Exit Paulson, enter Geithner with the latest "no banker left behind plan"—a.k.a. whatever Wall Street wants, Wall Street gets. Yet, the reception was underwhelming. The Dow plummeted 382 points while investors took shelter in bonds and gold. AP reported that "the new bank rescue plan landed with a thud on Wall Street" as investors worried that no end to the crisis is in sight. Editorial and op-ed commentaries were near unanimously negative and some especially critical.
At a February 9th congressional briefing, lawmakers greeted Geithner with laughter and sarcasm, but most of it is just politics. Bailout opponent Brad Sherman (D, California) asked for details and a dollar amount, but instead got generalities about what he announced the next day—a plan to:
- "clean up and strengthen the nation's banks;" in other words, spend hundreds of billions more to recapitalize insolvent ones;
- create a Public - Private Investment Fund to shift toxic assets from them to the public;
- expand the Fed's Term Asset-Backed Securities Loan Facility (TALF) to provide funding for investors to buy toxic assets; partial government guarantees would be offered as incentive; and
- use "the full resources of the government to bring down mortgage payments (and) reduce mortgage interest rates;" already tried are foreclosure moratoriums, payment reductions, re-amortizations of delinquent balances, interest rate cuts, and more; yet home prices keep falling; a glut of unsold homes remains; foreclosures mount at a ferocious pace; the Foreclosure Data Bank cites "over 1 million bank foreclosures for sale;" and borrowers with modified loans are re-defaulting anyway.
The Office of the Comptroller of the Currency (that charters, regulates, and supervises national banks) reported that 36% of first quarter 2008 modified loans were delinquent after three months and 58% after eight months. The main problems are over-indebtedness and huge numbers of continuing job losses.
Geithner omitted these facts and that each of his elements conflicts with the others. Most important, instead of closing or nationalizing zombie banks, punishing their top executives for decades of criminal fraud and excess, and wrecking the global economy, Geithner, like Paulson, will reward them as The New York Times reported.
On February 10th, it explained that he'll "flood the financial system with as much as $2.5 trillion" on top of $9 trillion previously doled out, and this is just "Stage One of a two-stage plan," according to economist Michael Hudson. He asked: "recovery for whom (and what do) they want to recover?" For Wall Street, of course, in a new "Bubble economy" of the kind Alan Greenspan engineered: "wealth in the form of indebtedness of the 'real' economy at large to the banking system, and unprecedented capital gains to be made (from) a wave of asset-price inflation."
The problem, according to Hudson, is it can't be done given "today's debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new (bank) credit or capital will induce (them to loan more) to real estate that already is over-mortgaged, or to individuals and corporations already over-indebted" or on the edge like the auto giants, auto suppliers, homebuilders, others, and who knows who next will join them.
Geithner got hammered on all fronts, including by former hedge fund manager Andy Kessler in a February 10th Wall Street Journal op-ed saying:
'The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans—ask the Japanese. Mr. Geithner wants to 'stress test' banks to see which are worth saving. The market already has with Citigroup, Bank of America and others now a mere fraction of their former worth, and Geithner's idea is to "throw good money after bad to a banking system struggling under the weight of its own mistakes."
"What we need are healthy banks with clean balance sheets and enlightened risk assessment to provide consumer and business loans that will generate returns to shareholders." Let them sell their own toxic debt. They won't because they "don't like the price." As for TARP, it failed and so will TARP 2.0 or what's now called a Financial Stability Plan. The idea is to get "private capital to buy bad loans and derivatives," but banks won't price them low enough to sell. Moreover, who'll buy risky assets unless they're practically given away or Washington guarantees them.'
Kessler wants the banks nationalized but only short-term. Others agree saying no quick fixes are possible, and Financial Times writer Martin Wolf asked whether Obama's presidency already failed in headlining his February 10th column: "Why Obama's new Tarp will fail to rescue the banks."
It looks like "yet another child of the" previous year and a half's interventions: "optimistic and indecisive" at a time "focus and ferocity" are needed. Instead of crafting a surer solution, it timidly chose "three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress."
Better advice is what Washington gave the Japanese in the 1990s but won't follow itself: "admit reality, restructure banks, (create good ones) and above all, slay zombie institutions at once." Instead, dead banks keep walking away with trillions more good money after bad.
It's why banking analyst Meredith Whitney told Bloomberg TV (on February 4th) that "Investors should not even consider owning banks at this point on an equity basis." Looking forward, she also doubts that Citigroup will exist in its current form, large numbers of Wall Street layoffs will continue, and eventually "we'll go back to an older and smaller bank system, where local banks lend off what they have in deposits."
In October 2007, Whitney was one of the first to spot trouble when she predicted that Citigroup would cut its dividend in the face of a weak balance sheet. She followed by forecasting losses and write-downs at Bank of America, Lehman Bros., and UBS as well as insights on bond insurer implosions that threatened banks' bottom lines. More still about damaged assets at Merrill Lynch.
She advised investors to bail out of bank stocks and saw the economy heading into an "early 1980s-style" recession that would devastate 10% of the population that was overextended by the housing boom. She said: "It feels like I'm at the epicenter of the biggest financial crisis in history," yet she didn't realize how accurate that was at the time.
She criticized the incestuous relationship between Wall Street and the credit-rating agencies that, in her judgment, would impede the banks' ability to recover. They hated her, but one top Citigroup executive said: "You've got to give it to her—she figured it out," well enough that today her comments move markets.
Investor Jim Rogers never holds back, and, on February 11th, was true to form on Bloomberg. Interviewed on Geithner's plan he said:
'Mr. Geithner has been bombing for 15 years. (He) caused the problem. He was head of the New York Fed that was supposed to be supervising banks. (Instead), all last year he came up with TARP. He came up with all these absurd bailouts. Geithner's has never known what he's doing. He doesn't know what he's doing now, and pretty soon everyone will know it, including Mr. Obama.'
Asked how to fix the problem, he referenced Washington's advice to Japan in the 1990s. "You let (bad banks) go bankrupt. You clean out the system. You wipe out insolvent ones and let (good banks) take over. America is making the same mistake (as Japan), and the politicians are making it worse. You want to know why they're making it worse? They want to support their friends on Wall Street."
"The idea of the government buying up bad assets is not going to work. Either the price will be too high (at taxpayer expense) or it will be too low....it's not going to work. It's never worked....Pouring in new money will only weaken the whole system. Go back in history and see what worked. Countries that took their pain (solved their crisis). It was horrible going through it, but they came out of it and became rapidly growing. Countries that did it our way never came out of it until a long, long time later, if ever."
"What Geithner should have said was we have a horrible problem of too much borrowing, too much debt, and too much consumption. You know what we are going to do — we're going to borrow more, go deeper in debt, and consume more....These guys don't know what they're doing (and it's why) I'm shorting" the market.
