Giving Geithner’s proposals the big build up, senator Shelby told him: “I hope they’re not more of the same. I hope you’re smarter than that.” Unfortunately for Shelby, it turned out to be goundhog day in Washington. A new Treasury secretary, in a new administration had nothing much new to propose and, apparently, no clear idea at all of what to do to restore the American banking system. Some of the biggest banks are now being kept barely alive with taxpayer insurance against losses on problem assets and guarantees for funding, but they are not healthy enough to support the economy in its hour of greatest need with much in the way of lending. While banks are seeking to cut ultra-cheap back-up credit lines extended in the good times to corporates at ridiculously thin margins, companies are flocking to the debt capital markets to secure the funding to replace them. They raised $84 billion in the first five weeks of this year from bond markets, far ahead of the levels raised at the start of 2007 and 2008. It is just as well bond markets remain open, even at high credit spreads, because we now live in the age of the zombie banking system. “Instead of catalyzing recovery, the financial system is working against recovery”, Geithner pronounced: powerful stuff. Unfortunately, his only memorable phrases and impressive rhetoric came in describing the damage to the financial system and the failures of the previous administration to revive it. “When the crisis began, governments around the world were too slow to act. When action came, it was late and inadequate. Policy was always behind the curve, always chasing the escalating crisis.” And Geithner should know, of course. As president of the New York Fed, he was right at the heart of the action, standing just in the shadows of Paulson and Fed chairman Ben Bernanke and helping shape that late and inadequate policy response. And now, having lived through that, had five months to work out a better approach, and having taken on the most crucial point job of supporting an ailing economy, Geithner ballyhooed: “To get credit flowing again...we are fundamentally reshaping the government’s program to repair the financial system”. As build-ups go, this was a promising one, with the momentum of his speech now rushing forward into the body of his new plans, which were, it turned out, no more than “to bring together government agencies...and initiate a more consistent, realistic and forward looking assessment about the risk on [financial institutions’] balance sheets,” and also to devise some form of public-private investment trust to buy toxic assets. Geithner told his deflated audience: “We are exploring a range of different structures for this program, and will seek input from market participants as we design it.” The sorry days of September 2008 seemed to be playing on rewind. This was the Tarp non-plan again with a minor work-over. The absence of concrete detail was all the more astonishing for Geithner’s own preceding condemnation of a government response that had been neither comprehensive nor quick enough. Expectations for his announcement had already been heightened by two weeks of leaks about possible approaches ranging from government insurance against tail risk in troubled asset portfolios to some form of good bank-bad bank model for a state funded removal of toxic assets from bank balance sheets. On the Friday before Geithner was scheduled to make his presentation on Monday February 10, Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, stood up and told a gathering of directors of American regional and community banks: “A lesson from past experience with banking crises around the globe is that the removal of bad assets from bank balance sheets, along with the injection of new capital, is needed to restore health to the banking system. As long as hard-to-value, troubled assets clog their balance sheets, banks find it difficult to attract private capital and to focus on new lending.” It had seemed that at least two competing camps within the US Treasury were pushing these ideas – the cheap and cheerful one of insurance and the more radical and costly bad-bank idea, which amounts to nationalization by another name. The only question was which would prevail. And when Geithner delayed his announcement by another day, this only further heightened expectation that the key details of one or other proposal were being inked into his final draft. Instead, there was next to nothing. The stress test of balance sheets will be a prelude to more capital injections, the public-private investment trust will be a work in progress and, in addition, Geithner will deploy more Tarp funds as equity to lever up a previously announced Fed financed programme to buy newly issued asset-backed securities encompassing underlyings now to include small business loans, student loans, consumer and auto finance and commercial mortgages. Geithner also promised a plan “in the next few weeks” to bring down mortgage payments and with that, and a few of the usual pious platitudes about transparency and accountability, he was done. And so, unfortunately, was the market’s faith in him. One might shrug off the stockmarket’s immediate near 5% decline. After all, who cares about the initial reaction of a financial market place of such extreme short-term volatility that it barely merits consideration as a valid destination for investors’ funds? But the 20-25% share price declines for some of America’s larger regional banks added a more worrying reminder that the very existence of some remains in doubt. At a moment when the financial system craves a restoration of confidence and stability and finds itself waiting on governments to provide this, the new US Treasury secretary appeared to have blown his stock of precious credibility just three weeks after being sworn into the job. A full analysis of the Geithner plan, as well as alternatives to it, will be published in the March issue of Euromoney. Do you agree with our analysis? What other options do governments in the US and beyond have? Post your comments here by clicking on the 'Add Comment' icon at the top of the story. |
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