kent nickell
Well-known member
http://seekingalpha.com/article/119...t-a-bad-thing?source=front_page_editors_picks
Markets Plunge Following Geithner's Plan and That's Not a Bad Thing
Is the Grim Reaper masquerading as Tim Geithner?
That's the emerging storyline. After President Obama's Treasury Secretary unveiled a new bank bailout plan that sounded more like a plan to make a plan, the stock market went into an immediate funk. Stocks started to plunge while he was still speaking. The Dow Jones Industrial Average ended the day of Geithner's debut down 4.6 percent, the worst showing of Obama's nascent presidency. And the press pilloried the performance:
* "Geithner sinks markets," declared BreakingViews, the financial Web site.
* "Geithner's Financing Fiasco," is how Forbes labeled the plan.
* "Is Tim Geithner Ready for Prime Time?" wondered Larry Kudlow on National Review Online. His answer: "Plunging stocks say no."
I don't know if Geithner is up to the job or not. Certainly neither he nor Obama planned to kick off a new and improved bank bailout scheme by thrashing the stock market. Like we need any more drama on Wall Street. If Obama and Geithner thought that a vague, incomplete plan would inspire confidence, they badly underestimated how fragile the markets really are.
But Geithner's first misstep could end up working in his favor. Here's why:
It's not about the stock markets. We've gotten into the habit of thinking that the direction of the Dow accurately reflects whether the economy is improving or not. Sometimes it does. But not always.
There are many times when bad news about the economy – like a rise in unemployment – sends the Dow up instead of down, because traders guess that the bad news might give the feds more incentive to take action that could be good for stocks. All that reflects is a short-term belief that stocks might go higher tomorrow than today. It doesn't say anything about whether the economy is actually getting healthier.
Many of the bailout actions up till now have been driven by the need to reassure the markets. That's one reason for those familiar, weekend-long emergency meetings between government officials and frantic corporate executives that end with a bailout announcement late on Sunday night: Those meetings were timed - and probably rushed - to come up with some kind of reassuring outcome before the Asian stock markets opened, half a day ahead of New York. God forbid we should start the trading week on a sour note.
But it's not the government's job to worry about whether the stock markets go up or down. In a crisis like we're in, the feds should worry about what will get the economy growing again, give banks a reason to lend, and motivate companies to stop firing and start hiring. Stock values might help gauge whether that's happening, but they're an indicator that will rise along with the economy – not a catalyst of growth in themselves.
Merely trying to goose the markets is a sucker's game. If Geithner and Obama shrug off the markets' reaction to their draft of a plan – and eventually produce some real action - the markets will learn to adapt to them. As they should. But if the process happens in reverse, and the Obama administration starts to pander to what the markets want to hear, there's no end to the potential misuse of the government's power.
What's bad for bank stocks might be good for the economy. If Geither had announced that the government was giving away unlimited funds to solve all of the problems at Citigroup (C) and Bank of America (BAC) and any other troubled bank, the stock markets would have soared. Because the banks would have been off the hook! But does anybody think that's what Geithner should have announced?
Instead, he basically said that banks seeking bailout money in the future have to prove they're healthy enough to put it to good use – the "stress test" – and they'll also have to abide by conditions that are much stricter than before. Investors hate that, because it's going to be costly and time-consuming for many banks to solve their own problems. It's so much easier when a rich uncle materializes with a wad of cash to wave away the demons.
Geithner didn't say what would happen to banks that need a bailout but fail the stress test. That produced the dreaded uncertainty, which always sends Wall Street into paroxysms. Once again, it raises the prospect of "nationalizing" some of the biggest, most important banks, which would wipe out shareholders. Hundreds of smaller banks could fail, taking down those shareholders, too. That's why financial stocks led the market plunge on Geithner's big day, with Citigroup falling about 15 percent, and Bank of America about 19 percent.
