Financial markets remain choppy and distressed as markets apparently view Treasury Secretary Geithner’s rollout of the “Financial Stability Plan” as a disappointment. I certainly was underwhelmed by the plan and its lack of details. But what's new? It seems that many of the recent governmental interventions have been far from transparent. Familiar with the expression, “Clear as mud”. That about sums it up.
As it stands, the plan outlines six big steps.
1. Need a Stress Test?
The first is to “stress test” major banks, increase disclosure, and if needed inject more capital and encourage private investment. For me, despite my view that of some big banks deserve a lot of the blame for the mess we’re in, this idea falls in the “if I wasn’t laughing so hard, I would cry” category. These banks are already totally stressed out and struggling to stay afloat. Another round of major regulatory reviews and disclosure requirements may not be the best use of anybody’s time or money in the midst of this financial crisis.
2. Public-Private Investment Fund
Step 2 is to create a “Public-Private Investment Fund” to allow banks to sell troubled assets to others in the private sector. In my opinion, the misstep here is that the new plan wants the assets sold at market prices. Heck, the banks can do that already, but they think the bids are too low.
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3. The TALF
Step 3 is to have the Federal Reserve (the Fed) to fire up the Term Asset-Backed Securities Loan Facility (TALF), start buying consumer and business securitized loans, and then expand the program to commercial mortgage-backed securities and consider purchasing other assets as well. The plan calls for up to one trillion dollars in Fed lending. My concern here is that the size and flow of credit could become politicized. In any case, the Fed has been slow to get this program rolling.
4. Is it Transparent?
Step 4 is a “Transparency and Accountability Agenda” which goes after banks requiring assistance; limiting dividends, compensation, lobbying and other restrictions. Some of the restrictions make sense; others, despite my anger over some of these institutions’ behavior, seem draconian.
5. Foreclosure Help
Step 5 is to spend money helping folks avoid foreclosure and support housing. My heart is okay with this, but my head says it is not likely to be very successful. It is hard to help out homeowners that are in way over their heads. Sometimes it is just best to move on and live in something you can afford. I guess it is worth a try, but I also wish I wasn’t paying for it.
6. The Ma and Pa Shops
Finally there is a “small business and community lending initiative” that allows the Small Business Administration (SBA) to make more loans and increase their guarantees on loans. This program seems okay, but I worry about defaults.
As I said earlier, there are no details yet, and given the decidedly tepid response from the stock and bond markets, I suspect there may be some significant changes in the plan over coming weeks. We will just have to wait and see. I hope they go back and reconsider the model used to lift a lot of risk out of Citigroup and Bank of America late last year. That model was simple and uncomplicated. Although it seems to me that the government charged too high a price to guarantee the troubled assets, given those banks’ languishing stock prices, it would be pretty easy to change the two-page term sheet used in those transactions to fine-tune the outcomes.
A lot of big numbers are being thrown around in all these discussions, and it is easy to lose perspective. Bear in mind that while total U.S. debt outstanding was about $52 trillion at the end of Q3 2008, total financial assets, after substantial write-downs and losses, were about $146 trillion. And remember that there are still a lot of companies in good financial shape. As always, please call me with questions or concerns.