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Where All the TARP Money Went
Tweet Share on Facebook February 12, 2009 Comment (4)Ed Yardeni tell us:
Yesterday’s interrogation of the eight bank CEOs by the 71 inmates of the House Financial Services Committee was surreal. The politicians all demanded to know what happened to the $350bn of the first installment of TARP. Few seem to understand that it was given to the banks to fill in the holes in their capital accounts caused by ballooning mark-to-market losses and mounting bad loans. They couldn’t understand why the banks hadn’t lent out $350bn to borrowers. They should be asking why hasn’t that huge sum of money been sufficient to shore up the banking system.
Me: What's more, the Geithner "stress test" will only push banks to recognize more and more losses, requiring more and more taxpayer dough to buck them up.
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Why Obama and Geithner Won't Fully Nationalize the Banks
Tweet Share on Facebook February 12, 2009 Comment (1)David Goldman gives a pretty good explanation on why we shouldn't nationalize the banks:
America is different; as the President rightly said in his Nightline interview last night, the culture is different. America has a bare-knuckles political market in public goods. The moment you nationalize a Citicorp or a Bank of America, every Congressman will have an opinion as to where it should lend, preferably in his/her home district. And why did it close branches, and fire tellers? And why isn’t it sponsoring the local sports team? Trying to run nationalized banks on the American political model would be the stuff of a Preston Sturges comedy. ... Keeping the banks afloat under nominally private ownership also avoids vaporizing the $800 billion universe of bank capital hybrid securities, perhaps 40% of which are owned by insurers who look much tippier than the banks.
Me: Yet by not giving some regulatory relief in terms of suspending mark-to-market accounting rules, the White House is ensuring the banks remain wards of state. Power without responsibility, as Goldman rightfully notes.
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Summing Up Geithner
Tweet Share on Facebook February 11, 2009 Comment (2)The great Andy Busch of BMO Capital Markets sums it up as well as anyone: "The market dropped faster than Chris Brown's sponsors as we were clearly anticipating a detailed, comprehensive program. Why did we expect this, because Obama and Geithner told us they would deliver. Markets are all about expectations and anticipation. Geithner is absolutely correct to say this is a massive problem that will require time. He's also dead on to say the announced plan may not solve the issues right away and they may need more money later. But don't promise the world and deliver Haiti." Heh.
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Obama! Geithner! Banks! Bailout! Confusion!
Tweet Share on Facebook February 11, 2009 Comment (3)Did Tim Geithner freak out when he heard his president say the following during the Monday press conference: "And so tomorrow my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again.”
Maybe so since Geithner's "plan" sounded like he was trying to fake his way through an essay exam that he didn't study for. Superstrategist Ed Yardeni helpfully outlines what was not in the "plan":
(1) There is no well-defined mechanism for removing toxic assets from the banking system.
(2) There was no mention of ring fencing bad assets.
(3) There was no mention of backstopping bad assets with government guarantees.
(4) There is no well-defined “bad bank.” Instead, there is a Public-Private Investment Fund, whatever that means.
(5) Nothing was said about the mark-to-market problem, which is exacerbating the crisis.
(6) Nothing was said about providing 4% mortgages, or any other initiative to revive housing.
(7) Nothing was mentioned about the drop in home prices, which has been the cause célèbre of the financial meltdownMe: But other than that, it was pretty comprehensive. And forget about suspending mark-to-market accounting. Geithner's "strest test" would, in fact, push banks to recognize these losses in a nod to transparency. As economist Mike Feroli of JPMorgan Chase put it:
In an effort to prevent a large number of "zombie" banks from clogging up the financial system, regulators will encourage banks to value their assets at more "realistic" levels. Such aggressive regulatory action could leave significant capital holes in banks that are forced to mark down their assets.
And that will force either huge capital injections or some form of quasi-nationalization.
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Geithner: From Indispensable to Indecipherable
Tweet Share on Facebook February 10, 2009 Comment (18)Treasury Secretary Timothy Geithner has gone from being the Indispensable Man to Indecipherable Man. With global financial community watching closely, Geithner laid out a confusing rescue plan for the U.S. banking system that did little to stem the ongoing dissipation of investor confidence.
The reaction from Wall Street was withering. "The bottom line from the Geithner speech is that it was too general, and it lacked the specifics needed to it to be credible," opined economist Brian Bethune of IHS Global Insight. Like many, economist Robert Brusca was perplexed about the plan to purchase toxic mortgage assets through some sort of sketchy public-partnership: "It is still not clear how this will work and how much cushion public money will provide and if it will involve any guarantees. I do not begin to understand how this private/public plan will work. Moreover, Fannie Mae and Freddie Mac failed precisely because of their public-private identity crisis." Little wonder why stocks plunged and investors rushed to buy safe U.S. Treasuries.