Obviously that's a major bummer for bank investors. But for taxpayers, it sounds as if bank-bailout money will be doled out more carefully than before. Nationalizing Citigroup or Bank of America is a dire scenario, but it would stabilize the banks and keep them in business, and it might even help with lending. After the excesses we've seen so far, should we really complain about Washington turning a cold shoulder to the worst Wall Street offenders?
The Geithner plan lowers expectations. And they need to be lower. The only market-mover capable of sending stocks upward lately has been the government. That's not good. Investors have been anticipating an Obama stimulus extravaganza and a reformulated bank-bailout plan for weeks. That's probably kept stocks at higher levels than they would otherwise have been at, given that other economic news has been relentlessly bad. Is it possible that investors have been overoptimistic about Obama's ability to boost the economy? Sure is.
We're all learning to expect less. In his first press conference, Obama basically cautioned Americans not to expect much of an economic recovery until next year, despite his huge stimulus plan. Geithner followed that up by saying that fixing the banks "will cost money, involve risk, and take time." If you were expecting a quick fix, that kind of language is quite a buzz-kill. But we have to accept that the party's over before we can start nursing the hangover.
----------------
Geithner is making some interesting moves... Obama did assemble a first class economic team and they appear to be getting into the heart of the problem... I like Paul Volcker for overall moral authority and Geithner seems to have the intellect to nuance the problem and its solutions. His many years as an Asian specialist appear to be bearing fruit with China and he is resisting strong calls on nationalization of banks by getting in deep to their balance sheets and bringing in available sources of private money with less risk to the taxpayer. The foreclosure problem is tricky and has a lot of moral hazard (no one wants to 'pay their neighbors mortgage' and reward reckless behavior) but hopefully Obama's practicality and popular support will prevail here... There has to be the realization that housing prices cannot be subsidized but must be allowed to fall to equilibrium prices that people can reasonably afford. Foreclosures hurt individuals, communities, banks, and secondary lenders. They can lead to social disruption. They cannot be stopped because there was way too much crazy credit but loans definitely should be modified to reflect current conditions. Interest rate reductions and extending loan time lines have not met with much success so it is apparent that principal reductions are necessary and that they need to be mandatory on lenders probably enforced by the various regulatory statutes of the FDIC....
http://seekingalpha.com/article/120118-why-geithner-s-plan-will-work?source=front_page_editors_picks
Why Geithner's Plan will work
February 12, 2009
Geithner's plan will work because it fixes what is wrong. The pundits and talking heads wasted a lot of everybody's time in personal attacks, citing lack of detail and vagueness and inferring a lack of decisiveness, rather than taking the time to read the fact sheet and consider the implications.
Foreclosures - What drives the current meltdown is the excessive rate of foreclosures. The plan will provide assistance to qualified homeowners, defined as middle class owner-occupants, reducing foreclosures. The upper class is assumed to be able to take care of themselves. The lower class by definition do not own homes. There is a lot of nitty-gritty detail involved in who gets help and it is beyond the scope of an outline to address the issues, which are complex. 50 billion spent here will seriously reduce the overall loss to the economy and financial system.
Troubled Asset Valuation – Nobody knows what the troubled assets are worth because nobody knows the future trajectory of the housing crisis and the economy. First and foremost, addressing foreclosures forcefully will change the trajectory for the better.
What puts a floor of sorts under the troubled assets is the stress test. The assets in question are those that will respond poorly in stress case scenarios. Two banks that are equally well-capitalized under the assumption that the economy will not deteriorate further may not be equal when their assets are stress tested.
The stress test assures that the government deals with the valuation issue only where it becomes a matter of public policy – when assets that respond poorly to stress create systemic risk in banks that are large enough to impact the system.
When combined with reasonable access to capital, the stress test forces and enables management to make responsible decisions about troubled assets.
Access to capital - The convertible preferred capital infusion provides certainty around several key issues. Shareholders will not be unfairly diluted by forced capital raises under a storm of short-selling.
