Do We Even Need the Geithner Bank Rescue Plan?

Maybe the banks just need to be left alone.

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Hey, I know the stock market loved hearing the details of the The Public-Private Investment Program.  Huge rally. But consider this:  1) Obama-Geithner want to get these so-called toxic securities off bank balance sheets so banks supposedly will lend more; 2)  the PPIP plan is predictated on banks agreeing to sell at some price to be determined by price discovery via subsidized private investment funds; 3) Many banks are not going to want to sell this so-called toxic assets which have cash flows and upside appreciation potential; 4) Regulators may  push them to sell and take huge writeoffs; 5) This will require further capital injections, maybe $1 trillion; 5) Congress and public opinion show little interest in another ginormous bailout. Indeed, Congress has zeroed out Obama's $250 billion placeholder in the upcoming budget.

Is there an alternative? How about this one from Larry Kudlow:

As net interest and profit margins rise while the yield-curve is upward-sloping, higher bank profits can be used to replenish capital. Meanwhile, government authorities can cease and desist — not only their punishment of private-equity shareholders, but also their clumsy attempts to control various bank operations (compensation, golf outings, means of transportation, etc.). Then, if bankers are so dumb they still can’t make money with zero borrowing costs, the FDIC should shutter them and sell them off piece by piece.

And some withering criticism of the Geithner Plan along the same line from economic analyst Ed Yardeni:

Do we even need the PPIP? Several of the big banks are reporting much better earnings during January and February. Won’t that be enough to make them want to lend again? Could it be that the problem has been solved in the traditional way, with the Fed lowering the federal funds rate well below lending rates? ... If FASB relaxes mark-to-market rules on April 2, won’t that make PPIP irrelevant? Banks have already taken large markdowns, and may now be able to mark up the values of their assets. In other words, their toxic assets won’t be so toxic. Their distressed assets won’t be so distressed. They won’t be under the gun to raise capital, or beg for more of it from the government. So they won’t be interested in selling these assets at the discounted prices that buyers are likely to bid even though their debts are non-recourse government-backed loans. It would be a real pity if the government forces the banks to sell their assets at distressed prices just because they fail Geithner’s gimmicky “stress test.” ... If you’ve downloaded the government’s various “white papers,” “term sheets,” and “FAQs” on their assorted financial rescue programs, you might have noticed that they appear unprofessional. (See link below.) They aren’t on official stationary of any sort. They look like rough drafts of talking points banged out late at night as Word documents after long and heated debates among government officials at the Treasury, Fed, White House, and FDIC. Could it be that no one is really in control of the process?


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