Where was Geithner the Technocrat when you needed him? Because that is just what the markets need right now: a detailed, technocratic explanation of the way forward. This might have been the clincher as far as investors are concerned: "We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it." In other words, "We have have concrete and high detailed plan to develop a concrete and highly detailed plan. We'll get back to you."
Oh, and it would be nice if he could do all that without painting such an unremittingly bleak picture of the economy. But more important is to change the mark-to-market accounting rules that are needlessly driving the financial system into the ground. Former FDIC Chairman William Issac has told the Securities and Exchange Commission that every money center bank in the 1980s would have gone bust had they been forced to sharply write down the value Latin American debt: "If we had followed today's approach during the 1980s, we would have nationalized nearly all of the largest banks in this country and thousands of additional banks and thrifts would have failed. I have little doubt that the country would have gone from a serious recession into a depression." Sound familiar?
And along with that change, how about embracing the private sector as the surest path back to prosperity? Cut corporate taxes. Suspend capital gains taxes. Indeed, one reason why Geithner may have been so vague about the bank rescue plan is that ultimately the plan may entail such high government borrowing that announcing it now would have derailed the current $800 billion Obama stimulus plan. -
Toxic Assets Toxic to Geithner Bank Bailout Plan: Updated
Tweet Share on Facebook February 10, 2009 Comment (4)Update: (12:25 PM): Geithner calls this a "recession" not a "depression." {Pay attention to this, Brits.) Says things are still deteriorating but will by improving a year from now.
Update: (12:21 PM): Geither says he is for a strong dollar. Of course.
Update: 12:18 PM): Geithner gives the "I screwed up" answer on his tax troubles. Now Leisman asks about valuing the toxic assets. Geithner talks about there being "lots of different ideas out there." Leisman asks him to give an example of how this public privagte partnership would work. Geithner instead gives the broad outlines again. And then he talks about the rest of the program.
Update: (12:12 PM): Great, they are bringing in Steve Leisman after the break.
Update ( 12: 07 PM ): Brian Williams is the wrong guy to do this interview. He is not pinning him down on the toxic assets plan.
Update ( 12:03 PM ): Brian Williams is interviewing Geithner right now on CNBC. Right now all Geithner is giving him is talking points and telling him what "challenging and complicated problem it is." Yeah, we got that part.
Update (11:59 AM): This is the killer quote from Geithner's speech: "We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it." In other words, we have plan to have a plan. Ouch.
After listening to Treasury Secretary Timothy Geithner reveal the Obama bank bailout plan, I still have no idea what the government is going to do about pricing these so-called toxic assets. And that, my friends, is why I would guess the stock market is selling off.
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Is the Rise in the Baltic Dry Index a Fakeout?
Tweet Share on Facebook February 10, 2009 Comment (6)With all the gloomy global economic news, some folks have been taking some comfort in the sharp rise in the Baltic Dry Index, a commonly followed metric of global growth. Superstrategist Ed Yardeni warns against doing so:
The Baltic Dry Index plunged from a record high of 11,793 on May 20 to 663 on December 5. That’s awfully close to zero, which is rock bottom for this index. Maybe that’s why it is up 174% since then to 1815, which is still 85% below the peak.
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Obama, Stimulus and the 2010 Election
Tweet Share on Facebook February 10, 2009 Comment (5)Liberal economic analyst Robert Reich makes a point in his blog that I have been making in my blog for some time: The economy is unlikely to improve fast enough by the 2010 midterm elections to substantially improve voter sentiment. Even if the economy is growing, unemployment is likely to be sharply higher than what it is today. Indeed, Goldman Sachs just put out a research note that said its forecast of 9.5 percent unemployment in 2010 might be in the low side. And certainly the history of banking crises would indicate a slow recovery. (Add into that the the inexplicable White House policy choice of eschewing tax cuts despite their tremendous impact on the economy over the past 25 years.) The result could be a rerun of sorts of the 1994 midterm election where GOP took control of the House and Senate.GOPers might be able to make the argument that the Obamacrats wasted trillions of taxpayers dollars and two months of time.
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Bank Bailout: Axelrod vs. Geithner
Tweet Share on Facebook February 10, 2009 Comment (5)In today's NYT story on today's Geithner bank bailout plan, there was this interesting nugget:
In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials. ... He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.
Me: In other words, Alexrod and other political aides wanted to do the exact thing that economists fear would happen as Uncle Sam intervenes more and more into the financial sector. And this is why nationalizing banks is such a terrible idea. The efficient allocation of capital is the function of the banking system. And that certainly can't happen if decisions are being made for political reasons.
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CBO: Obama-Senate Stimulus Costs $838 Billion
Tweet Share on Facebook February 9, 2009 Comment (3)The Congressional Budget Office says the Senate version of the Obama stimulus package costs $838 bilion. Of that total, 74 percent come after the 2009 fiscal year. Failure to pass a bill, Obama says, could result in "catastrophe."
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