Bank management can now make an informed decision whether to sell troubled assets or hold them until circumstances reveal their true value. The stress test creates a minimum or worst case value. If private buyers will pay more than that price, it makes sense to sell the assets and raise the remainder of the required capital buffer by requesting an infusion. Otherwise, the full amount of the capital would be raised by an infusion.
I tried a few hypothetical examples of what would happen to shareholders in a bank that was trading at well below book value and holding troubled assets. My results suggest that shareholders would ultimately absorb the actual economic losses from troubled assets, but would be protected from the depredations of manipulative short-selling during the process of capital raising.
Withholding of Capital – The private sector has been withholding capital from the financials. Partly this is fear - "smart money" suffered horrible losses on situations such as WaMu. Partly it is greed – the longer troubled assets are left to deteriorate, the greater the chances of huge profits by buying at fire sale prices. As noted, access to capital reduces the power of the dark side. Since the ultimate fire sale is off the table, greed would suggest to all but the most stubborn of the vultures that they participate in creating a market for troubled assets.
The private-public aspect of the plan is troubling to me because I seem to see the government partnering with and financing hedge funds and others who created this problem by collusive and manipulative behavior.
However, from a logical point of view anyone who is willing to bring capital into the financial arena should be supported for the common good. If there were evildoers who contributed to creating this mess, the SEC has authority to research past actions and punish the offenders. It's really a separate issue.
Rating Agencies – We are all familiar with their role in creating the original problem. As of this moment, they are the ones who are doing the stress testing, according to their visions of the future, and issuing destructive downgrades. Who knows what dark vision animates the destructive activities of Moody's?
By establishing their own stress testing criteria, regulators remove the rating agencies from primacy in this area. A good idea, why should they have the power to issue self-fulfilling prophecies of doom?
Systemic risk – A serious deficiency in the prior regulatory regime was the lack of authority over and insight into systemic risk. We have seen the results. The stress testing is a large step in solving this problem. It provides a definition of who is big enough to create systemic risk and it creates a window into that previously inaccessible area.
Summary - The forgoing is sufficient to suggest that the plan is workable. As Geithner said, the issue is not one of ability, it is one of will. We will all be better off if we get behind the plan and make it work.
Markets Plunge Following Geithner's Plan and That's Not a Bad Thing
Is the Grim Reaper masquerading as Tim Geithner?
That's the emerging storyline. After President Obama's Treasury Secretary unveiled a new bank bailout plan that sounded more like a plan to make a plan, the stock market went into an immediate funk. Stocks started to plunge while he was still speaking. The Dow Jones Industrial Average ended the day of Geithner's debut down 4.6 percent, the worst showing of Obama's nascent presidency. And the press pilloried the performance:
* "Geithner sinks markets," declared BreakingViews, the financial Web site.
* "Geithner's Financing Fiasco," is how Forbes labeled the plan.
* "Is Tim Geithner Ready for Prime Time?" wondered Larry Kudlow on National Review Online. His answer: "Plunging stocks say no."
I don't know if Geithner is up to the job or not. Certainly neither he nor Obama planned to kick off a new and improved bank bailout scheme by thrashing the stock market. Like we need any more drama on Wall Street. If Obama and Geithner thought that a vague, incomplete plan would inspire confidence, they badly underestimated how fragile the markets really are.
But Geithner's first misstep could end up working in his favor. Here's why:
It's not about the stock markets. We've gotten into the habit of thinking that the direction of the Dow accurately reflects whether the economy is improving or not. Sometimes it does. But not always.
There are many times when bad news about the economy – like a rise in unemployment – sends the Dow up instead of down, because traders guess that the bad news might give the feds more incentive to take action that could be good for stocks. All that reflects is a short-term belief that stocks might go higher tomorrow than today. It doesn't say anything about whether the economy is actually getting healthier.
Many of the bailout actions up till now have been driven by the need to reassure the markets. That's one reason for those familiar, weekend-long emergency meetings between government officials and frantic corporate executives that end with a bailout announcement late on Sunday night: Those meetings were timed - and probably rushed - to come up with some kind of reassuring outcome before the Asian stock markets opened, half a day ahead of New York. God forbid we should start the trading week on a sour note.
