Monday, 16 February 2009

Geithner Unveils New Bank Bailout: Devil's in the Details (Really)

1 comment:

Guanyu said...

Geithner Unveils New Bank Bailout: Devil’s in the Details (Really)

Aaron Task
10 February 2009

Treasury Secretary Timothy Geithner unveiled the latest bank bailout effort Tuesday, a.k.a. a new “Financial Stability Plan.”

In seeking to make a break with his predecessor and quell taxpayer anger over how the first $350 billion TARP funds were allocated, Geithner outlined the basic principles behind the plan that focus on transparency and accountability:

• Policy response has to be comprehensive, and forceful. “There is more risk and greater cost in gradualism than in aggressive action.”
• Action has to be sustained until recovery is firmly established. “Previous crises lasted longer and caused greater damage because governments applied the brakes too early,” he said. “We cannot make that mistake.”
• Access to public support is a privilege, not a right. “Government support must come with strong conditions to protect the taxpayer and with transparency that allows the American people to see the impact of those investments.”
• Policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital.

Of course, the devil is in the details and stocks tumbled in the wake of Geithner’s midday press conference, in part because the plan (vs. the principles) remains sketchy on two key elements:

“We are exploring a range of different structures for this program,” Geithner said of a plan to create a public-private investment fund that will start at $500 billion, and then expanded “based on what works.”

The risk is that this fund will provide hedge funds and other private investors an opportunity to buy toxic debt whereby they benefit from any potential upside while all the downside risk is taken by the government, i.e. more privatized gains and socialized risks.

Secondly, Geithner’s plan to “stress test” banks before they are able to access additional government capital, which is a step in the right direction vs. what’s occurred to date.

However, Geithner also plans to continue the policy of propping up zombie banks vs. declaring those that fail the stress test insolvent.

“Those institutions that need additional capital will be able to access a new funding mechanism that uses funds from the Treasury as a bridge to private capital,” he said (see above).

The bottom line, unfortunately, is the Obama administration is still following the Bush administration’s ‘too big to fail’ doctrine.

“We believe that the United States has to send a clear and consistent signal that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy,” Geithner said.

In other words, it’s wrapped in new packaging but the bailout story remains the same.