US President Barack Obama and his Treasury Secretary Timothy Geithner have unveiled their long awaited financial system bailout plan, the successor to the much-reviled and unsuccessful TARP 1 (Troubled Asset Relief Programme) that was built by George Bush and Henry Paulson.
Here's the speech this morning from Geithner
, which outlines plans for a US$500 billion 'Public Private Investment Fund' to buy toxic assets from banks. Geithner did not give details on how this 'Bad Bank' would value toxic assets (a key issue with any bad bank), how much public money would go into it, which private investors would stump up the money and who would reap the profits.
Geithner also announced plans to spend US$1 trillion through the Treasury and the Federal Reserve to buy mortgage-backed securities to kick start consumer and business lending. This will be called the 'Consumer and Business Lending Initiative' and be based on the Federal Reserve's Term Asset Backed Securities Loan Facility (TALF).
Finally, he said the government would inject more capital into banks through a ' Financial Stability Trust', but he gave no details on who would receive the government investments, how it would be done, how much would be spent and how taxpayers would be protected.
Also, there are some reports of US$50 billion being spent to stop foreclosures, but it was not mentioned in the speech. Meanwhile, the Senate passed its own US$838 billion stimulus package.
What others think and what I think
The key reaction was on Wall St, where the Dow was down 350 points and below 8,000 in late trade. Here's some other reactions below.
These reactions were reported on Bloomberg.
"Everybody is disappointed in the lack of details," said Diane Garnick, who helps oversee $354 billion as an investment strategist at Invesco Ltd. in New York. "They came out and said, "˜We want you to believe that we're still working on this.' Well, we knew that last night."
"There's still a lack of clarity," said Dan McMahon, director of equity trading at Raymond James Financial Inc. in St. Petersburg, Florida. "These are smart people and they're supposed to have it figured out. We've been waiting all week and then he said nothing."
These reactions were reported on the WSJ.com
The concept of a public/private investment fund sounds intriguing, but there is no plan - the Treasury Secretary "seeks input" how to achieve this. There simply is no fair way to take bad assets off the books of financial institutions. The sooner policy makers not just recognize it, but embrace it in their strategy, the better"¦ We did not see convincing evidence that the government is moving away from its Band-aid approach to helping banks. By now, the only viable solution left may be to nationalize the financial institutions that are deemed to big to fail; it's then a political decision whether depositors should carry part of the cost. "“Axel Merk, Merk Investments
The bad bank, which will be fleshed out over the next several weeks, will be extremely tricky to design effectively. At best, it will be modestly inferior to the solution of providing a guaranteed floor value for toxic assets without requiring banks to sell them to gain the protection. At worst, the plan may fizzle by failing to achieve a large volume of purchases or may prove considerably more expensive for taxpayers than anticipated. On the positive side, continuing to offer substantial capital injections to banks, despite the intense political unpopularity of those done under the Bush administration, shows a measure of political courage. "“Douglas J. Elliott, The Brookings Institution
This is from FT columnist Martin Wolf
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this "progeny of the troubled asset relief programme" fails, Mr Obama's credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.
he new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.
What I think
Obama needs to stop tip toeing around the problem, which is that the core of America's banking system is insolvent. There can be no bad bank without a massive public subsidy, which is now politically unsustainable and frankly, morally unsustainable. He must nationalise the insolvent banks to wipe out shareholders and any bond holders who get in the way. The government must take control of the lending, remove the corrupt and toxic governance and compensation structures, and get these banks moving again. Right now they are like rabbits in the headlights with cash stuffed in their mouths.
As a free market friendly sort of commentator it pains me to recommend nationalisation. But the investment bankers on Wall St showed with TARP 1 that they have no scruples about taking public money to sustain their bonuses and still didn't lend the money out. These banks are in chaos trying to protect shareholders and management. They need to be put to work lending taxpayers money to businesses and consumers.
The US$1 trillion plan to use the Federal Reserve to buy mortgage backed securities to kick start home and consumer lending makes sense because it effectively uses a system already in place to funnel lending to the people who need it, but circumvents the frozen banks. Although it is fundamentally still using the securitisation system that helped create the mess in the first place. I'm a bit boring on this. I think a bank lending manager should meet or know the borrower and the underlying asset being lent against and lend money that this manager is responsible for in the long term. Then we know who to blame or sack if it all goes wrong. There are no excuses for not knowing that way. Securitisation puts too many steps and obstacles between borrower and lender.
My final thought for now is that all of these desperate attempts to prop up the system and restart consumer borrowing and spending fails to acknowledge or address the fundamental problem in the US economy and the global economy for that matter. Americans have spent far more than they earnt and need to consume less and save more. Much of the rest of the world has reconfigured it economy to service the US consumer, either by producing and exporting the goods to America and/or lending Americans the money to buy these goods.
It struck me time and again during my 3 weeks driving across America that many had eaten too much, most drove cars that were too new and too big, many were living in houses that were too new, too big and too far away from their workplaces, and many had too many useless and pointless gadgets and stuff that they never used.
This is a hard message to deliver to Americans and to New Zealanders. We need to adjust to lower standards of living and less borrowing from foreign lenders. They key is how we adjust our standards of living without impoverishing people and damaging our core productive capacity. It means consuming less frivolous and wasteful goods and services, while ensuring the poorest have enough income for the basics and businesses retain the human and capital needed to be productive when the economy stabilises. That's a tough task.
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