But it's not the government's job to worry about whether the stock markets go up or down. In a crisis like we're in, the feds should worry about what will get the economy growing again, give banks a reason to lend, and motivate companies to stop firing and start hiring. Stock values might help gauge whether that's happening, but they're an indicator that will rise along with the economy – not a catalyst of growth in themselves.
Merely trying to goose the markets is a sucker's game. If Geithner and Obama shrug off the markets' reaction to their draft of a plan – and eventually produce some real action - the markets will learn to adapt to them. As they should. But if the process happens in reverse, and the Obama administration starts to pander to what the markets want to hear, there's no end to the potential misuse of the government's power.
What's bad for bank stocks might be good for the economy. If Geither had announced that the government was giving away unlimited funds to solve all of the problems at Citigroup (C) and Bank of America (BAC) and any other troubled bank, the stock markets would have soared. Because the banks would have been off the hook! But does anybody think that's what Geithner should have announced?
Instead, he basically said that banks seeking bailout money in the future have to prove they're healthy enough to put it to good use – the "stress test" – and they'll also have to abide by conditions that are much stricter than before. Investors hate that, because it's going to be costly and time-consuming for many banks to solve their own problems. It's so much easier when a rich uncle materializes with a wad of cash to wave away the demons.
Geithner didn't say what would happen to banks that need a bailout but fail the stress test. That produced the dreaded uncertainty, which always sends Wall Street into paroxysms. Once again, it raises the prospect of "nationalizing" some of the biggest, most important banks, which would wipe out shareholders. Hundreds of smaller banks could fail, taking down those shareholders, too. That's why financial stocks led the market plunge on Geithner's big day, with Citigroup falling about 15 percent, and Bank of America about 19 percent.
Obviously that's a major bummer for bank investors. But for taxpayers, it sounds as if bank-bailout money will be doled out more carefully than before. Nationalizing Citigroup or Bank of America is a dire scenario, but it would stabilize the banks and keep them in business, and it might even help with lending. After the excesses we've seen so far, should we really complain about Washington turning a cold shoulder to the worst Wall Street offenders?
The Geithner plan lowers expectations. And they need to be lower. The only market-mover capable of sending stocks upward lately has been the government. That's not good. Investors have been anticipating an Obama stimulus extravaganza and a reformulated bank-bailout plan for weeks. That's probably kept stocks at higher levels than they would otherwise have been at, given that other economic news has been relentlessly bad. Is it possible that investors have been overoptimistic about Obama's ability to boost the economy? Sure is.
We're all learning to expect less. In his first press conference, Obama basically cautioned Americans not to expect much of an economic recovery until next year, despite his huge stimulus plan. Geithner followed that up by saying that fixing the banks "will cost money, involve risk, and take time." If you were expecting a quick fix, that kind of language is quite a buzz-kill. But we have to accept that the party's over before we can start nursing the hangover.
----------------
Geithner is making some interesting moves... Obama did assemble a first class economic team and they appear to be getting into the heart of the problem... I like Paul Volcker for overall moral authority and Geithner seems to have the intellect to nuance the problem and its solutions. His many years as an Asian specialist appear to be bearing fruit with China and he is resisting strong calls on nationalization of banks by getting in deep to their balance sheets and bringing in available sources of private money with less risk to the taxpayer. The foreclosure problem is tricky and has a lot of moral hazard (no one wants to 'pay their neighbors mortgage' and reward reckless behavior) but hopefully Obama's practicality and popular support will prevail here... There has to be the realization that housing prices cannot be subsidized but must be allowed to fall to equilibrium prices that people can reasonably afford. Foreclosures hurt individuals, communities, banks, and secondary lenders. They can lead to social disruption. They cannot be stopped because there was way too much crazy credit but loans definitely should be modified to reflect current conditions. Interest rate reductions and extending loan time lines have not met with much success so it is apparent that principal reductions are necessary and that they need to be mandatory on lenders probably enforced by the various regulatory statutes of the FDIC....
http://seekingalpha.com/article/120118-why-geithner-s-plan-will-work?source=front_page_editors_picks
Why Geithner's Plan will work
February 12, 2009
Geithner's plan will work because it fixes what is wrong. The pundits and talking heads wasted a lot of everybody's time in personal attacks, citing lack of detail and vagueness and inferring a lack of decisiveness, rather than taking the time to read the fact sheet and consider the implications.
