Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Geithner: A Man, a Plan, a Ditch


Treasury secretary now at mercy of Congress.

I wanted Secretary Geithner to succeed yesterday. I really did. But as soon as Senator Dodd stepped up to the podium to introduce the Treasury Secretary, I knew we were in trouble. Real Cabinet members don't need introductions.

Not that Mr. Geithner doesn't deserve the position; by all accounts, he's well qualified. But when a member of the executive branch has to be introduced by a member of the legislative branch, the message is clear: It won't be a "comprehensive" plan; it will be a "compromised" plan. And unfortunately, that's what was delivered - at least for the parts that mattered to me.

But what was delivered was a clear message: Liquidity problems, we know how to solve. However, bank-capital problems are still too icky to touch.

On the former, the expansion of the TALF to include more SBA loans, CMBS and likely non-Agency RMBS was easy - and largely already in place thanks to the Federal Reserve's TALF announcement last Friday. (And thanks to the Fed's unfettered SIV-like balance sheet, I have no doubt that new asset-backed securities will be purchased by the truckload. And, if I read the tea leaves, so too will 10-year Treasuries - at least until we get mortgage rates down to somewhere between 4 and 4.5%.)

But where the plan fell into the ditch was on issues directly linked to capital - how, to whom, and at what price do banks offload "toxic" assets. And how much, in whose opinion, under what time frame, and in what form will additional capital be required by the nation's largest banks.

On these 2 interrelated issues, Secretary Geithner appeared to completely punt, suggesting that the Treasury was still working on the first and that the second would be a function of a still-to-be-determined "stress-testing" process - although the conversion price on the latter would be fixed at a modest discount to Monday's stock price.

On the toxic-asset transfer process, I have no opinion - other than that it's far easier to remove cancerous organs from a dead body than a live one. And in that regard, I expect that the debate on these transfers will go on and on and on until Congress is prepared to use the process as a means to put additional capital into banks - not to take capital out. Short of that, I'm afraid that, like every other banking crisis, we'll have to wait until the body is cold to truly deal with the disease.

On the Capital Assistance Plan, I think I've been clear all along. Common equity is what is lacking at most banks. Mandatorily, convertible stock is closer to the pin than layering on more straight preferred - but it isn't a foundation.

And suggesting that these new shares may not convert feels awfully disingenuous. If the stress test suggests they're needed, aren't they really needed - and now? And judging by the stock performance of various US money center and regional banks yesterday, I think we know the answer (and for some banks not on the initial exam list, too).

But my greatest concern from yesterday's speech is that Secretary Geithner, by placing the plan squarely in the ditch, is now completely at the mercy of Congress to pull it back out and onto the road. And at a time of dramatically rising unemployment, I can't imagine there are too many members in Congress who are eager to tell their constituents that we need to put yet another $200 billion (more likely $400 billion) of capital into the banks. But that's what's necessary - more real gut-wrenching common equity.

Or keep shrinking the banks. And judging from the questions being hurled at our top bank CEOs this morning, I don't sense that Congress wants that choice, either.

But it's a 0-sum game. And maybe that should have been the message delivered yesterday.
< Previous
  • 1
Next >
Position in SPY
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos