Moscow?
Markets nonetheless roared their approval yesterday, though also for the increase in existing home sales and for the Obama Administration's (belated) pushback against Congress's rage against bankers and private contracts. In simplest terms, Treasury is using loan guarantees and $100 billion in remaining TARP money to create a more liquid market for dodgy financial assets. These include those infamous mortgage securities, as well as various loans that may be nonperforming. The idea is to create new buyers for those assets, perhaps leading to higher prices than now exist in a illiquid market, and thus help banks gradually clean up their balance sheets.
This isn't the worst idea the federal government has ever had, and if it works it will help banks take their losses and burn down debt. A Resolution Trust Corp. would have been a simpler and more politically transparent way to do this, especially six months or a year ago. But this Administration and the entire bailout have already lost too much standing with the public to pull that off now. So in essence this is an attempt at a slow-motion bank workout without a fight over a new resolution agency or having to ask Congress for more money.
On the other hand, none of this will be easy to execute. Start with the problem of attracting private investors, who will have to accept Uncle Sam as a 50-50 business partner. Mr. Geithner says investors won't be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside -- especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.
Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying "I do solemnly swear . . ." Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.
Then there is the question of whether the banks will sell enough of those assets to make a difference. Mr. Geithner's bet is that the banks will judge that they are better off disposing of their bad assets, even if it means taking losses. With a cleaner balance sheet, they would then have an easier time raising more private capital and repaying their TARP money to Treasury more quickly. The stronger banks may well find this attractive, since they'd emerge faster from asset purgatory and get a competitive jump on the laggards.
The harder call is the weaker banks, such as Citigroup, which fear that taking big losses will weaken them further. Citigroup CEO Vikram Pandit has publicly said that he'd be violating his fiduciary duty to shareholders to take such losses when he thinks the market value of its assets is artificially low. Citi and Bank of America already have federal guarantees against tens of billions in future losses, so they have even less incentive than most to sell and write them down. Much will depend on how much Treasury can raise asset prices with this new liquidity play. Some banks -- some of them big -- will undoubtedly fail anyway.
Of course the largest risk, as always, is to the taxpayers. Don't be fooled because Treasury isn't going to Capitol Hill for more cash. The Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.
In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-1 to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses. Better hope the recovery really is, as the White House says, just around the corner.
Whatever the Geithner plan's pitfalls, we sincerely hope this works. The feds have so thoroughly botched the TARP execution and various bailouts that Treasury has few options left. No accounting change can make bank losses vanish, or inspire investors and short sellers to value bank assets at more than their market price. Yes, banks need to earn their way out of trouble, and many are doing that, but they also need to burn losses. Might as well get on with it.
At least it's an attempt to clean up bank balance sheets.
The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to "partner" with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn't keep falling lest taxpayers lose big on their new loan guarantees.
Other than that, General, how was the siege of Moscow?
Markets nonetheless roared their approval yesterday, though also for the increase in existing home sales and for the Obama Administration's (belated) pushback against Congress's rage against bankers and private contracts. In simplest terms, Treasury is using loan guarantees and $100 billion in remaining TARP money to create a more liquid market for dodgy financial assets. These include those infamous mortgage securities, as well as various loans that may be nonperforming. The idea is to create new buyers for those assets, perhaps leading to higher prices than now exist in a illiquid market, and thus help banks gradually clean up their balance sheets.
This isn't the worst idea the federal government has ever had, and if it works it will help banks take their losses and burn down debt. A Resolution Trust Corp. would have been a simpler and more politically transparent way to do this, especially six months or a year ago. But this Administration and the entire bailout have already lost too much standing with the public to pull that off now. So in essence this is an attempt at a slow-motion bank workout without a fight over a new resolution agency or having to ask Congress for more money.
On the other hand, none of this will be easy to execute. Start with the problem of attracting private investors, who will have to accept Uncle Sam as a 50-50 business partner. Mr. Geithner says investors won't be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside -- especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.
Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying "I do solemnly swear . . ." Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.
Then there is the question of whether the banks will sell enough of those assets to make a difference. Mr. Geithner's bet is that the banks will judge that they are better off disposing of their bad assets, even if it means taking losses. With a cleaner balance sheet, they would then have an easier time raising more private capital and repaying their TARP money to Treasury more quickly. The stronger banks may well find this attractive, since they'd emerge faster from asset purgatory and get a competitive jump on the laggards.
The harder call is the weaker banks, such as Citigroup, which fear that taking big losses will weaken them further. Citigroup CEO Vikram Pandit has publicly said that he'd be violating his fiduciary duty to shareholders to take such losses when he thinks the market value of its assets is artificially low. Citi and Bank of America already have federal guarantees against tens of billions in future losses, so they have even less incentive than most to sell and write them down. Much will depend on how much Treasury can raise asset prices with this new liquidity play. Some banks -- some of them big -- will undoubtedly fail anyway.
Of course the largest risk, as always, is to the taxpayers. Don't be fooled because Treasury isn't going to Capitol Hill for more cash. The Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.
In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-1 to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses. Better hope the recovery really is, as the White House says, just around the corner.
Whatever the Geithner plan's pitfalls, we sincerely hope this works. The feds have so thoroughly botched the TARP execution and various bailouts that Treasury has few options left. No accounting change can make bank losses vanish, or inspire investors and short sellers to value bank assets at more than their market price. Yes, banks need to earn their way out of trouble, and many are doing that, but they also need to burn losses. Might as well get on with it.
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posted by KYJurisDoctor at 1:22 PM
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