Foreclosures - What drives the current meltdown is the excessive rate of foreclosures. The plan will provide assistance to qualified homeowners, defined as middle class owner-occupants, reducing foreclosures. The upper class is assumed to be able to take care of themselves. The lower class by definition do not own homes. There is a lot of nitty-gritty detail involved in who gets help and it is beyond the scope of an outline to address the issues, which are complex. 50 billion spent here will seriously reduce the overall loss to the economy and financial system.
Troubled Asset Valuation – Nobody knows what the troubled assets are worth because nobody knows the future trajectory of the housing crisis and the economy. First and foremost, addressing foreclosures forcefully will change the trajectory for the better.
What puts a floor of sorts under the troubled assets is the stress test. The assets in question are those that will respond poorly in stress case scenarios. Two banks that are equally well-capitalized under the assumption that the economy will not deteriorate further may not be equal when their assets are stress tested.
The stress test assures that the government deals with the valuation issue only where it becomes a matter of public policy – when assets that respond poorly to stress create systemic risk in banks that are large enough to impact the system.
When combined with reasonable access to capital, the stress test forces and enables management to make responsible decisions about troubled assets.
Access to capital - The convertible preferred capital infusion provides certainty around several key issues. Shareholders will not be unfairly diluted by forced capital raises under a storm of short-selling.
Bank management can now make an informed decision whether to sell troubled assets or hold them until circumstances reveal their true value. The stress test creates a minimum or worst case value. If private buyers will pay more than that price, it makes sense to sell the assets and raise the remainder of the required capital buffer by requesting an infusion. Otherwise, the full amount of the capital would be raised by an infusion.
I tried a few hypothetical examples of what would happen to shareholders in a bank that was trading at well below book value and holding troubled assets. My results suggest that shareholders would ultimately absorb the actual economic losses from troubled assets, but would be protected from the depredations of manipulative short-selling during the process of capital raising.
Withholding of Capital – The private sector has been withholding capital from the financials. Partly this is fear - "smart money" suffered horrible losses on situations such as WaMu. Partly it is greed – the longer troubled assets are left to deteriorate, the greater the chances of huge profits by buying at fire sale prices. As noted, access to capital reduces the power of the dark side. Since the ultimate fire sale is off the table, greed would suggest to all but the most stubborn of the vultures that they participate in creating a market for troubled assets.
The private-public aspect of the plan is troubling to me because I seem to see the government partnering with and financing hedge funds and others who created this problem by collusive and manipulative behavior.
However, from a logical point of view anyone who is willing to bring capital into the financial arena should be supported for the common good. If there were evildoers who contributed to creating this mess, the SEC has authority to research past actions and punish the offenders. It's really a separate issue.
Rating Agencies – We are all familiar with their role in creating the original problem. As of this moment, they are the ones who are doing the stress testing, according to their visions of the future, and issuing destructive downgrades. Who knows what dark vision animates the destructive activities of Moody's?
By establishing their own stress testing criteria, regulators remove the rating agencies from primacy in this area. A good idea, why should they have the power to issue self-fulfilling prophecies of doom?
Systemic risk – A serious deficiency in the prior regulatory regime was the lack of authority over and insight into systemic risk. We have seen the results. The stress testing is a large step in solving this problem. It provides a definition of who is big enough to create systemic risk and it creates a window into that previously inaccessible area.
Summary - The forgoing is sufficient to suggest that the plan is workable. As Geithner said, the issue is not one of ability, it is one of will. We will all be better off if we get behind the plan and make it work.
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