Page 1 of 2 Perhaps a cool hand By Julian Delasantellis
It wasn't the planet-killing asteroid from 1998's Armageddon that you
heard slamming into Earth with a deafening thud last week, but the consequences
of what it was may be just about as serious. It was but the latest attempt, the
Treasury Secretary Tim Geithner plan, to pull the US financial system out of
the deep hole it so aggressively and enthusiastically threw itself into during
the great credit boom early in this decade.
How bad was it? Well, as Wall Street secretary pretending to be investment
banker Tess McGill (Melanie Griffith), in 1988's Working Girl, observed
on her attempt to pitch a corporate buyout seemingly going badly, "They don't
exactly have bouncers at
these things, they're a little more subtle than that."
Geithner should be thankful for that as well. If not, he would have been
grabbed by his collar and thrown out into the gutter on Pennsylvania Avenue,
beneath the statue of Alexander Hamilton, his country's first Treasury
secretary, realizing that, on the basis of the tax problems and this dubious
financial system rescue plan that have essentially become the coming-out party
for the Treasury debutante, he has a long way to go to even match up to the
standards of Ogden Livingston Mills, Herbert Hoover's second Treasury
secretary, let alone the giants in the office such as Hamilton.
The basic complaint about the Geithner plan was that it was vague. At a time as
dire as this, the press, and, it turns out, the markets, with the Dow Jones
Industrial Average dropping over 350 points just as Geithner was speaking,
wanted something a bit more substantial than just the Treasury secretary
playing coy and batting his baby-blue eyes before the entire world.
On his "Conscience of a Liberal" blog, New York Times columnist and current
Nobel Prize in economics winner Paul Krugman was confused.
An old joke
from my younger days: What do you get when you cross a godfather with a
deconstructionist? Someone who makes you an offer you can't understand. I found
myself remembering that joke when trying to make sense of the Geithner
financial rescue plan. It's really not clear what the plan means; there's an
interpretation that makes it not too bad, but it's not clear if that's the
On his "Maverecon" blog on the Financial
Times, Willem Buiter's reaction to the Geithner plan was so bad, it was driving
him to drink.
Picking through the entrails of this multi-faceted,
surprisingly incomplete, seriously underfunded, occasionally well-designed but
mostly inadequate, counterproductive and unnecessarily moral-hazard-creating
set of proposals was just too depressing. I will wait till I am at my parents'
home this weekend, mollified and mellowed by my father's good claret, before I
review the Geithnerbharata.
On Portfolio.com's "market movers"
blog, Felix Salmon was similarly unimpressed. On
November 21, when Barack Obama announced that he was nominating Tim Geithner to
be his Treasury secretary, the Dow rose 494 points and broke through the 8,000
barrier. On February 10, when Geithner gave his first major speech as Treasury
secretary, the Dow fell 273 points and broke through the 8,000 barrier ... The
speech was surprising only in its vagueness. It's been over 11 weeks since
Obama's announcement, and this is the best that Geithner can come up with?
Geithner promises unprecedented levels of transparency for the new plan. So
far, all we have is talk. The markets will wait to actually see the details -
and, of course, will wait for Congressional approval of all this - before they
start believing. Having a transparent window is nice,
I suppose - assuming that there's something of value on the other side to look
at. Unlike those who saw the plan's vagueness and were willing to give Obama
and Geithner (probably more the former) the benefit of the doubt, on his "Naked
Capitalism" blog, Yves Smith was in no mood to offer it any measure of faith,
hope, charity, or any combination of the three.
I cannot recall a major
US policy initiative being met with as much immediate revulsion as the
so-called Geithner plan. Even the horrific TARP [Troubled Asset Relief
Program], which showed utter contempt for Congress and the American public was
in some ways less troubling. [Former Treasury secretary Henry] Paulson demanded
US$700 billion, nearly $200 billion bigger than the Department of Defense, via
a three-page draft bill, nothing more that a doodle on a napkin, save that it
did bother to put the Treasury secretary above the law ... And the TARP
initially did have some supporters (perhaps most important, among the media,
who trumpeted the "Something must be done" case). Fans are much harder to find
for the latest iteration of the seemingly never-ending "let's throw more money
at the banks" saga.
As we, and increasingly others, have said, the Obama economic team is every bit
as captive to Wall Street's interests as the Bushies were. The differences
increasingly look stylistic, not substantive. Treasury Secretary Geithner
presented today what in essence was a plan to come up with a plan. I now
understand why he is so loath to have government run banks. He presumably sees
himself as an elite bureaucrat, as his glittering resume attests. Yet the man
has a deadline to come up with a proposal, yet puts off presenting it twice
(the "oh he has to work on the stimulus bill" is as close to "the dog ate my
homework" as I have ever seen in adult life).
What he served up as an initiative is weeks to months, depending on the item,
away from being operational (if even then; the public-private asset purchase
program will either not see the light of day, or be far narrower and smaller
than what is needed) ... Yesterday, I got an e-mail from a political consultant
who got a report on the Senate Banking Committee briefing by the Treasury the
night before the announcement. No briefing books, no documents. He deemed it to
be no plan. That assessment was confirmed today by a participant at the
session, who said that the details were so thin that one staffer asked, "So
what, exactly, is the plan?" and repeated questions from one persistent senator
got "absolutely no answers".
So just what is it that turned
Wall Street's smile upside down, and got the buzzing gnats of the bloggers
swarming out of the hive? Well, if we assume that a research animal is an
intelligent being if it learns from its mistakes, if, once shocked, it avoids
the behavior that caused it pain, than we are forced to start raising serious
questions as to whether US Treasury secretaries can be considered intelligent
For over a year now, I've been saying that the world financial crisis would
only end when the mortgage backed securities (MBS) carved out of the crest of
the US real estate boom a few years ago but now spiraling down in value were
removed from the portfolios of the banks that currently owned them. As these
securities declined in value, they shrunk the capital bases of the banks that
owned them, and the resultant vicious circle contraction of bank lending is the
core phenomenon of what we now call the worldwide credit crisis.
In late September, bloodied and beaten from the huge world stockmarket declines
that occurred after the fall of Lehman Brothers, Paulson saw the light upon the
feeling of the heat. He proposed the $700 billion TARP to buy out the bad MBS,
then convinced the Democrats in Congress to nail themselves to the TARP's cross
in order to assure its passage.
Then Paulson changed his mind, decided he wasn't going to do TARP. He was going
to leave this dirty, sopping and fetid diaper wrapped around the banks, for
then president-elect Obama to have the joy in changing once he moved into the
White House. As you would expect, in the interval between regimes, the problem
only got worse; that nappy really began to stink. With Obama's inauguration on
January 20, followed by another dreadful unemployment report on February 6,
well, maybe change had come to America, but it was the banking and financial
sector that needed a change in the absolutely worst way.
The problem is the same as it's been since the crisis began - it's that, for
the sake of the health of the general economy, the government wants to save the
banks a lot more than the banks want, or are willing, to be saved.
Specifically, due to prospective fears of mortgage defaults that started with
the subprime sector but are now spreading to the core of US housing finance,
the few MBS that are at this time changing hands are usually doing so at prices
of 25 cents to the dollar or less; in response, if that's what the banks can
get for them, they won't sell them.
They're still holding out for prices at 80 cents or more to the dollar as if it
were still 2005, when every secondary school dropout tossing tortellini at
Olive Garden was considered by the banks to be yet another potential mortgage
borrower just two or three flips away from being a real estate millionaire.
Thus has been created the phenomenon of the so called "zombie banks", lenders
that, in reality, have liabilities that are far in excess of their assets but
only now exist in the dark shadows of the land of undead, draining the
lifeblood out of the financial system as a whole, with no conscience or counter
In the opening hours of the Obama administration, you know, that long-ago-time
from three weeks past, reports leaked out of the his administration that they
were planning to retrieve the baton that Paulson had dropped, buying up the bad
MBS and putting them in a so-called "bad bank" to be called "The Aggregator"
(see Back to
the woodshed, Asia Times Online, January 28, 2009).
However, once Geithner promised to be always a good boy, looking both ways
before crossing the street, never playing with matches, always paying his
taxes, et al, he won approval by the Senate, got to work, and apparently headed
off in a new direction, away from any solution that involved simply having the
US government purchase the MBS at prices to the banks' liking.
In the days before the official unveiling of the "Financial Stability Plan"
last Tuesday, press reports had Geithner in bureaucratic battle with Obama
chief of staff Rahm Emanuel and senior advisor David Axelrod, who supposedly
were seeking a policy that took a more politically popular, harder, less
accommodative stance with the banks. When the policy was finally revealed to
the public, not many understood it, but it did seem fairly clear that Emanuel
and Axelrod had lost.
This is the section of the plan that deals with the question of what is to be
done with banks' bad assets.
Together with the Federal Reserve, the
Federal Deposit Insurance Corporation, and the private sector, we will
establish a Public-Private Investment Fund. This program will provide
government capital and government financing to help leverage private capital to
help get private markets working again. This fund will be targeted to the
legacy loans and assets that are now burdening many financial institutions.
By providing the financing the private markets cannot now provide, this will
help start a market for the real estate related assets that are at the center
of this crisis. Our objective is to use private capital and private asset
managers to help provide a market mechanism for valuing the assets. 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. We believe this
program should ultimately provide up to one trillion in financing capacity, but
we plan to start it on a scale of $500 billion, and expand it based on what
The "public-private partnership" became a hot buzzword
under the bastardized triangulated centrism that became the standard operating
procedure for domestic policy in the Bill Clinton